Should i pay off mortgage??

mellowmick

Good Afternoon.
I had a small repayment remortgage with the Halifax for 8 years term 2 years ago. It is fixed at 5.49% for another 3 years then transfers to current rate.

I have just under 13k remaining and have just recieved a lump sum of cash which will be enough to pay off the mortgage in full. To pay this off in full early will cost me £680 in charges. I currently pay £257.20 p/m.
I am wondering which would be the best option,wether to pay it off in full or make monthly/annual overpayments? the maximum overpayment a year is 10%.

Any advice greatly appreciated.
Thanks.
Mick.

lincoln-potter

Pay the maximum 10% each year at the start of each year and once the term ends pay the remainder off in full.

SillySod

I think over the next three years you'll be paying about £1500 in interest (£820 once you take off the early repayment fee), so you need to compare that with the amount of net interest you can earn over three years with your £13K.

arthurdick

hello curly , what you could do is, pay off the first year max 10% off your mortgage, then max up your ISA, and put the remainder in a 2-5 year fixed higher rate account. Or, if you are a MFW, pay it all off, and accept paying the £680 early redemption fee and think sod it, you have got the great weight of a mortgage out of the way and it was worth paying just to be mortgage free. but there is always the case of having a nest egg for unforseen emergencies that may crop up, so maybe paying off the max 10% each year and still having a contingency fund for whatever might happen...Whatever you decide to do, enjoy it, you are in a great position to be in..

torbrex

From my own experience, pay the mortgage off then put the £250/month into an ISA or regular savings account straight away.
The satisfaction you get from being mortgage free is orgasmic

Kwaker_Knacker

If it was me, I'd pay the whole thing off.

However, being MF is my all encompassing goal, so the charges wouldn't bother me. Better people than me will work it out for you where it costs you the least (paying the 10% etc), but for me the thought of being totally MF would be all that mattered.

Good luck on whatever you decide.

K_K

JimmyTheWig

What net interest rate can you get on your savings?
3% gross is easy enough (Santander 123 account) but the net rate will depend on your income tax position, and that of your spouse, and your cash ISA contributions, etc.

Lets assume you can get 3%.

So by putting the money in savings rather than paying it off your mortgage means you are losing around 2.5% interest a year.
By paying the mortgage off now you lose your ERCs, which are about 5% of the mortgage balance.
So money paid off in one year's time is better off done without ERCs (2.5% is better than 5%), money paid off in two year's time doesn't matter whether ERCs are paid or not (5% in both cases) and money paid off after three years is better paid now with ERCs (7.5% is worse than 5%).

Now without paying ERCs you can pay
10% overpayment now.
16% over the next year (average in 6 months time) in repayments.
7.4% overpayment in a year's time (10% of remaining balance).
16% over the second year (average in 18 months time) in repayments.
5.1% overpayment in two years time (10% of remaining balance).
16% over the third year (average in 30 months time) in repayments.
29.5% balance repaid in three year's time.

So I make that a total of 4.45% interest that you'd be paying, which is less than the 5% ERCs. So you'd be around £65 better off doing it this way.

If you can ask them to reduce your term to match the end-date of the product that you are tied in to then this would increase the 16%s in the above and make it even more worthwhile. In this way you'd only be paying about 3% total interest, saving you £260 over paying the whole thing off now.

Whether they will let you change the term (I don't see why not - Santander did for me, recently) and whether this messing around is worth £65 / £260 for you is for you to find out and decide.
Obviously this all changes if you have to pay tax on your savings interest, as per the start of my post.

Paying it off in full now is better than leaving it as it is.

mellowmick

Evening All:)
Thanks for the replies.
In relation to the above post i live alone so no spouse to include and i am not in the high tax bracket. I have not opened an ISA in this year,i do however have one from years ago with a measley £28 approx in it:)

I do like the idea of being mortgage free and the plan was to pay off the mortgage completely,open an ISA with the remaining money and put my monthly mortgage payment then into the new ISA.
I just thought i would see if anyone had a definitive answer to wether this was the best option. It seems i wouldnt save much by paying parts over time left so i may just pay it off:)

Thanks again for the replies.
Appreciate it:cool::beer:

Matt_The_Chippy

Yep, pay it off!!!! The feeling of doing so would be awesome. It would for me anyway!

JimmyTheWig

mellowmick wrote: »

I do like the idea of being mortgage free
It seems i wouldnt save much by paying parts over time left so i may just pay it off

Yes, it certainly sounds like for you the best answer is to pay it off.

Also...

i live alone so no spouse to include and i am not in the high tax bracket.
...
the plan was to pay off the mortgage completely,open an ISA with the remaining money

This means that you would be paying basic rate tax on the interest you get from the money that would be otherwise paying off the mortgage.
At 2.4% net interest (i.e. 3% after 20% tax) the figures I did above come out differently and, keeping the term the same you would be £60 _worse off_ by putting the money in savings than you would by paying off the mortgage and paying the ERCs.

[By messing around and changing the term you might be £120 better off, but at this point I would say it's not worth it - just pay the thing off and be mortgage free.]