Redeem or keep overpayment Fund?

Nemo

I've made lump-sum overpayments into my Co-operative Bank mortgage, and received a letter a couple of weeks ago saying that the overpayment fund is now equal to the capital balance (£35000). It said that I could phone up and redeem if required.

The lady I spoke to confirmed that there's now a zero-balance, and she's requested a redemption figure to complete the mortgage, which she expects to be the a £195 admin. fee. She did point out though that I could just leave the mortgage running to the full term (I think it's about 6-7 years to go), therefore having the option of using the overpayment fund in future.

My natural instinct is to complete now. I would rather have it all done with. I can't see me needing to dip in again, but am I being silly completing when there's no disadvantage that I can see to letting it run?

Thanks.

Martinslovechild

I would complete now. Strangely enough, I'm also with the Co-Operative Bank and i'm expecting an identical letter in just over 2 weeks!

Double check whether you're required to pay the full £195 admin fees - the FSA ruled on this 6 months ago and as a result you're only required to pay the amount which was in force when you applied for your mortgage with the lender. For instance, this was £75 when I took out my mortgage with the Co-Op nearly about 4 and a half years ago, but they've since increased this twice, firstly to £95, then to £195.

Back to your original question - there's really no need to keep the mortgage unless you're thinking about moving in the very near future, but even then there's nothing to stop you going back to them, or indeed elsewhere should you require another mortgage.

BTW - they send the deeds back to you about 6-8 weeks after redeeming; there's no option to keep £1 outstanding on the mortgage for them to hold the deeds. As these are held electronically for a lot of people now anyway, the paper copies don't have the importance that they once did.

Nemo

Thanks for your reply.

She did say it will be the admin fee that was in place at the time I took out the mortgage. I thought the fee at the time, about 6 years ago, was still the £195, but I'll dig out the original paperwork to compare to the figure they quote me.

MarkyMarkD

I don't see why moving house in the next few years (as per MLC's post) is relevant. If you move house, and need a mortgage, you can get one then. Having an existing one won't help either way.

I would still keep the account going, as it's a convenient and cheap source of funds should you need them in the next few years without any underwriting.

If, for example, you lost your job, it would be very hard indeed to get a loan to survive on. But you could draw it down on your mortgage with no hassle and no questions asked.

Nemo

I've just checked my original paperwork. Would the redemption admin charge also be known as a sealing fee? If so, the charge at the time was £75, same as Markslovechild.

Thanks for your reply MarkyMarkD. I'd still welcome any other opinions.

ailuro2

Will they pay any interest on the overpayment fund?

I doubt it- you can either move some or all of the money to a higher rate interest savings account/ISAs or pay off the mortgage and save what you have been paying in monthly payments.

Make that £35K work for you,one way or the other.

fwiw We are with the Co-op too- we've had no hassles,decent rates, enjoy their ethical stance,home-based call centre,we bank with Smile too-hopefully in three years we will get the same magic letter,our overpayment fund 'only' stands at £11500 at present.;)

Kaz2904

Why don't you let it run until December so that you can build up a pot of money in higher interest accounts. That way you will have money available should anything break down but would still need to borrow or save for big purchases. I would say that it would be better to do it this way and then keep saving what you should have been paying each month in order to not waste the money!

MarkyMarkD

ailuro2 wrote: »

Will they pay any interest on the overpayment fund?

I doubt it- you can either move some or all of the money to a higher rate interest savings account/ISAs or pay off the mortgage and save what you have been paying in monthly payments.

Make that £35K work for you,one way or the other.

fwiw We are with the Co-op too- we've had no hassles,decent rates, enjoy their ethical stance,home-based call centre,we bank with Smile too-hopefully in three years we will get the same magic letter,our overpayment fund 'only' stands at £11500 at present.;)

An overpayment fund isn't a pot of real money. If you should have a mortgage balance of £30k (say) and you've overpaid £30k, you'll be paying interest on nothing. So the £30k of overpayments is effectively earning you the mortgage interest rate, tax free.

Martinslovechild

Nemo wrote: »

I've just checked my original paperwork. Would the redemption admin charge also be known as a sealing fee? If so, the charge at the time was £75, same as Markslovechild.

That's correct - it's one and the same, so you'll only be required to pay £75, thereby saving yourself £120.

Martinslovechild

MarkyMarkD wrote: »

An overpayment fund isn't a pot of real money. If you should have a mortgage balance of £30k (say) and you've overpaid £30k, you'll be paying interest on nothing. So the £30k of overpayments is effectively earning you the mortgage interest rate, tax free.

I can kind of see your point MarkyMarkD, but if you have borrowings of £30K and an overpayment fund of £30K, then you have an 'effective' balance of £0 thereby earning no interest at all.

As it's not possible to 'earn' interest on the Co-Op mortgage account, if your overpayment fund is greater than the balance on the mortgage account then a letter is automatically sent out asking you whether you'd like to redeem the mortgage now or keep it going with future payments being drawn down from the overpayment fund.

What's the point in keeping an arrangement like that going? The original poster may as well just clear the mortgage now and put direct savings into an ISA initially and then into savings accounts once his £7K limit has been exhausted.

Robflh

Hi Nemo

That is a very interesting situation. You have a £35,000 mortgage, which for the purpose of this example, is at, 7%. You have, in overpayments, £35,000 that is effectively earning you 7%. Therefore, one is costing 7% , one is making 7% and they are cancelling each other out. That may seem a very strange way to put it but as they say, I have a method in my madness.

If you continued to make your mortgage payments, I would suspect that you would not be earning any interest on that money.

£35,000 is a lot of money and if you invest that money and receive a return on that investment of say 10%. Then using the example above that £35,000 is earning 3% more then it was, which is an extra £1050 per year. Six or seven years later, when the mortgage is dead, it would be making you £3,500 per year.

As I understand these things, it is possible to receive a very high return on that investment but in doing so, you could risk loosing some or all of that money. Whether the return would be worth the risk is only something you can decide

The other option you have is to use the £35,000 to pay off the mortgage. Then instead of a DD for the mortgage payments, you would have a DD for the same amount and pay it in to an ISA. Once that money has built up to the maximum £7,000, you could again invest a lump sum for a high return based on the risk you are prepared to take.

Do not forget you can add money to the ISA anytime you have a bit of spare cash, just like you did with the overpayment's and every so many years you will be able to add and additional £7,000 to your lump sum, from you current ISA.

Therefore, to answer your original question, you first have to answer this one. Which, of the two options will net you the most money, from now, until the day you decide to retire or until the day you die?

The only person that could possible answer that question for you, is an Independent Financial Advisor.