Should I clear off mortgage using savings?

jacklia

I have £11,000 remaining on my Interest Only mortgage with Northern Rock Asset Management at 4.54% and I'm itching to get it paid off!

I make regular monthly overpayments (which I increase by £10/month each year) - currently paying £270 per month overpayment.

I also pay a fixed monthly amount of £88.30 to NRAM which covers the interest plus currently results in an additional overpayment of around £42 per month. This figure of £88.30 hasn’t changed since our mortgage was transferred to NRAM at the end of our deal a few years back.

The mortgage is due to end in December 2017 but it looks like I’ll be paying it off about 6 months earlier, if we carry on with payments as above.

My question is - do I just sit tight and carry on with the payments to NRAM as I currently am doing or should I use my savings to clear the mortgage now (and then make payments back into our savings account to top it back up over the next 3 years - cash isa at 1.8%).

I get confused with the figures and can’t work out how much benefit there would be for either route?

Can anyone please help?

Thanks

Jackie

edinburgher

How much do you have in savings?

Also, I'd be remiss if I didn't point out that there are (taxed) current/savings accounts offering 3%,4% and 4.89% gross available. In any case, you need to shop around more.

jacklia

Got about £13,000 in the ISA at the moment...

ViolaLass

It's a no-brainer, provided you keep some emergency savings. You've got a higher interest rate on the mortgage than you could possibly get on your savings.

edinburgher

Assuming you have no job worries and there are no early repayment charges, I'd absolutely pay off the mortgage if I were in your shoes.

Your savings aren't keeping pace with inflation, you'll be £300+/mth better off once the mortgage is gone and you'll still be left with a small amount in savings.

suse*

I don't understand interest only so ignore me if this is a stupid question. If you pay that off do you then have to start a repayment mortgage instead, or do you have a way to pay off the capital?

If I'm just not understanding and that is all you have left to pay in total then I'd get it paid asap, why keep paying nram interest if you don't need to. It could even make more sense to even see if you could get once of those 0% credit cards for 30 months and use that to pay it off if you wanted to keep the isa, but still save on the interest payments. As others have said though 1.8% isn't brilliant interest, but depends if you're a higher rate tax payer too if some of the saving account / current account higher interest deals work out to be better than the isa after tax.

jamesd

suse*, with an interest only mortgage the extra payments are off the capital/mortgaged equity. The monthly interest reduces as the capital gets paid off.

jamesd

jacklia, your most profitable risk-free route is to get a 0% for purchases credit card and put all spending on that card, paying down the mortgage with the amounts spent on the card. Repeat with a new card once you fill the first one. Continue until you've cleared the mortgage. As the deals start to come to an end, apply for a new card and clear the one that is ending with the money spent on the replacement card. Use the ISA as a fallback in case there's a time when you can't get a new card or repeat customer deal. This lets you have both the ISA interest and the saving of mortgage interest. Use the saved interest and mortgage payments to gradually clear the cards, paying them off with the amount you used to pay on the mortgage.

suse*

oh thanks jamesd, I have that very wrong then. I thought interest only meant you only paid the interest, so needed another way to repay the capital like an endowment, where repayment meant you pay the interest AND the capital so once it is paid off that's it. Why are interest only payments so much cheaper then if you're paying back both interest and capital, how does that work?

Beckyy

Providing you have some emergency money put aside/a reliable income, and no early repayment charges I would absolutely pay it off!

jacklia

Thanks for your replies. There is an early repayment charge of £250 but it still sounds like I'm better paying off the mortgage with my savings (and then investigating other saving account options with better interest rates).

Jamesd explained my type of mortgage perfectly :-)

Thanks again.

Jackie