Should I Pay Off My Mortgage.

Drive_By_Photography

Hello all!
I am very fortunate to have just inherited a sum that allows me to pay off my mortgage.

I am 3 years into a 10 year, £40,000 mortgage on a house worth approx £250,000.
The current mortgage balance is just under £30,000.
I am on a 5-year fix at 3.19%, paying just under £400 a month.
The early redemption fee is £1,450.

My inheritance is just enough to clear the mortgage.
This maybe a no-brainer, but should I clear the mortgage now, at the end of the 5 year fix, or just let the mortgage run its course and use the money for home improvements (I need a new roof and windows) and maybe a new car?

Many thanks in anticipation, Paul.

da_rule

Paying it off now, even with repayment fee, will save you money in the long run. As the interest you'll be paying over the next 2 years will in all likelihood exceed the early payment fee.

But, if the works to the house are going to add considerable value then this may be the way to go. However it may be possible to finance these works (as well as the new car) via a 0% credit card or a 0% finance agreement, which means you are substituting your monthly mortgage payments for a monthly finance/credit card payment but with the bonus of only repaying the capital and no interest.

Another option, if you want to avoid the early repayment charge is to put the money into a savings account which pays more interest than the 3.19% you are paying for the mortgage. Then at the end of the 2 years, the money in the account will have grown at a faster rate than your mortgage debt and you'll be able to pay it off and have some money left over (the interest plus 2 years worth of premiums).

Drive_By_Photography

Many thanks for your reply, da_rule. Very informative.
I hadn't considered getting a finance agreement for the works, i shall investigate further.
Regards, Paul.

getmore4less

Don't get rid of all your cash when you have known expenses coming up.

There may be ways to get the money other ways(0%cards_ but get that money BEFORE you do anything with the money you have.


Working on £29k 5% erc. £389pm. 2y interest £1617.

£167 saving and loss of options.

£29k at net saving 0.3% for 2 years is £174.
(you don't need 3.19% net to break even)

Does the ERC drop at some point?
What are the penalty free options over the next 2 years?
if you just let the mortgage run in two years you owe just over £21k

I can't see any point in paying it off now but do think about in 2 years when you need around £21k if you want to pay it off then

Price up the work and a car so you can make a plan.

dimbo61

Check if you can overpay 10 percent of the mortgage without penalty !
Even in a fix most lenders allow this.
We managed to overpay 20percent last year with Santander.
Get the new roof and Windows sorted.
Pay another 10 percent next year and shop round for the best deal for a car.
Pay any spare money left at the end of the fix and overpay the mortgage every month.

ThePants999

If you would need to borrow money for upcoming expenditure, it would be silly to repay existing debt with this windfall and then attempt to obtain more credit later.

da_rule wrote: »

Paying it off now, even with repayment fee, will save you money in the long run. As the interest you'll be paying over the next 2 years will in all likelihood exceed the early payment fee.

This is excessively simplistic. It's not valid to just compare the interest payments to the ERC - you need to compare the interest charged [/i]less the interest received[/i] to the ERC. Even if the OP could only get 1% interest on their money, that would be enough to make it not worth incurring the ERC.

getmore4less

ThePants999 wrote: »

If you would need to borrow money for upcoming expenditure, it would be silly to repay existing debt with this windfall and then attempt to obtain more credit later.


This is excessively simplistic. It's not valid to just compare the interest payments to the ERC - you need to compare the interest charged [/i]less the interest received[/i] to the ERC. Even if the OP could only get 1% interest on their money, that would be enough to make it not worth incurring the ERC.

it is actually less than 0.3% and likely closer to 0% as the fee could well be more than the money saved if there is some fee free overpayments that can be made.

dimbo61

Could you give your lender a call and ask to reduce the term from 7 years down to 2/3 so your payments increase each month ?
Ask if you can make any overpay by 10 percent

Drive_By_Photography

Thankyou, everyone, for taking the time to share your thoughts and expertise.
It's given me a lot to think about.

Ragards, Paul