Pay off or continue saving?

dannymccann

Hi all MSE'ers

Situation:

Joint mortgage, both 20% tax payers
£135,000 house, built 2010
5% deposit = £6,750
20% 0% builder loan (new build) = £27,000, repayable in full 01/03/2020
40 year 75% mortgage = £101,250 (current debt £99,600)
Current product, 37 year 3.99% SVR, unsure of any exit fees, £50 recurrent overpayment / month

Essentially, we are in the 'lucky' position where have half of the builder loan to be repaid saved in an ISA over the last 3 years, through saving £500 / month between us.

I am looking to remortgage and take on a 5 year fix (roughly 3.5% I've seen) at the moment, which should hopefully secure mortgage payments for the short term future without affecting the monthly payment, unless I decide to shorten the term.

My question however is whether I should use all, or part, of the ISA money, which currently earns 2.3% even with a bonus, to take between 5 - 10% chunk of the mortgage off (Halifax allows 10% overpayment in 12 month rolling period fee free). According to the MSE calculator a £8000 one off payment (8%) would shave off £35k+ of interest and around 11 years. However, this would obviously leave us £8k down on the savings to put towards repayment of the loan.

Future family commitments (we are both 25y/o) could well mean income is reduced in the next 5 years, so getting a new mortgage might prove tricky, as would continuing to save towards the loan. There are no immediate, or short term future, plans to sell up.

This would leave us in the position that we either need to add the builder loan on to a new mortgage product, increasing the LTV significantly (who knows what the mortgage market will be like next month, let alone 7 years) or sell up.

The logical step is to bung as much savings to the mortgage as possible, I know this, but what would others in this situation do?

Many Thanks

Suarez

Im no expert but could you pay off as much as the mortgage overpayments as possible using the savings keeping a decent amount for emergency and keep doing this until 2020 then re mortgage releasing £27,000 to pay off the loan.

Like I said though - Im no expert.

duchy

As the builder loan is 0% then there is no benefit in paying it off at this time -as the savings made in mortgage over-payment are a definite saving.

At the moment you are child free with stable employment so it seems this is the time to overpay the mortgage as much as is reasonably possible as you aren't going to get a better return for your money elsewhere and will be long term reducing your liabilities later so may have the option later for one of you to be a stay at home parent /work part time later on if that's something that may be a consideration..... and if it isn't then more disposable income for whatever you chose ...

Are you paying off /saving for anything towards the builder loan at the moment ?

dannymccann

@ Suarez, certainly is an option, but if we need to add £27k on to the mortgage to release the cash to pay the loan the LTV will increase by roughly 20% (27k cash / 135k property = 20%), which may make future mortgage payments (should interest rates increase) crippling

@ Duchy, when we bought the house we wiped out our combined savings of £7000 for the deposit. Since we have been here we have managed to save a further £13k using the £500 (ish ) / month method mentioned in the OP. This £13k is in an ISA and is currently building up nicely ready to pay off the loan in 7 years time, but is also a nice safey net should something happen in the mean time (new car etc) as it is Easy Access for that specific reason. It is this saving fund (well, 8 or 9k of it maximum) that would be used to offset against the mortgage as an overpayment, leaving us with a smaller safety net to build from again, and much less toward the builder loan

Suarez

dannymccann wrote: »

@ Suarez, certainly is an option, but if we need to add £27k on to the mortgage to release the cash to pay the loan the LTV will increase by roughly 20% (27k cash / 135k property = 20%), which may make future mortgage payments (should interest rates increase) crippling

But the 27k will already be on the mortgage if you didn't pay it off anyway. The way I suggested means that will not pay interest on £27k of your mortgage until 2020, then you remortgage to add this back on and pay off the loan.

Edit : You've mentioned about about using £8k above for the overpayment. Think of it this way..

1. Overpay mortgage by 8k
2. Remortgage releasing the 8k in 2020 to put towards the loan repayment.
3. You have saved mortgage interest payments on 8k for 7 years.

dannymccann

Just to clarify, if needed, I can't tell, that I wouldn't be looking to release £27k until deadline day for the loan (I certainly wouldn't be releasing it, say, tomorrow, to pay off a 0% loan).

And I see what you mean, by 2020 we would ideally have saved a decent chunk, lets say £15k, towards the builder loan so then it would just be a case of remortgaging enough to release the required cash, and the LV would only go up a little bit.

I had missed this crucial point!

Thrugelmir

Pay off as much as you can now. 6 months before the loan to the Builders is due for repayment seek a remortgage.

Still some years away. So you may even move property by then.

orcocan

definitely reduce the mortgage

bigadaj

What's the current value of the house, also would you qualify for the fixed rates you've seen with a low level of equity in the house?

dannymccann

Sorry I didn't come back, for some reason my subscription to the thread has expired so I didn't get any more alerts...

House value will (hopefully) be roughly what we paid for it, £135k, and I'm thinking of reducing mortgage debt to 65% (should it be required for the re-mortgage discussed below, £88k)

I've talked to the wife and we are now thinking we want to go the Offset route. Yes they are a little more expensive on the interest rate side, but every calculator I've used hammer's it home. The flexibility to use the savings as and when but still receive the benefit of reduced interest payments on the mortgage is for us. We are extremely disciplined with money (I am a management accountant, I run cash flow forecasts several times a month on the joint account with the aim at running that account as close to £0 at all times :rotfl: ) so we wouldn't suffer with the old problem of spending the savings willy nilly.

dimbo61

I love offset mortgages and agree with your idea of building up savings in the offset account to repay the builders loan in 2020.
You cannot guarantee that you will be able to remortgage at the end of 2019 to repay this loan and unless the builders have stated what rate you would pay if you fail to repay the loan you could end up with a very poor deal IE high interest rate or percentage of the sale price of the property.
We have been with YBS for the last 8 years and the difference between a 5 year fix and a 5 year offset fix is only 0.1% with them.
You also have an emergency fund if needed in the next 7 years