What to do with spare pennies?

TallulahBelly14

Hello, clever people. I think I need some advice about what to do (I also suspect I've made some bad decisions over the years so ready to be chastised here...)

So we have a big mortgage - we bought for £480K in 2010, with a £80K deposit. We went for the interest-only option as I was pregnant at the time and we wanted to keep our outgoings low. We currently owe £390K of this and the rate of 3.74% gives us a monthly payment of around £1,300, with 24 years to go. (Sorry if some of these amounts seem obscene but that's London for you ).

We're managing at the moment, but could no doubt reduce our outgoings further in order to make over-payments. Although, in the last 6 years, I've gone from being a high earner to having more of a flexible income (started my own business), and we also have high childcare costs.

What's prompted my question is that we're about to receive a lump-sum (around £80,000 after tax), from selling some property, and I'd like to make sure we're doing the right thing with it. One option is to plough it all back into the mortgage. But I'd like to spend it on extending our current home - we live in an area where prices seem to be on the up, and I'm told kitchen extensions are good for adding value. According to Zoopla, the house is worth £780K, so it's added an extra £300K in 6 years.

My logic is that we can't afford to move to a bigger house in this area without taking on even more debt, so extending seems to be the only way to get more space. And by staying in the property for longer, we'll eventually get to the point where we can pay off the original £480K, and have enough left for a smaller property - I'm thinking in 20 years when the kids have left home (post-Brexit crash permitting).

Does that all make sense? I really just wanted to check that I'm not crazy for deciding not to overpay on the mortgage, and to see whether there's a better way of doing this. I do desperately want to be mortgage-free, but perhaps that's not realistic for us in the short-term? Any advice would be hugely appreciated...::A

And very sorry if this isn't the right place for this - it's my first post on here...

Jonbvn

TallulahBelly14 wrote: »

Hello, clever people. I think I need some advice about what to do (I also suspect I've made some bad decisions over the years so ready to be chastised here...)

So we have a big mortgage - we bought for £480K in 2010, with a £80K deposit. We went for the interest-only option as I was pregnant at the time and we wanted to keep our outgoings low. We currently owe £390K of this and the rate of 3.74% gives us a monthly payment of around £1,300, with 24 years to go. (Sorry if some of these amounts seem obscene but that's London for you ).

We're managing at the moment, but could no doubt reduce our outgoings further in order to make over-payments. Although, in the last 6 years, I've gone from being a high earner to having more of a flexible income (started my own business), and we also have high childcare costs.

What's prompted my question is that we're about to receive a lump-sum (around £80,000 after tax), from selling some property, and I'd like to make sure we're doing the right thing with it. One option is to plough it all back into the mortgage. But I'd like to spend it on extending our current home - we live in an area where prices seem to be on the up, and I'm told kitchen extensions are good for adding value. According to Zoopla, the house is worth £780K, so it's added an extra £300K in 6 years.

My logic is that we can't afford to move to a bigger house in this area without taking on even more debt, so extending seems to be the only way to get more space. And by staying in the property for longer, we'll eventually get to the point where we can pay off the original £480K, and have enough left for a smaller property - I'm thinking in 20 years when the kids have left home (post-Brexit crash permitting).

Does that all make sense? I really just wanted to check that I'm not crazy for deciding not to overpay on the mortgage, and to see whether there's a better way of doing this. I do desperately want to be mortgage-free, but perhaps that's not realistic for us in the short-term? Any advice would be hugely appreciated...::A

And very sorry if this isn't the right place for this - it's my first post on here...

What leaps out at me from your post, is how will you pay the mortgage at the end of the term? You could look at a remortgage to get a much better rate than 3.74%.

Other issues to be considered in conjunction with your mortgage are what is your situation regarding an emergency fund and pensions?

TallulahBelly14

Thanks for the reply Jon. You're right, I'm relying completely on my property increasing in value to pay off the mortgage. And keeping the mortgage payments low through going interest-only has allowed me to build up an emergency fund - I have been contributing to a cash ISA, and until last year I had a stakeholder pension through work which I should continue to top up.

It's good to know that I could potentially get a better rate on my mortgage. Although I'm nervous to rock the boat, because I wouldn't want to somehow end up with a worse deal, or have a bank refuse to give me an interest-only option so have my outgoings jump up. Admittedly I haven't done a huge amount of research (just used a few online calculators), so that's probably me being a pessimist. I'll have another go at talking to someone about that. Thank you.

But assuming I have enough saved up for an emergency, would experts say that the decision not to overpay is a sound one?

TallulahBelly14

Now I think of it, I need to do some admin to work out exactly what my pension situation is. I've had 3 different pensions through jobs over the years so I should probably try to consolidate them somehow. But that involves some research which I've not made time for. I'll add it to my to-do list.

The emergency fund lives in two ISAs that we never touch, and that's up to £78,000, so we could definitely live for a year on that, should disaster strike. I'm sure we could get better rates on those as well - the First Direct one says 0.9% AER which doesn't sound impressive at all.

Molillie

I'm no expert, but maybe you could check on what your payments would be if you shopped around and paid a chunk of the expected money you have coming in off the mortgage, maybe split it between home improvements and overpaying. You might be able to end up paying the same but on a repayment basis, which would leave you better off at a stage when your children might need help if they want to stay in London and conditions are similar to today. There is also the possibility that they won't rush to leave home, so you could end up faced with repayment at the end of the term and not really wanting to sell. Your interest rate seems high, but I don't know whether that's because of the size of the loan or whatever. You seem to have the emergency fund and pensions under control, in that you're making provsion, and just need to make sure it's the most appropriate. These are just my thoughts from reading your posts, but on a personal level, I'd want to be making sure the mortgage was being repaid, or that savings were in place for that. Good luck.

TallulahBelly14

Thanks very much Molillie, that's helpful in itself. Helps me realise I need to be so much more focused with exploring all those options. It's hard work though...

TallulahBelly14

This prompts another question....

I've been looking into re-mortgaging, and it does seem like I could get a better deal. But I notice that the calculators ask for details of the current property value. Does that mean that if I went with another bank I'd have to borrow even more money!? If so, that's surely the last thing I'd want to do...?

elsien

No, they're looking at the loan to value ratio. You don't need to borrow more to remortgage.

melanzana

Do you absolutely, definitely, without any doubt WHATSOEVER need to live in London?

If you sold and bought something within commutable distance, would that ever be an option for you?

Would reduce the mortgage, and you could keep the cash for other things maybe.

But I am only throwing it out. I am sure you have your reasons for staying where you are.

Jonbvn

TallulahBelly14 wrote: »

The emergency fund lives in two ISAs that we never touch, and that's up to £78,000, so we could definitely live for a year on that, should disaster strike. I'm sure we could get better rates on those as well - the First Direct one says 0.9% AER which doesn't sound impressive at all.

Given that your mortgage rate is 3.74% and your savings rate is only 0.9%, your arrangements are losing you GBP2215.20 every year.

You should look at increasing the rate on the ISA & reducing your mortgage rate. If you are unable to get your ISA rate above your mortgage rate, look to move some of the ISA money into your mortgage - leaving yourself with suitable emergency funds.

AnotherJoe

What Jonbvn said, your emergency fund is too large and is losing you a lot of money, you should seriously consider paying a chunk off the mortgage, and I'd suggest you do that with all your lump sum at as well unless you desperately need this extension.

If the extension is just as an "investment", I suggest you look at part paying off your mortgage. One issue may be, you won't be able to remortgage to a new IO mortage, but only a repayment.

However if you look at the amount of money you will lose by staying with such a high interest rate over 24 years, and what your plans will be when that comes to the end , forcible downsizing, I think you would be better advised to use a combination of around half the ISA money and a fair chunk of the £80k to reduce your mortgage and move to a repayment mortgage*

I think this will give a better payback than your speculation on an extension gaining you money, and it's a certain payback, you can work out how much money you'll save and it will be many many tens of thousands of pounds, which currently you are throwing away through low savings rates high mortgage rate and keeping the interest on your mortgage at its maximum for the lifetime of the mortgage simply because its IO. (IO doesn't just mean "interest only" it also means "paying as much in total interest on a mortgage as its possible to do". Not really a good thing " )

If an extension is 'necessary', then perhaps consider if the premium you are paying to live where you are is worth it, (you are in a house worth the best part of a million pounds and it's not big enough !!!???). but if it is then extend with the £80k ( is that enough though), and pay off some of the existing mortgage with the ISA so you can change to repayment.

* Changing to repayment and a lower interest rate will save you a lot of money over 24 years. I'm sure someone could do the exact maths, it could easily be £50,000 using my back of a fag packet estimate. Since you took your IO mortgage out, rates have come down substantially, your LTV is hugely better, and you have income you didnt before. All that says a rate of say 2% less than current should be easily attainable and thats without trying.