Paying off mortage in May, should I pay ERC?

italianie

I'm being made redundant in May and have a small mortgage remaining which I intend to pay off with my compensation and savings. I'm with First Direct and will have about 4 years left in my fixed term, I believe the Early Repayment Charge is around £800. I've phoned FD and they suggest to avoid the ERC I could pay the majority of the mortgage by lump sum but not all off, they would then recalculate the small remaining balance over the remaining 4 year term to avoid the ERC, which would cost me peanuts each month. My current interest is fixed at 1.98% remaining balance remaining approx. 40,000.


My question is, would it be better to pay off the mortgage to own my home and fork out the £800 ERC? Or would I be better taking the option suggested by First Direct to avoid the ERC? I'm considering that there would still be interest to pay even on a small remaining amount, which might add up to similar or more then the ERC itself, not sure how the maths would work out. Would appreciate any advice.

ACG

If you reduced the balance to say £500, you would be paying 1.98% on £500. That would be about £1 a month in interest, multiply that by 48 months and it is costing you £48 over £500 years, so you would be £750 better off by not clearing the mortgage.

I have just guesstimated those figures so you might want to double check them. But you may find it better to keep the mortgage or at least part of it.

italianie

ACG wrote: »

If you reduced the balance to say £500, you would be paying 1.98% on £500. That would be about £1 a month in interest, multiply that by 48 months and it is costing you £48 over £500 years, so you would be £750 better off by not clearing the mortgage.

I have just guesstimated those figures so you might want to double check them. But you may find it better to keep the mortgage or at least part of it.

Thanks that's really helpful and it makes a lot of sense to do it this way, when put like that.

Knowing this, I can't think of any other reason why it would be worth paying the ERC, other then having the reassurance that the mortgage is totally paid off and celebration of being a home owner. I think I can hang on for another 4 years for that if needed.

ACG

italianie wrote: »

Thanks that's really helpful and it makes a lot of sense to do it this way, when put like that.

Knowing this, I can't think of any other reason why it would be worth paying the ERC, other then having the reassurance that the mortgage is totally paid off and celebration of being a home owner. I think I can hang on for another 4 years for that if needed.

Check the figures though. The last thing I want is you coming back in 4 years telling me you are not £750 better off... I could be wrong.

enthusiasticsaver

I think I would take FDs advice and pay a lump sum off but not repay it completely. £800 is a lot to lose when the mortgage interest rate is only 1.98% anyway so it is not like the mortgage payment will be high once the balance is almost paid off.

getmore4less

Should be possible to find savings for 2% now and if the "rates can only go up people" are right(they have to be sooner or later) you should be able to better that.

dimbo61

Have you got another job lined up ?
What are you going to live off until you get another job or retire ?
Maybe wait and see if you NEED the money to live off for the time being and pay mortgage and other bills as normal.

Gary1984

A minor consideration perhaps but when I worked in a home insurer's customer service department I noticed that premiums would actually be slightly higher for people who owned their property outright than for those that had a mortgage.

AnotherJoe

Is that because we have a propensity to set fire to our houses more often? "hah now its all mine I"ll do what i want to with it, thank you very much"

Or is it age associated, and older people are more likely to have paid off their mortgage?

italianie

dimbo61 wrote: »

Have you got another job lined up ?
What are you going to live off until you get another job or retire ?
Maybe wait and see if you NEED the money to live off for the time being and pay mortgage and other bills as normal.

Fortunately my wife is working, and I'll a bit of money still spare to tied me over a few month. I'm not too concerned about finding further work, and happy to take a pay cut if needs be on the reduced outgoings. I'll probably take a break and find something I enjoy doing.