To overpay or not?

pahicks

Hi guys,

Looking for a bit of help to make sure I am not missing something. I have recently been told that due to the sad loss of a family member that I will be inheriting a large amount of money £182,000.

Being a very much money saving expert follower I have looked at the obvious things first i.e. Paying off dept (don't have any except for the mortgage) having some rainy day money (already have a reasonable pot) etc.

So have started looking at the mortgage, here are the details of the mortgage:

Mortgage type - 5 year fixed rate for 30 years

Amount borrowed £186,000
Interest rate 3.14%
Monthly payment £798.27
Yearly payment £9,579.24

* Early Repayment charge during first 5 years @ 5% of the amount left at time of repayment, 10% overpayment allowed each year without penalty.

I am currently just over 2 years into the mortgage and had no idea that I would ever inherit this kind of money. I am unsure if I should out right pay off the mortgage or if I should keep going until the 5 year period ends?

I have done the sums already, but am questioning if I have done it accurately or if I am missing something. I will attach my sums shortly, but any help would be greatly welcomed and hopefully mortgage free freedom would be wonderful! :j

pahicks

Right so the original mortgage was taken out for £186,000 and I am roughly 2 years in (started on year 3 if that makes sense) so:

Year 1 - £186,000
Year 2 - £182,209
Year 3 - £178,298

Assuming I could outright pay off the mortgage, I would have to pay the 5% early repayment fee, so...

£178,298 x 0.05 = £8,914.90
£178,298 + £8,914.90 = £187,212.90

So in total I would have to repay £187,212.90 if I paid off the mortgage today, so in addition to the inheritance I would have to find the following?

£187,212.90 - £182,000 = £5,212.90 extra lump sum required

Which is fine, I could do this with other savings although it would not leave me with much of a safety net, but the thought of not having a mortgage would be so nice!

Then working out that in another 3 years time, I could then potentially save the following mortgage payments:

£9,579.24 x 3 = £28,737.72

Minus the extra lump sum required to repay the mortgage

£28,737.72 - £5,212.90 = £23,524.82

Which sounds really nice :T

However I have a feeling that if I do this, I won't have much money in the bank for emergencies etc and I also think I might actually be worse off. Again I have done the calculations, which I shall attach shortly. Sorry for the long post everyone, just want to make sure I am not missing anything!

pahicks

Apologies everyone, this is a long one!

So same principle as before

Year 1 - £186,000
Year 2 - £182,209
Year 3 - £178,298

However assuming a over pay the 10% I am allowed each year and the paying the mortgage off as a lump sum, I think I am better off.

Year 3 - £178,298

Over payment of 10% allowed
£178,298 x 0.10 = £17,829.80
Dept left after 10% over payment
£178,298 x 0.90 = £160,468.20
Interest payment for the year
£160,468.20 x 0.0314 = £5,038.70
Normal capital repayment
£9,579.24 - £5038.70 = £4,540.54
£160,468.20 - £4,540.54 = £155,927.66

Year 4 - £155,927.66

Over payment of 10% allowed
£155,927.66 x 0.10 = £15,592.76
Dept left after 10% over payment
£155,927.66 x 0.90 = £140,334.89
Interest payment for the year
£140,334.89 x 0.0314 = £4,406.52
Normal capital repayment
£9,579.24 - £4,406.52 = £5,172.72
£140,334.89 - £5,172.72 = £135,162.17

Year 5 - £135,162.17

Over payment of 10% allowed
£135,162.17 x 0.10 = £13,516.22
Dept left after 10% over payment
£135,162.17 x 0.90 = £121,645.95
Interest payment for the year
£121,645.95 x 0.0314 = £3,819.68
Normal capital repayment
£9,579.24 - £3,819.68 = £5,759.56
£121,645.95 - £5,759.56 = £115,886.39

Overpayment - Capital Repayments
£17,829.80 + £15,592.76 + £13,516.22 = £46,938.78

Total Repayment Cost
£115,886.39 + £46,938.78 = £162,825.17

£182,000 - £162,825.17 = £19,174.83

Right so that's the amount I would have to repay and amount left, which at the moment would seem like I am worse off, however I was thinking I could invest the lump sums into a combination of 1, 2 and 3 year fixed bonds and easy access accounts?

pahicks

Just a really quick bit of maths based on the idea that I could invest £135,000 into a 3 year bond (found one paying 2.4% at the moment).

£135,000 x 0.024 = £3,240 a year
3 years x £3,240 = £9,720 in 3 years

So £19,174.83 + £9,720 = £28,894.83

I know this is missing tax for the savings, but based very roughly on this, I think I would be £5,370 better off keeping the mortgage until the 5 year term ends?

Thanks for everyone's help, just want to make sure I do the right thing, and at the end of the day an extra £5,000 in my pocket is. Not a bad thing.