Overpay mortgage advice please

contrast

I am currently 10 months into a repayment mortgage with a five year fixed rate at 2.69%. I am fortunate enough to have just received an unexpected gift from my family that will allow me to be mortgage free and still have enough emergency money in savings. I did not envisage this when I was taking up the mortgage therefore took up what was the best rate I was offered. The caveat is that deal came with repayment penalties of anything over 10% per year of the 5 year fixed rate period (no fees after that). Penalties are 5% of the remaining balance in years 1 and 2, 4% in year 3, 3% in year 4 and 2% in year 5.
I am asking for advice on three options.
1. Putting all the money in savings and continuing to pay the mortgage until the 5 year is over provided I can find a savings product with guaranteed net return of over 2.69%.
2. Pay mortgage outright and incur the penalty. Does anyone have experience with this? Can you negotiate this figure down with lenders?
3. Overpay every year but just within the limits allowed not to incur the penalty and having the rest of the money in savings.

I am between option 2 and 3 to be honest.

Any advice would be greatly appreciated.

Thanks

ally18

Hi,

I'm sure someone with better advice will come along soon but if it were me, option 3 definitely.

I don't think you will be able to get a higher rate on your savings to combat the fixed rate interest payment at the moment so pay off 10% this year. Look into the highest rates going to invest the remainder until you can do the same next year.

Good luck

edinburgher

In my opinion, the best option is the one that makes the most of your money.

1) Great idea assuming you can beat 2.69%
2) Not sure why you'd pay ERCs when you can do #1 and make more money anyway
3) The second best option, you get some of the benefits of savings rates higher than your mortgage and you still pay it off faster. Then in 4 years time, you're out of the tie-in and you can pay off anything remaining (if you wish to do so).

If you need the peace of mind, go for 2. If you want to make the most of the generous gift that you have received, 1 is probably the option to go for (at least for now). There's nothing stopping you from using a combination of 1 and 3 based on prevaling savings interest rates.

It's a nice predicament to be in :beer:

ally18

Mind you, on the other hand, it depends on the amount to be paid off.

If you pay 10% off now, you then incur the 5% penalty on the remaining amount. Depending on how much that will be, would you make that amount back in savings over the 5 years?

Some sums needed.

edinburgher

I see what you're driving at, but I'm not 100% convinced that fee vs. savings over 5 years is a fair comparison.

Yes, you can make 5% in 5 years, easily. But shouldn't the opportunity cost of tying up the £500 as a fee should also be considered over the 5 years?

The best rate a basic rate tax payer can currently get is c. 3.92% after tax. If they saved the £500 for 5 years, they'd get c. 20% back.

contrast

Thanks for the responses so far. Mortgage payments are 867 per month.
I have not done any maths since a-leve 17 years ago.
The way I am looking at it is:
Option1: To get a savings rate significantly over 2.69% I will have to go for a five year fixed. The likelihood is over those five years rates may well go up and I end up losing out.
Option 2: There are about 4 years left. If I pay the 5% penalty, spread over four years, that is about an extra 1.2% per year, but I am saving a 2.69% per year. That makes me about 1.5% better off, per year.
Therefore option 2 wins over option 1 even if savings rates don't go up unless I find an account with interest over 2.69+1.5 = 4.29% - Unlikely.
Option 3: This is where my maths lets me down. Roughly, and please let me know if I am looking at it the wrong way, if I overpay unto 10% per year, at the end of five I will have overpaid 50% of the mortgage. To make it simple for myself I say, lets say I could overpay the 50% from now, I would effectively be cutting my rate in half, i.e 1.35%. Again to make this better than option two, I would need a savings account offering a net rate 1.35+1.5 = 2.85% remembering the simplistic assumption I made of overpaying it at once. It means I would need a net savings of at least around three percent.

What do people think of my thinking above?

midnight_child

What a nice dilema to be presented with!!

2.69% is a decent rate but I think you will struggle to beat this in savings after tax. Ed is correct that you can get 5% (3.92 after tax) in regular savings accounts, but these are usually restrictive in either allowing max £500 invested per month, £3000 total etc. Even if you opened several of these accounts you would still probably have the bulk of the money initially held elsewhere, in an account offering presumably a much poorer rate.

Therefore assuming I could not get all my money held at 2.69% after tax in savings account then I would immediately OP as much as I can without incurring any fees, while deciding what to do next.

I could potentially do the sums to work out the option which is the cheapest, but its impossible without knowing the actual amount owed, standard monthly payment (full term of mort), and what level of interest you can achieve in savings.

MC

ally18

edinburgher wrote: »

I see what you're driving at, but I'm not 100% convinced that fee vs. savings over 5 years is a fair comparison.

Yes, you can make 5% in 5 years, easily. But shouldn't the opportunity cost of tying up the £500 as a fee should also be considered over the 5 years?

The best rate a basic rate tax payer can currently get is c. 3.92% after tax. If they saved the £500 for 5 years, they'd get c. 20% back.

Really sorry, this has me completely lost . Where does the £500 fee come in?

OP - how much do you owe on your mortgage? Work out 10%, minus it and then what is the 5% penalty amount on the remainder?

Looking at a good account with a good rate on it, use this to work out how much you could make in interest over the 5 years.

This hopefully will give you an idea instead of pfaffing around with the various rates you mention.

Sorry, I prefer to keep it simple for my brain

contrast

Thanks MC,
total mortgage is 221k, 31 year term, monthly payment 867.77. My mortgage is with a different lender to my bank. I have a meeting with my bank to see if they can offer a rate around 3% but looking at whats about, maybe 1.5% is more realistic

midnight_child

My last post crossed as im a slow writer!!

Im now getting very confused but I think your calculation above is slightly out: Yes you would be 1.5% better off per year in option 2, but this is assuming you get zero interst on savings (i.e putting your cash in your mattress). I think you need to subtract the ERC from savings rate rather to find out the level at which 1 becomes preferable.
What is the outstanding balance?
MC

pjcox2005

It does depend on your risk profile but with that level of cash, I think I'd personally be looking at savings and investments rather than just paying off the mortgage.

Even simple points like ISAs and regular savers can pay more than the 2.69% and will definietly if interest rates increase over the next 5 years.

Other options such as pensions (if you can't contribute at present but this would allow you too having a tax saving) or shares.

You can still keep a large chunk low risk but this seems a better way personally than paying off a lowish rate mortgage and then having funds tied up going forwards.