Living (wishing) the debt-free dream.

I'm 29, and my fiancee is 24. Between us, we bought a house last year.

Key facts:
- Bought September 2014 with a 267,750 mortgage
- Mortgage free date: September 2043
- 4 year fixed mortgage, 3.94%.
- Can pay off 10% (26,775) every year without penalty. 3% penalty on overpayments thereafter (until end of 4 year fixed period in September 2018.

Key changes:
- My parents passed away. Estate is paying out: £160k cash each + a mortgage free property worth £330k, split 3 ways between my brother, sister and myself, so a further £110k each.
- Using the inheritance, I've paid off 10% in the first year of our mortgage and 10% the second year, totalling £53,550 overpayments. At present, we now only have £207,800 outstanding on our mortgage, and resultingly have knocked 9 years off our mortgage.

Initially I topped my ISA up to £20,000, and placed £20k into a Santander 123 account. I still have £65k or so sat in a Nationwide account doing little and am wondering if I should incur the 3% overpayment charge, or even lose the ISA as well, and pay £85k (saving the other £20k for a wedding/honeymoon). I'll pay a penalty of £2,550, but if I've crunched numbers correctly, it is still a lot cheaper than: A) Reducing my term, B) Waiting to Sept 2016 to overpay another 10% without penalty, as the mortgage interest now at this stage is £680 per month, so between now and September '16 would cost approx £7400 in interest. I think I'm objecting to paying the £2,550 overpayment penalty, but in the bigger picture, it totally makes sense to overpay, doesn't it?

As a side note, the house is likely to be sold. My sister has a terrible credit rating, and my brother an unemployed student, so neither could obtain a mortgage. Neither wish to club together to buy me out. I've looked at Buy to Let mortgage, but I don't think it is for me, especially as I've just gone part-time. I don't think I can benefit from the property as an asset at this stage with so long to run/much to pay on my existing mortgage, and would prefer the cash to pay off my own mortgage in bulk, which to me makes the most sense. Keeping sufficient money aside for daily living, I would then be mortgage free within the next year or two. unless I'm missing other opportunities?

Replies

  • SeanymphSeanymph Forumite
    2.9K Posts
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    Forumite
    Whilst your number crunching on the surface looks reasonable what you haven't factored in is the income that money would gain if put elsewhere.

    Nationwide to an account which pays good interest - TSB pay 5%.

    If you put, say £20k into the TSB account then even after tax you are earning 4% interest.

    Your mortgage is lower than that BEFORE the overpayment penalty.

    So, I would be looking not to pay the penalty (and there is the added fact that it is a joint property and then you have paid for it - if I was your parent I'd ask you to be careful and perhaps give it a few more years before you put your all into something that wasn't being matched...)

    Anyway - apart from my caution over relationship outcomes, it doesn't even make financial sense.

    You would get more from not making any repayments if you got more than 3.94% on the money elsewhere.

    And, given that that is touch and go - make the repayments you are allowed, exceed the interest elsewhere, but definitely don't cost yourself 3K.

    I know you have such huge sums sloshing about that the penalty doesn't look too scarey - but it's a lot of money. Once you have put your money into your property you will no longer have access to it - hang onto what you have, be careful, husband it.
  • GT85GT85 Forumite
    15 Posts
    We have a declaration of trust in place, for my benefit, should it go tits up.

    Cheers for the reply. Correct me if I'm wrong. I did look at TSB, but that is 5% on balances up to £2,000, which caps at £100 per year. It doesn't pay interest on balances over that £2,000 limit.

    Santander 123 - 3% of £20k = £600
    Lloyds - 4% of £5k = £200
    TSB - 5% of £2k = £100

    If we opened 3 of each of the above accounts (joint plus 2 individual accounts), that would earn £2,700 per year (before tax), but also require £81,000 invested. Yet this next calender year I have 3.94% on an outstanding £207,800 mortgage, this year I will pay just under £8,000 in interest.

    At least that's my understanding of it all! :undecided
  • GT85GT85 Forumite
    15 Posts
    Can anyone clarify?

    Many thanks!
  • mikenolanmikenolan Forumite
    42 Posts
    Part of the Furniture Combo Breaker
    Forumite
    If you overpay £85,000 today then over the next year your interest payments would be reduced to around £4,800 but you have to pay a penalty of £2,550 so I work out that you'd be about £800 better off but this assumes you're not able to earn any interest on the £85,000 and you've already worked out that you can get at least a couple of grand. You'd also reduce the interest you pay in years 3 and 4 of your fix (though you'd also be able to OP 10% without penalty if you saved the £85,000 so the benefit isn't as great).

    You've not mentioned if you have any other savings so you should probably consider an emergency fund of some kind and you should consider any other significant spending you may have - house extension/rennovation, kids etc.

    Personally, I'd stick to just overpaying the 10% each year and accept the marginal extra cost as the "premium of liquidity". You may even want to consider using some of it for (slightly) riskier investments rather than the pitiful savings interest - if you can get a return of 5% on a chunk of it then that makes it better than overpaying.
  • Secret_Saving_SquirrelSecret_Saving_Squirrel Forumite
    4.1K Posts
    Mortgage-free Glee!
    Forumite
    Hello,

    There are lots of accounts, current and savings, paying between 3 and 6 percent. It is a faff doing a money juggle each month as some have certain requirements like two direct debits or a certain amount in each month. M and s and first direct both have regular savers at 6%. If you are willing to put in the work you will be much better off than paying the Penalty fee which in my opinion is daylight robbery and you should have no truck with the idea of paying a financial institution a fee just to pay off your own mortgage. They make enough out of us as it is. Good luck with whatever you decide and it is good to see a young person being so sensible. Hope you have some fun too though!
    Paid off mortgage nine years early in 2013. Now picking and choosing our work to fit in with the rest of our lives!
    Still thrifty though, after all these years:D
  • turtlemooseturtlemoose Forumite
    1.6K Posts
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    Forumite
    this website is a handy little tool that tells you which accounts to open and how much interest you'll get, it also tells you how to set up your standing orders to bounce money around to meet the minimum pay in requirements.
    MFW2021#27 - £364.88 / £1800
    1%MFW - £316.15 / £1070
    SIPP - £2264.40 / £3000
    (PAYE pension conts £107.56)
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