The Mortgage Free in Three - Take 5 challenge (MFiT-T5)

DiscountDuck

Please can some of you lovely people help me work something out? I cannot for the life of me get my head round whether it is more cost effective to overpay above my 10% allowance and pay an early repayment charge, or save the amount to overpay at the end of the five year mortgage? It would be a lump sum of about 10% of the remaining balance that I would like to repay. 

Thriftyknickers

Almost certainly, don't pay above the allowance and invest the money elsewhere for 5 years.  What's your mortgage interest rate and the amount of the early repayment charge? 

Greenglockenspiel

JEdwards said:

Please can some of you lovely people help me work something out? I cannot for the life of me get my head round whether it is more cost effective to overpay above my 10% allowance and pay an early repayment charge, or save the amount to overpay at the end of the five year mortgage? It would be a lump sum of about 10% of the remaining balance that I would like to repay. 

Is the early repayment charge higher than the interest rate? If so, save the money elsewhere. If it’s less than the interest, it should save you money still to pay it off.

Suffolk_lass

JEdwards said:

Please can some of you lovely people help me work something out? I cannot for the life of me get my head round whether it is more cost effective to overpay above my 10% allowance and pay an early repayment charge, or save the amount to overpay at the end of the five year mortgage? It would be a lump sum of about 10% of the remaining balance that I would like to repay. 

Are you sure your mortgage permissable OP is not 10% per year, rather than in the early redemption fee period? Mine was per year, based on the end of year balance (not the starting balance), so the 10% figure reduced every year as the capital debt reduced.

The first crucial calculation is that of the interest rate. If your mortgage interest rate is 2% but you can only earn 1.2% (Marcus, instant saver), your savings are costing you 0.8% on what you would otherwise be paying off. It also depends on the early repayment fee versus the amount it would be. If you OP every month is it a one off fee or would they charge you every month? And the amount of the fee, as Greenglockenspiel sets out. 

In my spreadsheet I also keep a running total of my interest, so I know how much that is costing me, and although you can argue that it is all about the money, it is also about the motivation, and it is seeing that come down while keeping the payments the same that makes the magic snowball grow.

DiscountDuck

Thanks very much, you lovely three! Thriftyknickers, my mortgage rate is 2.99% (I fixed for 3 years just before the rates dropped 🤦‍♀️) and the early repayment charge is 4% of the overpayment amount. 

I’ve already paid off my 10% per year allowance, so it will all be chargeable, sadly. I think it might be worth me paying it off so I don’t end up over the savings allowance for my working families tax credit as it would potentially cost me more to lose that than the early repayment fee. It’s all very complicated but one day this is all going to be worth it. And it’s so nice to have people that support me with it and are so kind helping me work out the hard bits!

DiscountDuck

Please is it possible to get my username updated on the next chart? I’m having to be less easy to find by name due to personal circumstances.

trix-a-belle

should be, send me a message

DiscountDuck

I think I’ve worked out how to put a link to my MF diary in my signature, as suggested...yay!!!

Lomcevak

The first crucial calculation is that of the interest rate. If your mortgage interest rate is 2% but you can only earn 1.2% (Marcus, instant saver), your savings are costing you 0.8% on what you would otherwise be paying off.

One thing to be aware of though is it's not quite a straight swap, because you're trading a very liquid asset (cash) for a very illiquid asset (a bit more of your house). You can use cash for lots of things, but it's very hard to spend part of your house, so you need to consider if the loss of flexibility is worth the 0.8% saving. If you have plenty of cash on hand the answer is yes, but otherwise - and especially at times like these - there's quite a lot of value in just having cash to hand.

Suffolk_lass

Lomcevak said:

The first crucial calculation is that of the interest rate. If your mortgage interest rate is 2% but you can only earn 1.2% (Marcus, instant saver), your savings are costing you 0.8% on what you would otherwise be paying off.

One thing to be aware of though is it's not quite a straight swap, because you're trading a very liquid asset (cash) for a very illiquid asset (a bit more of your house). You can use cash for lots of things, but it's very hard to spend part of your house, so you need to consider if the loss of flexibility is worth the 0.8% saving. If you have plenty of cash on hand the answer is yes, but otherwise - and especially at times like these - there's quite a lot of value in just having cash to hand.

Good point, well made!