Looking for a steer on which way to go

sgblender

Hi Folks
I’m after a bit of mortgage advice please. About 7 years ago I was in some serious financial trouble and re-mortgaged my house at the time to the maximum to pay off my debts. Since then I’ve been saving whilst paying interest-only on the mortgage and taking advantage of the low mortgage rate. My wife and I want now to start paying back the capital again but I’m unsure as to what the best thing is to do.
The mortgage at the moment is a little under 140,000 with the house valued at 145,000 so very little equity to play with. The mortgage payments at the moment allow us to save around 500 pounds per month and over the period we’ve managed to save some 20,000 pounds in cash which is split across a number of savings products. In order to start paying off the capital I think that we have three choices.
1. Overpay the mortgage by somewhere around 350 pounds per month until we can build a bit of equity then re-mortgage onto a capital and interest product
2. Re-mortgage onto an offset mortgage and link the 20,000 pounds savings to that mortgage
3. Pay off a chunk of the mortgage using our savings and re-mortgage onto a capital and interest product.
I really don’t know which option is best. Ideally we’d like to keep some of my savings back (maybe around 5,000) rather than lose it all as I’m nervous of the employment market etc and would like to keep a small cushion. Any advice would be gratefully appreciated.

Leon_W

It really depends on what interest rate your mortgage is on. If it's a low rate and you are receiving more in interest on your savings than the mortgage is costing then it seems a bit silly to repay any of the capital at all.


If the mortgage rate is higher then it would make sense to pay some off, and as long as you are not in an Early Repayment Charge period, and your mortgage lender allows it, then lump sum capital repayments are usually possible.

sgblender

Thanks for the reply. It is low (around 2.5%) but Its higher than what the savings are accumulating. I've checked with the mortgage provider and over-payment is an option with no financial penalties.

Leon_W

I would say you need to have a serious think about switching from your interest only deal in that case. At the moment you have a great rate and A LOT of flexibility which you will never get back by going repayment.


You say you're worried about the employment market. If you make overpayments that's fine, if you lost your job you can immediately revert to the interest only payment which you would find almost impossible if you switched.


I seriously advise people to think about what they are giving up (interest only) even at higher rates than yours. It is impossible to switch back given your circumstances.

lonestarfan

I agree with Leon. There is no need to switch to repayment. You just need to overpay as you say there's no penalty to overpaying.
If you switch to repayment with a specific term and specific payment based on that term then you become contracted to make those payments. If you get in a situation eg lose job, where you can't keep up that higher payment then you risk repossession and defaults on your credit file. It's safer to keep with lower payment and overpay.

Thrugelmir

Don't switch products at the current time. Do overpay as much as you able to. Particularly if your savings interest rate is lower than that you are paying on the mortgage.

How many years are remaining on your mortgage? As you'll need to target repaying the capital over this term.

amnblog

Why not delay the decision for now whilst making monthly overpayments to a level you feel you can manage.


In 6 or 9 months you have more of a view as to what is comfortable for you and will also have a lower mortgage balance.

enthusiasticsaver

If you are paying a higher rate on your mortgage than you are getting in interest on your saving it makes sense to make lump sum repayments as and when you can providing there is no fee or financial penalty. If you are in insecure employment you can remain on interest only rather than repayment and continue to make lump payments whenever you are able. Each time you make a repayment they will recalculate your monthly payment which means they will reduce anyway meaning you can save more. As you say it is best to keep an emergency fund back as well.

Yorkie1

sgblender wrote: »

Ideally we’d like to keep some of my savings back (maybe around 5,000) rather than lose it all as I’m nervous of the employment market etc and would like to keep a small cushion. Any advice would be gratefully appreciated.

Common opinion is to ensure you have 3-6 months' outgoings available in a rainy day fund.

sgblender

Thanks guys for the advice, I appreciate it. Looks like the overpayment option is definitely the way to go. I've also been looking at my Life Insurance linked with the mortgage which is a level term death and critical illness policy. I'm wondering if its worthwhile reviewing this as well and looking towards something which will pay out a lump sum at the end thus meaning that I might make my repayment target by the end of my 25 year term.

Any thoughts on this or is it maybe for a different board?

amnblog

That is not a practical idea.


Your life insurance is for protection only and should stay that way.


The days where policies existed with investment potential and life cover have long gone.