Mortgage conundrum

ProStuart

Hi all,


We have an inheritance coming our way later this year that will let us pay off around 100k of our mortgage.


Our house-for-life is on a 3 part mortgage:


Part 1: 205k outstanding, fixed @ 3.89% for next 6 years. ERC is 6% up until 2021 then drops to 3%. Full remaining term is 19 years. Limited overpayments 10% per year. Currently paying £1300 per month.


Part 2: 99k outstanding, tracker @ 1.34. No ERC, no restrictions on overpayment. Full remaining term is 19 years. Paying £500 per month


Part 3: 10k outstanding, tracker @1.34. No ERC, no restrictions on overpayment. Full remaining term is 11 years. Paying £85 per month.


I'm in a quandry as to what to do.


I could pay £12k ERC on the 205k, put remaining 100k on a tracker and then our monthly outgoings go down by around £700 but we've paid 12k for the privilege. This option probably leaves us the least overall debt.

I could pay the 99k and the 10k - monthly outgoings go down by around £600 but we're left with our biggest debt at the worst rate and probably the most overall debt.

There are other alternatives of course combining overpayments, etc.


Any suggestions as to what we do?

ACG

It is pretty rare you will be financially better off paying the ERCs.
Personally, I would be inclined to pay off my 10% allowance (assuming it is 10%) on the £200k this year and next. That means you have cleared £40k off the debt in 6 months - that would knock around £250 off your payments without incurring any ERCs.


The rest I would see if it can be placed in a savings account with a better rate than 1.34% or not. If there is only a slight difference, I would clear the £10k part of the loan and make a dent in to the £99k loan.

getmore4less

There is a chance you can squeeze 1.34% net from savings.
chances are saving will track up when mortgage rates go up.
that means paying off part 2 or 3 may be neutral at best

That leaves part one.

Part 1: 205k outstanding, fixed @ 3.89% for next 6 years. ERC is 6% up until 2021 then drops to 3%. Full remaining term is 19 years. Limited overpayments 10% per year. Currently paying £1300 per month.

Base calculation is quite simple

Every month you can save (3.89%-1.34%)/12 = 0.2125% over the other option of paying a bit off part 2/3, less if you can get a better rate with savings


Payback period is 6%/0.2125% = 28.24 months.

Depending when your lenders 10% period starts that's 2-3 periods where you are better off keeping back the ERC free bit.

There is a second factor because overpayments reduce the ERC free amount as well, there will be an optimum amount to pay back paying ERC.


Another option with £100k sitting in the bank is reduce the term to increase payments and reduce the interest as well as the ERC free overpayments.

£205,000 @ 3.89% 19y is £1274pm
£205,000 @ 3.89% 10y is £2065pm (£800*12*10= £ 96k so covered by the £100k)

You could go shorter as the 10% overpayments will help but 10y looks comfortable.