Is it worth overpaying mortgage by £30k at 6% fee with 9 yrs left fixed

Fezzington

Ok my brain hurts trying to be sure I make the best financial decision. Anyone in the know out there who can help me crunch numbers or notice a flaw in my logic I would greatly appreciate the help.

Current Stats (Feb 2017)
Mortgage: Barclays, £190k remaining (joint with gf)
Standard Repayment: £1062/month
Interest: 3.25% pa, calculated daily
Fixed Term Ends: Dec 2025
Overpayment without incurring fees: 5% of balance a year
My Bank: Club Lloyds, sitting on £35k (recent inheritance), only £5k gets the 2% interest so the rest is currently doing nothing

Option 1: Stick £30k in mortgage asap, full 6% over-over-payment charge as i've already used some of the inheritance to pay amap non-fee over-payments (5%) on the mortgage for this year.

By my calculation that gives me 30,000/1.06 = £28,300 that would impact my mortgage, and £1,700 would go to the bank for the fees. If we just did our standard payments to the end of the term (Dec 2025) that would have reduced the interest by £7.8k

If we then ALSO did max over-payment every year until then, we'd spend £40.7k to lower it by £48.4k (another £7.7k shaved off interest). Total £15.5k interest dodged. (plus interest of extra savings ~£0.9k - see below)

BUT we would lose out on potential interest generated by the £30k AND by lowering our mortgage this year we would then reduce the 5% over-payment we would be allowed to pay in all the following years. ALTHOUGH the extra money we then can't put towards the mortgage each year would be saved & generate interest (around 1k a year @ 2%).

Am I making this harder than it needs to be?

Option 2: Stick 30k in a fixed savings ~2% over 9 yrs, voila £5.85k interest. We'd then spend £51.6k on fee-less over-payments to lower it by £60.9k. Which is £9.3k interest. Total £15.15k interest dodged/generated.

In both scenarios we hope to then be able to pay the remaining amount off the mortgage, which I think is £36k in option 1 and £62k in option 2, through our savings (which remember are £35k greater in scenario 2).

So option 1 looks more appealing, but is under the assumption I can only generate 2% pa on my 30k.

If anyone has an easier way of working out whether £30k at 6% fee is better used on mortgage or invested/saved elsewhere please share.

Any other comments are welcome as i'm sure there are other pro's/cons to either option besides escaping interest!

JimmyTheWig

Fezzington wrote: »

If anyone has an easier way of working out whether £30k at 6% fee is better used on mortgage or invested/saved elsewhere please share.

As a rough rule of thumb...
6% charges with 9 years to go is the equivalent of 6% / 9 = 0.67% a year.
So paying it off the mortgage will be worth 3.25% interest, less 0.67% fees. So 2.58% a year.
So you'd need to be able to get 2.58% interest a year on your savings on average for the next 9 years.

Currently that's not possible. If things stay as they are you'd be better off paying it off the mortgage now.
But in a few years, who knows?

ThePants999

JimmyTheWig wrote: »

So you'd need to be able to get 2.58% interest a year on your savings on average for the next 9 years. Currently that's not possible.

Might not be possible with savings, but it's certainly possible with investments, if you'll accept some risk.

ThinkingOutLoud_2

If you don't mind saying
- how old are you both?
- are you both or either of you higher rate tax payers (guessing maybe with 190k mortgage)
- what are you doing in pension contribution terms
- do you have an "emergency" fund?
- do you have any other debt?

The questions as identified is if you can get a better return doing something else with the money. These help identify if some other possibilities are worth considering I think.

Lovin_It

yeah pay it off asap, unless the 6% fee is due to fall any time soon.

trailingspouse

It's a nice problem to have!!

I can't comment on the figures, but a few things to bear in mind -

Once that money has gone to overpay the mortgage, you can't get it back. That would make Option 2 the more sensible one - you keep the money in a savings account, use it if a rainy day comes along, but if all is well you use it to overpay the mortgage in a few years' time.

Is the mortgage the only debt you have? The best course of action is to pay off the highest interest debts first - maybe a car loan, or credit card. Or use some of the money towards buying a car for cash and avoid having to take out a loan in the first place.

Depending on where you are in life, this might not be your 'forever' home, and of course the mortgage will be paid off anyway when you sell, so overpaying would be of limited benefit and the money might be better used for other things.

I'm sure someone will be along shortly to look at the numbers in more detail.

MyOnlyPost

JimmyTheWig wrote: »

So you'd need to be able to get 2.58% interest a year on your savings on average for the next 9 years.

Currently that's not possible. If things stay as they are you'd be better off paying it off the mortgage now

Yes it is but not in a single account. By opening multiple high interest current accounts and regular savers you could probably earn ~4% on £35k, utilising joint accounts and accounts for both partners. It is time consuming to set up and not for everyone but it's possible this year at least

dunstonh

If anyone has an easier way of working out whether £30k at 6% fee is better used on mortgage or invested/saved elsewhere please share.

What about pensions and investments? Most of those would be expected to outperform the mortgage over the long term. I just did a review for a cautious investor who had bad timing before the credit crunch and he has returned over 7.6% per annum despite that.

If you are a higher rate taxpayer than a pension becomes even more favourable.

Boredatwrork

Any outstanding debts get cleared first then...

If you are allowed 5% of your current balance 190k, thats £9.5k straight in done and dusted and a 3rd of your dilema sorted there and then.

The rest chuck into the best savings account for 12 months.

Rinse and repeat. I would be tempted also to have 5 to 10k of it kicking around for a worst case scenario that you can get your hands on quick too (in case of job loss etc).

armchaireconomist

Personally, i'd skip the fees and overpay the maximum allowed. 190k w/ 5% allowed should come in at £9,500 OP for this year.


Of the £21,500 remaining i'd be tempted to stick say £6,500 (for simplicity sake) in an easy access account, then invest the remaining £15,000 in a S&S ISA


In 12 months time i'd against overpay the allowed 5% from the £15,000 investment, which has hopefully made a decent return by this point.

Fezzington

ThinkingOutLoud wrote: »

If you don't mind saying
- how old are you both?
- are you both or either of you higher rate tax payers (guessing maybe with 190k mortgage)
- what are you doing in pension contribution terms
- do you have an "emergency" fund?
- do you have any other debt?

.

Thanks to everyone for their replies! Regarding the questions above: I'm 29, she's 27. With bonuses we both sneak into the 40% tax bracket ~£40k. We were both brought up under the "Save then buy" mentality as opposed to "Buy then re-pay", so we have no other loans or debt and neither of us own a credit card.

I hadn't thought about my pension, but I inquired at work and i'm on the lowest 1% pay-in, so that's certainly something I can bump up - thanks for the suggestion. Anyone know what a good % is to pay to your pension?

Anyone who has mentioned the £9.5k going to 5% over-payments, I have already paid the £10k max to take it from £200k mortgage to £190k, so not allowed to pay in any more until Jan 2018 (it was a large inheritance).

We have no rainy day fund, and I agree with those who mentioned it that we should have 5k or more easy-access funds should we have unexpected outgoings or job loss. We each have Club Lloyds account so if we kept that topped up around the £5k mark that should suffice.

It's not our forever home, we will move in 7-8 years time and likely require a top up on the mortgage for a new place.

Looking at the figures provided by JimmyTheWig, 2.58% average seems achievable over the coming years.

I will have a read through the threads about investments and see what I can learn.