Paying off some of mortgage???

Dec_3

Hi,
We have got an interest only mortgage at the moment and are going to change it to a repayment one and are thinking of paying some of it off which would leave us with £12,000 over five years. Does anyone know if this is a good idea paying off a lump sum like this or is better to save the money. We really dont know
Anyone got any ideas please??

lisyloo

Do any redemption charges apply to your mortgage? i.e. can you pay money off without penalty.
What interest rate are your paying?
What tax rates do you both pay?

Sorry for the questions, but they are relevant to coming up with the right answer.

Dec_3

there are no redemptions. the rate we are paying it back at the moment is 5.75%. The tax bracket is the normal one. Thanks

david78

If you have the money and have no redepmption penalties on your mortgage you would be very wise to pay a chunk off your mortgage. You can always access this cash again later by remortaging if you need to. At the moment as you are bothh basic rate tax payers, you would have to find a normal savings account paying 7.37% or a cash ISA paying your mortgage rate (5.75%) to do better. Both are unlikely.

On the other hand you should have some money in ready savings for emergencies, so personally I would put some in a cash ISA (one each?) and some towards the mortgage.

If you do pay off a lump sum check first that your mortgage "calculates interest daily". Because if it does it annually, you would be better off putting the money in s savings account first and waiting until just before the year end for your mortgage term before making the lump sum payment. Check with your lender about this.

lisyloo

In general I agree with David.
Any money you put in savings accounts (not ISAs) will be taxed at 20% so it will be impossible to beat the mortgage rate.

However as David says there are a couple of caveats.

As he says you should have emergency money available. This is to get you though a few months in am emergency e.g. job loss.
An ISA is the perfect place for this because it's accessible and not taxed.
It's difficult to say how much you need because we don't know how much you've got at the moment, but 3 months income is the usual rule of thumb.
You have allowances of £3K each in cash.

Dec_3

Great help and thank you very much!!

DaveK

At the moment as you are bothh basic rate tax payers, you would have to find a normal savings account paying 7.37% or a cash ISA paying your mortgage rate (5.75%) to do better. Both are unlikely.

I don't understand this. What has being a basic rate tax payer got to do with saving or paying your mortgage off? If you've got 25 years to pay off a mortgage you'd be charged more in interest than you would have saved over 25 years in an ISA. As you've got an interest only mortgage you'll never pay it off so you've be mad not to pay your mortgage off as soon as you can.

Rule of thumb is always pay off your debts before saving it.

Scott

Good advice there. Always pay as much of your mortgage as you can afford off, as soon as you can.