Lump Sum into Mortgage - Best Way?

mysmeg

:)I hope someone who knows about these things can help as im not sure my mortgage lender adviser can tell me what is best for me and not what is best for Nationwide. We have £50k cash ( unfortunately because of critical illness pay out for my husband). We have 15 years left on our mortgage and balance of £85k on standard variable rate. We would like to reduce our term to 10 years and pay £20k into the mortgage - and keep the rest for a rainy day as hubby will not be able to work in the near future. So my question is - is it that straight forward? is there a certain way to do it?. I have been told there will be no penalties. We have never been in this situation before having never really had any savings. Any advise would be very much appreciated folks. Thank you

getmore4less

which Nationwide rate are you on?


£85k @ 2.5% 15 years is £567pm
£65k @ 2.5% 10 years is £613pm

£85k @ 3.99% 15 years is £629pm
£65k @ 3.99% 10 years is £658pm

Is that what you want?

mysmeg

Thank you Yes, I am on 2.5%. My payments are around the £550 mark just now. I think im confused as to whether part with a whole lump sum or simply pay extra each month. I suppose what Im really looking for is information on the interest I would save if I paid £20k lump sum?:cool:

CLAPTON

well

if you reduce your mortgage by 20k and are paying 2.5%
then you save 20,000 x 2.5% per annum i.e. £500 in interest per year

it really is that simple

they will probably give you the option of keeping the current level of payments and shortening the period of the loan or keeping the same period but reducing the monthly payments

dimbo61

Its never really that easy !
Now is your husband still working ? Are you working ?
are you claiming benefits ?
If you and your husband have over £16K in savings it will effect your benefits.
Might be an idea to make an appointment to see the nice people from the CAB.
You might be better off paying off say £35K and keeping £15K in cash ISA,s
We know nothing about your current situation RE work/income/age/plans/pensions/retirement/Health etc so maybe a good idea to speak to the CAB or IFA

jamesd

It appears as though it will be a bad idea to pay more on the mortgage. You can easily get a higher interest rate than 2.5% on cash ISAs so the best financial choice with minimal risk will be to use the cash ISA allowances of yourself and your partner to get that money into ISAs as soon as possible. Everything you pay off will just make you worse off when the mortgage rate is lower than the ISA rate.

Using an instant access ISA you can get 3.5% from Santander. Your loss from paying money off the mortgage instead of using this for £11,280 this year for two people's cash ISA limit is £394.80 interest from the ISA - £282 saved mortgage interest = £112.80 loss from paying money off the mortgage instead of using the ISA. But you can probably use two year fixed rate ISAs paying 4% and get £451.20 instead of £394.80.

First Direct do a taxable 8% regular saver account for a year and using that would also be good and would take care of not being able to use the full ISA allowance this year. The regular saver will pay out £156 gross if £300 a month is paid in, on an average balance of £1800. Do this with two people to get £156. The mortgage saving on two people's average balance of £1800, total £3600 is £90. The regular saver after basic rate tax pays £249.60. Loss from paying the money off the mortgage instead of using the regular saver is £139.50.

The best easy access savings account is paying 3.25%. That's equivalent to 2.6% after basic rate tax, again higher than your 2.5% mortgage rate so you'll lose money by paying money of the mortgage instead.

So the answer turns out to be fairly easy: you would save nothing by paying the money off the mortgage because you'll lose more interest than you save.

The same applies to reducing the mortgage term. You'll currently lose money on the deal because all of the extra money paid off the capital at the moment will cost you more in lost interest than it saves in mortgage interest.

This may change in the future when savings mortgage interest rates become higher than savings account interest rates.

mysmeg

Thank you both for your replies and expertise. - very much appreciate the time you put into your responses. A lot to think about. We are both working full time and receive no benefits. I guess I feel like I want to off load the cash asap and make a dent in our mortgage.

jamesd

For the short term, think of the value of th extra £300 you can have this year by not paying the money off the mortgage yet. You can track the money and show the increasing mortgage payoff pot if you like, to continue to provide you with the satisfaction of getting towards clearing the mortgage even though it's currently getting you to payoff time more quickly by not actually putting the money into the mortgage.

Many people just want the mortgage gone or reduced and will make a payment into the mortgage even though it delays getting it fully cleared. But tracking the growing payoff pot is an alternative approach.

dimbo61

So why not do both !!
1 put the max into a cash ISA each
2 pay off some of the mortgage
3 keep a good emergency savings pot for emergencies of upto £16K
4 Carry on making the same mortgage payment each month and that way you are overpaying and building up an " overpayment pot" which you can use to have a " mortgage payment holiday" if you really need to.

mysmeg

Thanks for replies, Im going to see financial consultant at Nationwide next week to see what he thinks. Maybe that's not wise? But im steering towards savings route yes.