Mortgage overpayment and buying friend out

PogMoma

Hi,

My friend and I have a joint mortgage but he doesn't live in the property and doesn't pay towards the mortgage at all. He simply helped me out to get the mortgage in the first place. However in a couple of years time, he may want to buy a property of his own in which case we will have to get him removed from the joint mortgage.

- Remaining mortgage is about £303k over 29 years.
- I have savings of about £25k in ISAs.
- The mortgage is a tracker with no restrictions on overpayments.
- I am able to make monthly overpayments.
- My current salary is £40k which will go up to minimum £43k in a couple of years time.

Q1) Should I use the savings to overpay the mortgage? (Leaving some emergency cash in ISAs)
Q2) Should I make monthly overpayments, would it help?
Q3) What would need to happen when he decides he wants to be removed from the joint mortgage? I'm worried that the bank may not let me re-mortgage alone.

Foxy-Stoat_3

At 4.5 times your salary, you will struggle to get a mortgage of over £200,000.

So overpay for the next 2 years and when the time comes, use your savings to try and secure the mortgage on your own through a broker.

Do you have a Deed of Trust set up to protect your money?

PogMoma

Thanks for your reply.

So I keep the ISA as it is and just make overpayments?

I don't have a Deed of Trust set up. Just looked it up, do I just need to fill in an application form from their site?

Foxy-Stoat_3

No, its between you, your friend and a solicitor or sort out.

Your friend will need to sign a Transfer of Equity to you in order to be removed from the mortgage, once a mortgage is agreed in your sole name. I would hope that you took legal advice at the time as your friend may not want to give up an asset like this without some consideration.

JimmyTheWig

Does your friend own any of the equity in the house?
What is the house worth, for that matter?
What are your chances of selling the house and buying somewhere affordable on your own?

audigex

(Amateur opinion!)

Would it not make more sense to over-pay as much as possible now, to increase the amount of capital you're paying, rather than interest? Right now you're basically servicing the interest, but I would have thought the important thing is to reduce the capital as swiftly as possible. That means getting as much money into the mortgage as fast as possible

My suggestion would be to put the ISA into it immediately, which would bring your capital down to £265k rather than £292k in 2 years, (saving you nearly 5,000 in interest).

Then over-pay until you hit your yearly limit. After that, put the over-payment into your ISA (or other savings account) until you roll into the next "year" for overpayment, and again dump as much as possible into it again.

PogMoma

The flat is worth £380k at the moment and we're joint tenants.

It's a bit complicated but he will not claim anything from the property.

Worst case scenario I will sell and move somewhere else but don't necessarily want to do that as I also look at it as an investment especially since the value has gone up by £80k in the last 2 years and will still increase (Central London location).

PogMoma

audigex wrote: »

(Amateur opinion!)

Would it not make more sense to over-pay as much as possible now, to increase the amount of capital you're paying, rather than interest? Right now you're basically servicing the interest, but I would have thought the important thing is to reduce the capital as swiftly as possible. That means getting as much money into the mortgage as fast as possible

My suggestion would be to put the ISA into it immediately, which would bring your capital down to £265k rather than £292k in 2 years, (saving you nearly 5,000 in interest).

Then over-pay until you hit your yearly limit. After that, put the over-payment into your ISA (or other savings account) until you roll into the next "year" for overpayment, and again dump as much as possible into it again.

That's what I initially thought - put all of the ISA into the mortgage now and make overpayments. I don't have a limit on the overpayments.

I wanted some advice before I actually did it and whether I'd missed something.

audigex

If there's no overpayment limit, and you need to be able to refinance in ~2 years, then yeah I'd personally pile every penny I could into the mortgage right now.

With a mortgage, earlier payments make far more difference than later ones: overpaying the first few years can make the difference of barely denting the mortgage, compared to making a sizeable chunk in it: simply because you're reducing the amount of capital you're paying interest on, so less of your payment in future goes to interest too.

The more you pay off early, the more capital your later payments are paying, and the more it snowballs.

JimmyTheWig

PogMoma wrote: »

The flat is worth £380k at the moment and we're joint tenants.

It's a bit complicated but he will not claim anything from the property.

Worst case scenario I will sell and move somewhere else but don't necessarily want to do that as I also look at it as an investment especially since the value has gone up by £80k in the last 2 years and will still increase (Central London location).

Now might be a good time to talk to your friend about an exit strategy.
If you can't remortgage into your name (sounds like you'll struggle according to Foxy-Stoat, but others may have other ideas) then you'll have to sell to release your friend. Would they be happy waiting the potentially many months it takes to find a buyer (at a price that you are happy with but they ultimately wouldn't care about) and go through solicitors, etc?
If you are downsizing the chain could be pretty lengthy.
I wonder if the answer is to start the selling process now.

As to the overpayment / ISA question it basically boils down to which has the higher interest rate. Obviously you need cash for an emergency, but if you are paying a higher rate of interest on your mortgage than you get on your ISA then you may as well pay the money off the mortgage.

PogMoma

Thanks for everyone's advice, much appreciated.