Lump sum overpayment - will savings in interest be more than early repayment charge?

winstononions

• I've got about £50,000 left to pay on my mortgage.
  
• I've got about £40,000 savings.
  
• I'm currently 18 months into a 3 year fixed rate deal at 3.65%.
  
• I can pay up to £6000 per year as an early repayment without incurring a penalty. I've already paid that £6000 in for this year.
  
• The early repayment penalty currently stands at around £1000, although I'm not sure if it's dependent upon by how much I overpay (eg. would I have to pay the full £1000 penalty if I overpaid by only £1? And if I overpaid again by £1 next month, would I have to pay another penalty? I'm not sure how the whole overpayment penalty thing is calculated)
  
• I am currently paying about £140 per month in interest on the mortgage.

Question: If I pay the full £40,000 savings into the mortgage now, incurring the £1000 penalty, what would be the effect on how much interest I would have to pay each month? Because the mortgage would be reduced to £10,000 (ok, £11,000 because of the £1000 penalty), is the amount of interest I would pay per month dramatically reduced and would this saving in interest over the next 18 months (until the end of the fixed term deal) be more than the £1000 penalty?

bigadaj

Assuming the penalty is fixed and one off for a single annual pay,ent then this would effectively add 1% to the cost.

To me this seems to wipe out most of the benefit of overpayment, and you lose the flexibility of having the money available and liquid.

My preference would be to overpay the six grand allowed each year and then ideally aim to pay off the whole outstanding mortgage at the end of the fixed term if sufficient could be saved in the next three years.

getmore4less

don't forget to take acount of the savings rate you can get on the money.

look at reducing term to increase normal payments.

find out how the penlty will be caculated and if it will change.

dimbo61

You really need to speak to the mortgage centre where you have your mortgage.
You only have 18 months left !!! Before you can pay your £40k in savings off the debt.
How much interest are you now paying each month on the £50k
Can you reduce the term to say 18/24 months and pay a much bigger mortgage payment each month.
My lender charged me £50 to reduce the term.

dimbo61

Do you pay about £150 a month interest only ?
You may be better off paying the £1000 ERC
Speak to your lender first

winstononions

I pay about £460 a month in total on the mortgage, of which about £320 is capital repayment and around £140 is interest (although the interest figure for some reason varies by a few £s from month to month).

So as things stand, over the next 18 months I'd be paying roughly 18 x £140 (£2500) in interest, which is obviously more than the £1000 penalty. But I'm not sure how much less interest I'd be paying per month if I reduced the mortgage to £11,0000 by paying in £39,000 and incurring the £1000 penalty.

getmore4less makes the good point that I'd also have to factor in the interest I could make on having £40,000 savings, which on the current savings rates I'm getting, I'd estimate to be around £1000 (I could get more in longer term fixed rate deals, but I want instant access).

Not sure I can do anything more to reduce the term or increase the monthly payment at the moment. The permitted £6000 overpayment I've already made this year went towards reducing the term. I think that's me used that one up for this year.

It is starting to look like leaving the money in the bank is perhaps the better bet, although it would feel psychologically so good to have the mortgage reduced to a number less then £10k.

Any further input gratefully received.

Thanks.

getmore4less

phone the lender and ask them if you can reduce the term to 2 years

getmore4less

winstononions wrote: »

(I could get more in longer term fixed rate deals, but I want instant access)..

if you pay of the mortgage you have no access so tieing it up for 18months would be no different.

winstononions

getmore4less wrote: »

phone the lender and ask them if you can reduce the term to 2 years

Yeah, I can but ask, I suppose. But do lenders generally accept such short terms, given all the interest they'd no longer be getting?

They would hopefully also be able to explain more about how their penalty system works.

getmore4less wrote: »

if you pay of the mortgage you have no access so tieing it up for 18months would be no different.

Well, I wanted the instant access in case it became clear that I'd be better off ploughing the money straight into the mortgage.

getmore4less

winstononions wrote: »

Well, I wanted the instant access in case it became clear that I'd be better off ploughing the money straight into the mortgage.

You do the numbers first then make the choice on where to save the money

you have to make the calculation based on the interest you could get if you did not pay off the mortgage(so can put it in a term account).

fixed mortgage, fixed savings, then it won't change the calcs after making the choice. if one was variable it could change

It may be the penalty is tiered drops each year so you have another point to calculate in 6 months.

winstononions

Contacted my mortgage lender and they seemed willing to let me reduce my term to 2 years, without incurring any penalty, so that seems to be a happy middle ground.

Thanks for the advice.