Pay mortgage off in full or Overpay

ness3765

Hi.
I am due to inherit some money in the next couple os weeks, enough to pay off my credit cards & mortgage.

I have 3yrs 6 months left on my mortgae with approx £22500 outstanding, Im paying on a fixed rate at 2.24% and it has a £1018.65 Early Repayment Charge.

So my question is do I make over payments each month to reduce the term & continue to pay the mortgage or pay the whole lot off. Which would financially be the better option??
Thanks Ness

sal_III

The amount of interest for 3y6m on 22500 at 2.24% is around £1000, same as the ERC. If you can overpay without penalty you can potentially reduce the amount of interests, so the best option in term of cost effectiveness.

On the other hand if you are looking to sell in the next 3 years and will have to pay the ERC, you might as well do it now and be mortgage free.

enthusiasticsaver

Are you able to overpay without penalty? Often you can by up to 10% of the balance. I would certainly do that and focus on perhaps finding a savings vehicle where you can get at least 2.24% until you can clear it. If you can't get that then clearing it to save the interest as sal says is probably worth it even with the ERC. Does the ERC drop in 6 months as presumably you are then into the next year of your mortgage deal?

ness3765

Hi Thanks Sall_III & enthusiasticsaver .

I can make over payments with out a penalty. I am not sure about the ERC drop I think its been set at that over the fix rate term

I have no plan to sell my property, in fact I plan to look at buying a small property to rent out with the rest of my inheritance

Trying to weigh up my options

GoingOn30

You can earn 3-5%in some current accounts/regular savers so make sure you open a couple of those, then make the penalty-free overpayments gradually over the next couple of years.

getmore4less

What is the ERC profile? (how does the rate change with time).

£1018 on £22500 is 4.5% ERC that's a 2 year payback before you add any interest you could get on the money.

£22,500 over 3y6m @ 2.24 is £557.49pm total interest is £915.51.

you won't save anything paying the ERC.

depending on the lenders approach to overpayments and recalculating the payment there may be a tiny benefit in paying some off now with ERC. but it will be no more than around the balance in Aug 2020 which will be less than £10k by then.
Chances are that won't work as the lender will just reduce the normal payment,

Your current payments include a £500+ penalty free capital component.

The ERC on that is £22.50p the interest saved is 93p a month

even if you were going to sell within erc period you wait till then and pay the ERC at the time no point in realising the loss on the full £22,500 now when you are reducing the ERC by at least £22.50 every month you wait

sparkey1

Personally, I would go with the 10 per cent overpay option. Assuming you have the option of overpaying, is the overpaying cycle based on a calandar year, or statement year. If calendar, (ie 1 Jan to 31 Dec) you could pay 10% now, and then a further 10% in Jan.

Would be useful to post what bank is your mortgage with!