Overpayment - What would you do?

Hi

I've joined this forum to seek the opinions of others on here. I've crunched the numbers for hours and hours, and no professional out there can give me actual advice. At the end of day it's my decision, so what I'm interested in is: What would you do in my situation?

I own a house valued between £550K-£600K. My mortgage has 18 years to run and currently stands at £169,000.

The bulk of my mortgage (£97,000) is fixed until May 2017 @ 5.34% (I took a 10 year fixed deal 7 years ago. I now wish I'd taken the 5 year option but it was a great rate at the time). In May 2017 this will move to a very attractive 2% above the base rate (currently 0.5%) so 2.5% if nothing changes in 3 years.

I then owe another £64,000 @ 3.69% which expires May 2014 before it moves to the 3.99% SMR.

Finally I owe another £8,000 which is already at the 2.5% rate and not locked in anywhere.

Come May 2014 I will have exactly 18 years to run and a lump sum of £54,000 available to me to pay off some of this debt. I've also estimated that I can afford to make overpayments of around £500 per month.


So this is my dilemma.

I can pay the lump sum off the largest mortgage, at the highest interest rate (5.34%) reducing this to £42,000 but this would incur fees of around £1,700.

I can pay the lump sum off the middle mortgage, at 3.99% and incur no fees leaving me with just £9,000 there

There's no point in touching the smallest mortgage as it's already on an unbeatable rate. Plus the benefit of keeping all 3 mortgages alive means if I can ever afford to, I can make 3 x £500 overpayments per month without penalty.

I've played with the numbers so much, I can see the benefits of paying all or some off each of the debts but in the long term I lose out on what might be favourable rates.

I could take the £1700 hit and save more interest by paying off a chunk of the 5.34% debt, but this debt could be on a very low percentage in 3 years time (2.5%), far lower than the 3.99% I'm paying on the 2nd mortgage.

I could pay £55,000 off the 2nd mortgage, there's no fees involved but at the same time why pay off a debt currently at 3.99% when you've got a bigger one at 5.34%.

The fact the large mortgage has such a nice expiry clause in 3 years time is making this an impossible decision for me.

So what would you do?

I have previously paid £1650 per month in repayments, but that was pretty hard going on my household finances. I'm now paying £1160 per month and seem to have enough to live on fairly comfortably. I've just started taking home an extra £500 per month, but my every increasing family outgoings appear to consume most of this. I would be OK paying £1300 a month, and by using the early repayment calculator on these forums, manually manipulating it to match my exact circumstances and interest rates, I can get the mortgage paid off in 8-9 years by paying £1300 per month.

But it's just that burning question. Where to pay off that £55,000 lump sum and how.

Your opinions would be greatly appreciated and may help make me make this decision.

thanks
Someone
«13456

Replies

  • edited 26 February 2014 at 3:27PM
    getmore4lessgetmore4less Forumite
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    edited 26 February 2014 at 3:27PM
    Summary. I think this covers it.

    House value £550K-£600K

    mortgage £169k 18 years May 2014 lump sum available £54k

    £97k fixed May 2017 5.34% followon 2.50% (base + 2%) ERC in may £1700 (1.75%?)
    £64k fixed May 2014 3.69% followon 3.99% SMR
    £ 8K 2.5% (base + 2%)

    (can't be bothered to work out the payments just yet would be handy to add them)

    total is £1160pm

    edit : I did it looks like around £700,£406,£46 ish

    Overpayment available £500pm? realy you seem to say otherwise?

    Overpayments upto £500 on each part?


    will have a think
  • getmore4lessgetmore4less Forumite
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    This is not the answer but an interim calculation.

    looking at the 3 years May 14 to May 17 you have around 54k lump sum pan £1100pm to go towards the debt + any extra.

    rough calc over 3 years if you pay off the 3.99% with the £54k then that mortgage goes to 10k over 3 years current payment is around £406 that can be finished in 2 years so 3 is easy.

    I think the optimum will be to start with £500pm overpayments on the 5.34 debt so they don't incure a ERC. then work out the optimum payments to make sure the 3.99 is paid off in 3 years.

    will have to do some more work on that. but need to go out now.
  • edited 26 February 2014 at 4:05PM
    SOMEONE_3SOMEONE_3 Forumite
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    edited 26 February 2014 at 4:05PM
    Hi, many thanks for your assistance

    My monthly payments are currently:

    5.34% £ 703
    3.69% (soon to be 3.99%): £407
    2.5%: £50


    To be a little clearer on the overpayments thing.

    I have a little more than £54,000 at the moment (inheritance). I've been paying £1000 per month off for a few months now (£500 into each of the larger accounts).

    I paid off £60,000 on the 5.34% account late last year at a cost of £1800 in fees. It seemed logical at the time as I had to pay it off somewhere and that one had the highest interest rate. I've kept the rest in a savings account whilst we upgraded the house and changed cars. So before I paid off that initial amount I was paying £1650 per month. This has now gone down to £1160 and I'm much more comfortable. I reduce the monthly payments as opposed to the term. (i.e: comfortable meaning I have no money left at the end of the month but aren't stretched anymore. Cost of living has gone up by that difference in a short space of time - lost child benefit and a few other changes). I should add here I have absolutely no other debts.

    I'm now earning £500 per month after tax more than last year, so I can in theory afford to pay £1650 per month again, however I'd rather not as that'll leave me short when something unexpected comes up.

    Working on the basis I pay off £54K of the 3.99% mortgage (without fees) leaving £10K debt. Using the repayment calc and leaving my payments as they are today shows I can reduce the term considerably too. The £700 per month main mortgage + £500 overpayment, and another £100 per month towards to mortgages #2 & #3 comes to £1300 per month. (Mortgage #2 would drop from £407 to something like £58 per month with that lump sum paid off). I'd be pretty comfortable with that, but maybe I should try to pay more.


    So to be clear, I was suggesting a single overpayment of £500 per month, on top of the then monthly figures, which in reality is only £150 more than today.

    The other dilemma is what to do with the 2 bigger mortgages. I could start up new fixed periods on either or both for much lower percentages. I could have something like 2% on the main mortgage but would forfeit the 2.5% outyears possibility & have to pay £ 2,900 in fees.

    At the same time I could pay circa £1700 in fees and rearrange the 3.99% mortgage for something more favourable without forfeiting that 3.99% non-deal.

    I can't get may head around if paying fees now to have 2% now is better than staying at 5.34% in the knowledge that I could be on 2.5% for the rest of the mortgage term in 3 years time.

    cheers
  • Prothet_of_DoomProthet_of_Doom Forumite
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    Not being funny, but open up a spreadsheet, and put in the current figures in the first tab, then copy that tab, and start trying various options.

    I suggest the first row is a list of the every month going into the distance,
  • SOMEONE_3SOMEONE_3 Forumite
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    To a certain extent i've done that, albeit using the calculator and pen/paper. I know exactly what the values of each mortgage are for the remaining years and where the savings are. i know the lot can be paid off in about 8-9 years no matter what I do. My issues are which way to go bearing in mind I don't know what the future of the base rate is going to be and every other factor that is essentially my decision.

    This is more a which way would you go question based on the information we have, weighed up against the variable information, like changes rates.
  • MisterMotivatedMisterMotivated Forumite
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    Hi. I can't be bothered to do the sums to see just how much impact the £1,700 fee has but, on first glance, I'd be tempted to direct most of my effort toward the £97k mortgage, on the basis that the interest rate is currently 1.65% higher than the middle one and will remain fairly high for the next 3 years. Also, with all the talk of when the base rate will rise, I'm reasonably confident it will be before 2017, affecting your 2% + base. I'm assuming this is variable so, even if the base rate is 0.5 in 3 years, it's highly unlikely it'll stay at that rate long term. Even a modest 0.5% rise will reduce the gap between your 'good deal' first rate and your fairly average second mortgage rate.
  • Just to throw another option into the mix...


    I'd suggest looking into the penalties to move the biggest chunk onto a better rate. From the terms you've described, I'm assuming you're with Nationwide, in which case they have some great 'ditch and fix' rates. You could then pay off your lump sum at the same time, and possibly even shorten the term. You have such a high LTV, you'll get the very best deals.
    Shrinking my mortgage!
    Nov 13 £166,000


    Jan 17 £142,900
  • SOMEONE_3SOMEONE_3 Forumite
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    Thanks for the latest comments.

    Yes, that base rate isn't going to stay like that forever, and possibly not more than another 12 months, so maybe I'd be stupid to hold out for that and not address the rates today.

    Yes, I am with Nationwide, I'm just not sure if I qualify for something when they already have me for another 3 years at 5.34%, but I'll look into those Ditch & Fix deals tomorrow, thanks

    The other decision then, if I can go that route, is whether to wrap the 3.99% debt into a new deal too, I guess there's nothing to lose other than the ability to overpay several accounts at the same time.

    Thanks so far, this is all helping loads and giving me different angles to consider

    cheers
  • Is there a charge associated with reducing the term of the higher interest charging mortgage?

    If not, then you could reduce it and then cover the higher mortgage charge for the next 3 years from the £54k lump sum?
  • SOMEONE_3SOMEONE_3 Forumite
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    Domino9 wrote: »
    Is there a charge associated with reducing the term of the higher interest charging mortgage?

    If not, then you could reduce it and then cover the higher mortgage charge for the next 3 years from the £54k lump sum?

    Very good point, I'd never thought about that. I'm not sure, I'll need to look into it


    Looks like I wouldn't qualify for Nationwide's Switch and Fix. It's for tracker customers only (my middle mortgage is actually on a tracker at the moment but is about to expire). The main mortgage is fixed at 5.34%. It looks like the reduction in monthly costs over 3 years is about the same as an overpayment penalty, so I'd basically only be swapping my BMR for the new SMR after 3 years
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