Re-Paying Additional Mortgage

Colin432

Hi Gang!

I have some money left over from my second mortgage. Am I better off repaying the mortgage (2 year fix at 1.59%) or putting in a 2 year fixed bond (1.70%). Does it make any difference that the mortgage interest is calculated daily? Hope can someone explain it to me?

eskbanker

The bond pays more interest so in strictly financial terms it makes more sense than paying the mortgage off now, i.e. just do it in two years and pocket the 0.11% extra that your money will have earned in the mean time.

However, that assumes that your interest income will (along with any other interest) be under your personal savings allowance and therefore not taxed - if you were taxed on it then the maths change.

Also, some are psychologically happier to be mortgage-free, how much is that worth to you?

TheLastMongoose

There is very little difference in the two interest rates so we are talking about £1.10 profit per £1000 invested in the bond after you take in to account the cost of the mortgage interest. I am all for making my money work hard but I would suggest it's possibly not worth the effort in this case. Your time and effort has a value too.

Colin432

Hi ALl, does this still hold true (that I would be marginally better off opening a savings account rather than paying the mortgage if the intital rate is 1.49%, SMR is 3.74% and the overall cost of comparison is 3.2% APRC (Overall cost for comparisom); given that I only plan to hold the left over money for the 2 years

AndyT678

Yes the interest that you gain on your bank account at 1.70% will be greater than the interest that you are charged on your mortgage at 1.49%. The difference is 1.7 - 1.49 = 0.21% or £2.10 per £1,000 per year. (Assuming no tax is due on the interest).

You can also get better than 1.70% using current accounts on limited amounts of money. How much are you talking about?

Thrugelmir

AndyT678 wrote: »

Yes the interest that you gain on your bank account at 1.70% will be greater than the interest that you are charged on your mortgage at 1.49%. The difference is 1.7 - 1.49 = 0.21% or £2.10 per £1,000 per year. (Assuming no tax is due on the interest).

You can also get better than 1.70% using current accounts on limited amounts of money. How much are you talking about?

On the majority of mortgage accounts interest is calculated daily on the outstanding balance and charged monthly. So the differential is less.

eskbanker

Colin432 wrote: »

Hi ALl, does this still hold true (that I would be marginally better off opening a savings account rather than paying the mortgage if the intital rate is 1.49%, SMR is 3.74% and the overall cost of comparison is 3.2% APRC (Overall cost for comparisom); given that I only plan to hold the left over money for the 2 years

You originally asked about a comparison for two years so that was the basis on which you were answered (albeit you quoted a slightly different mortgage rate when you first posted) so why would the standard mortgage rate be relevant if it only applies after that two-year period? Or are you locked in to the mortgage in a way that would constrain your ability to pay it off at the end of the two years?

Colin432

Hi eskbanker - I thought so - it's only the initial rate I need to be concerned with? Why is the APRC always quoted? People are not, on average, going to stick with their same provider for 35 years!

Thanks everyone. In short it seems that there is a marginal interest benefit of keeping any left over second mortgage funds for the time in which I have the initial 2 year fixed rate of 1.49%. However, unless it is a big amount this will be small.

It would be good to understand, what interest I would accrue if I kept £1000 in a 2 year fixed term bond, say a 1.70% with interest paid monthly, versus the interest the mortgage would accrue if it is calculated daily at 1.49% over the year period. Many Thanks,

eskbanker

Colin432 wrote: »

It would be good to understand, what interest I would accrue if I kept £1000 in a 2 year fixed term bond, say a 1.70% with interest paid monthly, versus the interest the mortgage would accrue if it is calculated daily at 1.49% over the year period.

The MSE mortgage calculator says you'd pay £30 in interest at 1.49% (i.e. the effect of the daily calculation is negligible), whereas a 1.7% AER bond would pay 1.017^2 - 1000 = £34, so it really is pretty marginal (on £1,000!), even more so if any of your savings interest was taxable.

Colin432 wrote: »

it's only the initial rate I need to be concerned with? Why is the APRC always quoted? People are not, on average, going to stick with their same provider for 35 years!

But mortgage providers are obliged to advise the total cost of repayment over the term - you're just conducting a relatively unusual exercise of weighing up full repayment over a very short period, during which a promotional rate applies.