Pay off a fixed-mortgage (very) early?

fred_davies

Hi,

My partner has just sadly lost her grandmother, and has been left some money in her will. It now turns out that we currently have more in savings than we do on the rest of our 23 year mortgage, taken out a year ago from Nationwide at 5.09% fixed for five years.

It will cost us £1,775 to pay it off early, but it seems crazy to have this money in the bank while still giving the mortgage firm money.

She hopes to do a post-graduate course in September so I will be the sole earner for a year, and so using this money towards a larger family-capable house could not be considered an easy option at this stage.

It is likely we'll need to get a larger mortgage within the next few years when we think about children, so should we pay off this debt and the early redemption penalty, or continue to pay our fixed mortgage as we may not get a fixed rate like this again?

Thank you for any advice you can give us.

Fred

Joe_Bloggs

That is a good rate and you can overpay £500 a month with a 1 day lag before it reduces the capital. So the capital can go down by 6K a year. You can establish a trusted financial relationship this way. You can take up your ISA allowances and there are a few very lucrative savings options that MSE Martin has researched. Read his articles before anyone suggests anything speculative.
J_B.

Lemoncurd

I'd weigh up how much you'll pay in interest over the next few years (minus the interest you'd earn after tax on your savings) against paying the penalty.

mrcow

I'm not sure how your mortgage is designed to work with overpayments, but is it possible to pay it all off, bar a token amount and keep this running until the penalty period finishes? At least that way you'll not be paying interest on such a large amount borrowed? (I'm sure that they probably have some sort of proviso to prevent people doing this??).

As long as you are not paying any more in interest than the redemption penalty, then it makes sense.

fred_davies

We are allowed to overpay £500 per month before getting penalised, (as Joe rightly posted), so at the very least we should do that.

We have ISA accounts and max these for the year when we can, and will have a look at the investment advice.

Joe, sorry to be naive, but what additional benefit would continuing to pay the mortgage with a lender be? Would they not look favourably on offering a mortgage in the future should we pay it off now?

Thanks to all for the advice, btw!

MarkyMarkD

If you have a 3% penalty for paying it off 4 years early, it's costing you 0.75% less than you think (effectively) to keep the mortgage for those 4 years. So that's around 4.34%. (Might be different as I'm guessing the 3% penalty).

If you can earn more than 4.34% tax free on the savings, then it's worth keeping the mortgage. Otherwise, you'd be best to repay it.

It will be easier to borrow again in a few years with a perfect repayment record on a mortgage. Having cleared the balance doesn't count for much. But that's not a reason in itself if you are losing a signficant amount on the interest differential.

Joe_Bloggs

It is always better to have the facts.
Nationwide have a 5,4,3,2,1% early repayment schedule. So after the first year, you pay 4% [money for nothing] to get rid of Nationwide.

This leads to a mortgage of around £42500. I have no idea as to value of the property. Neither do I have any idea as to the inheritance.

If your partner is not earning/student then a tax free savings vehical could be set up in their name. That could match the interest you are paying with Nationwide. It is always nice to have money in reserve. I wish I did.
J_B.