Mortgage overpayment with 5% ERC

toronomous

I have £75,000 which I would like to use to overpay my mortgage. Unfortunately I'm in year 1 of a 5 year fix and any overpayments would incurr a 5% early repayment charge.

I'm trying to work out the best option (in terms of overall long-term cost) for making the overpayment. My main question is whether I'm definitely better off paying off £75,000 now and taking the hit with the ERC - because of the benefits in the long-term, or whether I should wait until April 2017 when the early repayment charge is reduced to 4% and invest it elsewhere for a few months.

According to the MSE Mortgage Overpayment Calculator "Overpaying would save you £24,744 in interest alone, and mean you pay the debt off in full 14 years & 6 months earlier. Normally you repay £571 per month. If you overpay a lump sum of £75,000, you'd be mortgage free 14 years and 6 months earlier. Your total payment over this period would be £112,413." So I think it's a no brainer but I want to make sure I'm not missing something.

The details:

• I have no other debts and have already put aside some money for savings, so the £75,000 is all allocated for mortgage repayment or investment.
• The mortgage is a Nationwide 5 year fix at 2.29% with 20 years left.
• The early repayment charge is 5% at the moment, and drops to 4% on the 30th April 2017, and so on each year.
• There's a fee-free overpayment allowance per-year of £15,000 which I've used this year but would be able to make use of again from the April 2017.

Thanks!

getmore4less

you can ignore the MSE calculator it will not work out the optimum payment options just what happens if you do overpay.

how big is the mortgage and normal payment.
Whats the best saving rate you can get?

can you reduce the term? if you can what will the cost be.

you need to run the numbers from now till April 30th first.

toronomous

Thanks. Yep I realise the MSE calculator isn't going to tell me everything but it helps a bit.

The mortgage is £110,000 and normal payments are ~£600 a month.

I don't know if I can reduce the term or what the cost would be but would be interested to hear how that might help?

Running the numbers is what I want to do but I'm struggling to work out the calculations.

rtho782

If you pay the whole amount now you pay 5% of it (£3,750) in ERC.

If you wait until the end of the 4 years 6 months left on your fix, you will have paid 2.29% interest 4 and a bit times on that £75,000 of capital.

So, it's still cheaper to pay it off now than it is to wait until you have no ERCs.

It's actually cheaper to pay it off now, than it is to wait until next april and pay half a years interest for a 1% saving in ERC.

muhandis

In your place, I would not even consider paying any ERC until it (at the very least) went to 2% or below.

Your problem boils down to finding a place to park your money for the next 4 years where it gives you a return of at least (or as close to) 2.29%.

In your place I would first squirrel away as much as I can in high interest (2%+) current, savings accounts (BoS vantage 3%, Club Lloyds 2%, etc+ regular savers attached to them). You've probably already done this.

With the remaining money, I would invest it across a variety of interest bearing P2P investments (without locking capital into anything in excess of 1-3 years at most) looking for something around 4-5% to compensate for the riskier nature of these investments and the fact that there is NO FSCS protection of capital.

But that's just what I would do based on my risk appetite.

toronomous wrote: »

Thanks. Yep I realise the MSE calculator isn't going to tell me everything but it helps a bit.

The mortgage is £110,000 and normal payments are ~£600 a month.

I don't know if I can reduce the term or what the cost would be but would be interested to hear how that might help?

Running the numbers is what I want to do but I'm struggling to work out the calculations.

getmore4less

toronomous wrote: »

Thanks. Yep I realise the MSE calculator isn't going to tell me everything but it helps a bit.

The mortgage is £110,000 and normal payments are ~£600 a month.

I don't know if I can reduce the term or what the cost would be but would be interested to hear how that might help?

Running the numbers is what I want to do but I'm struggling to work out the calculations.

reducing the term increases the normal payment effectively overpaying from what you pay now with no ERC costs.

If we work on Nov to April inc that's 6 months

if you pay now you pay 1% more for the 6 months saving @ 2.29%
so roughly 0.145% or around £109 than if you paid it off May.

if you can get them to keep the payment at the same at £600pm for those 6 months it will help.

£110,000 @ 2.29% paying £600pm in 6 months you owe £107,648.
you also have £75k in the bank + the 6 months interest

you then pay off with erc 4% £72,115 and fee of £2885
(edit :see below I forgot the ERC free bit)

net position £107648 - £72115 = £35,533

if you pay £75k then that's £71429 off the debt and a fee paid of £3571

so now you have a mortgage of
£38,571 @ 2.29% paying £600pm in 6 months you owe £35,398 around £135 saved

Thing is you can probably get a better rate on the £75k for 6 months to make that £135.


At May the 1% cost for the year will be over the full year @ 2.29%
edit: and you will have another full ERC free which I forgot to put in the above calculations


edit: I missed the ERC free but you get the picture of how to do the numbers.


to get the amount owing figures I use(set to interest only and put in your payment don't use repayment)
http://www.whatsthecost.com/mortgage.aspx

getmore4less

Don't forget the tax on any savings.