Should I pay off my mortgage discussion

drcrab

Hi there, I'm new here (and the computer just crashed on me so I'm typing it again!!). Would greatly appreciate some advice on our situation. Many thanks in advance.

We currently have a 100K mortgage and about 24.5 years left on it. It's a tracker (.54% above BOE rates) and we're overpaying almost double into it at the moment.

We had a baby 9 months ago and put our 2bed mid terrace up for sale 6 months ago to move into bigger premises. Since then the house prices have dropped significantly and we've seen the price go from 160K to 130 (optimistic) or 100K (neighbour's house - quick desperate sale as had to pay for care home costs).

We'd offered on a 4 bed house which was going for 336K. It's since dropped to 250K (various reasons). We spoke to bank and the new mortgage repayment would be very very affordable for us. So we'd like to go for it, but we can only go for it if we achieve the 10% deposit for bank (25K). We can only get 25K if we sell our house for 130 (optimistic). Estate agents are winding me up trying to get me to drop the price. It's not dropping the price that's the problem - I can't drop it AND move if we don't have our deposit!!

My question is, should we continue to overpay into our mortgage (which will reduce the mortgage but we might see the money disappearing into an invisible black hole - so in a year's time we might have 90K in mortgage, but house valued also at 90K?!!); or should we pay some of it into a savings account (where although it might be low rates, we might have some form of a deposit for new house?)..?

We have no debts other than mortgage and a small loan which will finish in March by which time it'll free up another £300/month. Should we plough this extra £300 into the mortgage or stick it in savings?

We currently have about 14-15K in ISAs together, another 2.5K in savings or so.

Thanks very much in advance for any advice rendered!!

jamesd

drcrab, you either sell fast or accept being locked in to your current place for 3-10 years as you watch the declining value eat all of your equity.

You do have at least one way to escape this fix. Sell at whatever you can get and rent for one year. If current trends continue the prices of the more expensive place will have dropped enough by then for you to have the required deposit. You may also have saved enough from lower rent costs compared to mortgage interest for that difference to help your savings a bit.

It looks as though your best course is to sell fast, accepting only 15k profit if necessary to get that done before prices fall even more. the estate agents aren't winding you up. They are telling you the truth about what it will take to sell. If you're lucky and that manages it. It may not, since you're competing with those 100k deals and auctions and buyers who are prudent are just sitting and waiting for the desperate sellers to crack first.

This answer makes the savings answer easy: you won't have the mortgage to stick the money into, so savings is where it would go.

Or you could borrow and see if the lender would accept a borrowed partial deposit, some would. Or you could use ISA money to increase the deposit.

This response assumes that general predictions are correct and that we see two years of declining house price values. I don't see a great reason for you to be buying in a dropping market when you can rent for a while and then buy more cheaply. Rent a nice place for a year. Or two. You'll probably be able to rent a nicer place than you can buy, for less than the mortgage cost. Then you can smile about how much lower the mortgage you need is when you do buy.

Lisa1969

Hi, like a lot of you on here I've been considering whether to pay extra off of my mortgage each month. My mortgage agreement was up for renewal a few months ago, I'd had a great tracker rate before that so was a little bit dissapointed with the choice of tracker rates when I renewed. Turns out I was one of the lucky ones, I managed to get a 0.74% above Bank of England base rate before they jumped up even more then disappeared all together! I owe just under £92,000 over 21 years.
All the mortgage overpayment calculators I've looked at seem to show less of a saving the lower the rate goes so although personally I'll have a bit to spare each month now the rates are down does this mean now is not actually the best time to be overpaying? Also is it really worth overpaying now if I can't afford to continue doing that in the future? It seems like it's a long term commitment to make any real impact. I'd really like some of your thoughts on this please. Apologies if this message comes up twice, the forum seems to keep crashing on me!

smith9891

My OH has just left her job which had a pension to go into a job without one. Would we we better off paying extra off the mortgage (20 yrs to go ) or investing in a pension. My OH is 43. I have a quite a good pension fund and she would have a small ish one from her previous job. Any advice welcome!

missk_ensington

If your mortgage is an a really low interest rate (below 4%) and you dont have any other debts then I would put your money in an ISA and just leave it there. You can still get ISA's paying around 5% interest, maybe more, can withdraw it at any time. I would only pay off mortgage once interest rate starts to increase (hopefully by then you'd have a nice little nest egg in cash for that occassion) and there's the added bonus that you've got a safety net in cash for anything unplanned like home improvement, car repairs, a holiday...etc etc. I cant tell you how many times Ive cleared my ISA and paid off mortgage (only to realise its only saving me a few quid a month), then seeing a holiday or something I really want and wishing I still had the money in the bank!

Judith_W

Hi missk_ensington,

Thats really helpful. For some reason I thought it would be better to pay off as much of my mortgage as possible when the rates are low but that is backward.

Thanks

Judith

jamesd

Lisa1969, inflation is high and likely to rise. That will decrease the real value of the amount you owe on your mortgage. So your best bet is to put your money into savings or investments that pay more than inflation and more than your mortgage interest rate. Let inflation do the work of reducing your mortgage for you for a while, as your income rises by something closer to inflation, so it becomes easier and easier to afford the payments on the mortgage.

smith9891, the pension value should have grown by more than the mortgage interest rate if it was reasonably well invested, so as an investment it was likely to be better than paying off the mortgage. It's also important to provide for retirement and the easiest way to do that is to start as early as possible on the job of getting better growth than the mortgage interest rate. So the pension choice was probably a good one.

Judith_W, yes, it's backward and don't forget that inflation is probably going to rise for a few years, possibly after deflation for a while in 2009. That's really good news for anyone with a large debt, provided their income increases at something close to or above inflation. Can seriously reward not paying off the debt for a few years, provided you can match inflation and the mortgage interest rate for the savings.

Here's the effect of say 7% or 3% inflation on the real value of a 100,000 mortgage for a few years, assuming that your income rises with inflation:

1 year: 7% 93,000 3% 97,000
2 years: 7% 86,490 3% 94,090
3 years: 7% 80,435 3% 91,267
4 years: 7% 74,805 3% 88,529
5 years: 7% 69,568 3% 85,873

So hope for a nice bit of inflation!

emh_2

Hi
Can anyone help?

I was just about to reduce my mortgage term today, since the recent rate drops meant we are paying less each month. But having read some recent posts it seems that we might be best saving the money instead? We have a nationwide lifetime tracker and have about 7.5 years and £54k to go. We are also overpaying the max allowed, £1000 a month (over 2 products) but we can take out any of our overpayments if needed so I always thought it was the best place for our cash since we're both 40% tax payers. We have used up ISA allowance but I did manage to secure a fixed rate savings account with B&M last week (6.5% for a year?), should I start putting overpayments in there instead? should I take out some of the overpayments we have already put into our mortgage? or should I continue to overypay/reduce term on mortgage.

many thanks

Welshlassie

emh wrote: »

Hi
Can anyone help?

I was just about to reduce my mortgage term today, since the recent rate drops meant we are paying less each month. But having read some recent posts it seems that we might be best saving the money instead? We have a nationwide lifetime tracker and have about 7.5 years and £54k to go. We are also overpaying the max allowed, £1000 a month (over 2 products) but we can take out any of our overpayments if needed so I always thought it was the best place for our cash since we're both 40% tax payers. We have used up ISA allowance but I did manage to secure a fixed rate savings account with B&M last week (6.5% for a year?), should I start putting overpayments in there instead? should I take out some of the overpayments we have already put into our mortgage? or should I continue to overypay/reduce term on mortgage.

many thanks

As you are both high rate tax payers your mortgage rate would need to be very low in order for it to be worth paying into a savings account and I doubt 6.5% would be high enough to beat your mortgage rate.

jamesd

emh, if you're actually paying higher rate tax instead of paying higher rate money into a pension and getting a rebate than it will be hard to beat even quite low mortgage interest rates. That BM account is just 3.9% after you've paid higher rate tax on it.

If either of you is 50 or over, or will be 55 or over when you're content to have the mortgage end, then you might consider a pension mortgage to get greater tax efficiency. Pay into a personal pension, get the 40% tax rebated, then take out the 25% tax free sum when you're over 50 (now) or 55 (from 2010) to pay off part of the mortgage and leave the rest to provide pension income. About 45% of the money you pay into the pension will end up coming out in the 25% tax free sum, with the rest remaining in the pension. So it's not the fastest way to reduce the mortgage, just more efficient overall for mortgage and pension combined.

If you're willing to lock the money up for a while then you might consider lending at Zopa, which can currently achieve gross rates of 8-10% after fee and bad debt allowance, all variable depending on market conditions. the money is tied up until borrowers on three to five year terms repay it with their regular monthly repayments.

Given current stock market conditions you might consider using the money there via unit trusts, since prices are quite low compared to general past values, though they certainly could move lower and stay there for many years.