Better to pay off mortgage, or leave it as is?

Singh23

Hi, I have a fixed rate mortgage (5.29%!) until August 2018. I have the means to pay the total balance of ~£15k off. Generally speaking, is it advisable to switch it to a variable rate (6% fee) and keep it running - or should I just pay it off altogether and get it done with? I have no products which would pay off the mortgage should anything happen to the policyholder.

Many thanks!

SavingSteve

Pay that thing off, you are earning no where near that by leaving your money in savings accounts! The only reason not to pay it off and switch to a lower rate is if you want to save the money for a rainy day fund.

Thrugelmir

As you are paying over 5% interest. The 6% early redemption charge doesn't look too bad. Are you able to overpay the mortgage. As may be worth while overpaying by the maximum allowed prior to settling the debt.

SavingSteve

Oh, "6% fee" - Early Redemption Charge, got it.

In that case what Thrugelmir said!

marathonic

A 6% redemption fee that you can avoid by paying 5.29% for two more years?

The 5.29% is effectively costing you 2.29% so it's not as clear-cut as you might thing. You could be better retaining the £15k as an emergency fund in something like the Santander 123 account.

Singh23

Thrugelmir wrote: »

As you are paying over 5% interest. The 6% early redemption charge doesn't look too bad. Are you able to overpay the mortgage. As may be worth while overpaying by the maximum allowed prior to settling the debt.

I'm allowed to do up to £1k. I'll look into doing that then immediately settling, thanks.

marathonic wrote: »

A 6% redemption fee that you can avoid by paying 5.29% for two more years?

The 5.29% is effectively costing you 2.29% so it's not as clear-cut as you might thing. You could be better retaining the £15k as an emergency fund in something like the Santander 123 account.

Could you kindly explain what you mean by effective cost? I already have a fully occupied 1-2-3 sole and joint account, also.

marathonic

Singh23 wrote: »

Could you kindly explain what you mean by effective cost? I already have a fully occupied 1-2-3 sole and joint account, also.

By clearing it immediately, it's going to cost you 6%.

By clearing it in August 2018, it'll cost about 10.58% (5.29% * 2).

So it's really only costing an additional 4.58%, or 2.29% per year, to let the fixed rate run to the end of it's term.

If you already have savings as an emergency fund, I'd probably just go ahead and clear it.

Thrugelmir

marathonic wrote: »

By clearing it immediately, it's going to cost you 6%.

By clearing it in August 2018, it'll cost about 10.58% (5.29% * 2).

So it's really only costing an additional 4.58%, or 2.29% per year, to let the fixed rate run to the end of it's term.

If you already have savings as an emergency fund, I'd probably just go ahead and clear it.

By clearing now. You've then the benefit of the freed up cash to save/invest. Part into a pension would boost the return further.

snarffie

I think the above figures are wrong.

1. If you clear the debt now (6% penalty), you will pay £900.

2. If you pay the debt off over 24months (5.29%), you will pay £840.50 (which is equivalent to a 'penalty' of 5.6%.

So slightly cheaper to pay off over two years, and you have the security of £15k in the bank for rainy days. (You will knock about £50 off the £840 if you pay £1000 off the loan at the start of each year too)

AnotherJoe

snarffie wrote: »

I think the above figures are wrong.

1. If you clear the debt now (6% penalty), you will pay £900.

2. If you pay the debt off over 24months (5.29%), you will pay £840.50 (which is equivalent to a 'penalty' of 5.6%.

That cant be right.
If its £900 to pay off at 6%, which it is, it cant be £840 at 5.29% in total over two years.
It might be £840 a year. Though I make it £793.50 each year. Nearly £1600. So £700 cheaper to pay off immediately.

snarffie

AnotherJoe,

I can see where the confusion lies, but look at it this way.

At month 0 (start of the loan) you are paying interest on the £15000 balance. At month 1, you are paying interest on the remaining £14450 balance (you paid off £550 in month 1). And so on...

As you can see, each month, the interest is paid on a diminishing balance and not the original balance, so simply calculating 5.29% x2 doesn't give you the correct figure. The above is based on monthly interest being calculated, which is the case with most mortgages nowadays.

Take a look at this website to illustrate the concept (click the details button after typing in your numbers)

http://www.whatsthecost.com/mortgage.aspx

Hope this helps.