Pay it off with overpayment fee or pay of gradually?

sjb2016

We're in the very fortunate situation to be able to either payoff our outstanding morgage in full, however if we do that, we'd face a very 5% early repayment penalty. I've spend a long time looking at overpayment recalculators but I can't really work out if it's better to overpay at the beginning of each year the maximum we can overpay (10% of debt at start of year) without paying a penalty or just pay it off all now and pay the early repayment fee. Also, once our current offer ends in Dec 2023, we can pay the whole thing off without paying an early repayment fee. Obviously the numbers matter here, so here they are:


Outstanding mortgage: £104000
Total time left on mortgage: 19 years, 9 months
Current interest rate (until Dec 2023): 1.98
Early repyament fee (applicable until Dec 2023): 5% of repayment value.

Ammount we can repay early per year without fee: 10%



I never fully understood how they "frontload" the interest at the start of the repyament process, so I can't really work out how much interest we save by overpaying 10% p/a over the next 5 years. I did pop the numbers above into the mortgage calculator and set the term to 5 years to see how much interest I would pay, but that just didn't seem right to me.



Any number crunchers out there that could either tell me the answer, or explain how to arrive at the answer? I hope so. :beer:



Cheers

shangaijimmy

Not sure on the numbers but something to consider is that the 4 years or so until you can pay off without erp you may end up paying that amount in interest anyway. I suspect there'll be a pinch point where interest and erp meet, but sadly its beyond me to work out. Good luck.

sjb2016

Thanks for your reply, and that really is the problem. The way the numbers are, based on my calculations (which I'm not sure about), there isn't a whole lot of difference between the two numbers (pay off now and pay the fee or do it gradually), which makes it harder to work out. Anyway, I've had a bit more of a think about it, and it might make sense for us to go the overpayment route while the rest of the money sits in an account collecting more in interest than we are paying (there are a few options where interest is above 1.98%.



Any other thoughts welcome!

amilroy

Basically, what you do is this:


1. Find a mortgage calculator that shows monthly interest payments over the time you are paying the mortgage (https://www.drcalculator.com/mortgage/ is excellent! There is also an app for your smartphone - look up Karl's mortgage calculator)
2. Calculate how much your penalty would be if you paid it off today.
3. Work through each monthly interest payment, continually adding it up until it meets the same (or near as damn it) as the penalty payment. Note: ensure you include the addition of the 10% overpayment each year, because that will have an effect on the interest payment/cost. The app/calculator above should include that factor.



That will be the month where your penalty and combined monthly interest payments are the same.



Note: if your monthly interest payments doesn't ever equal the penalty cost (within the 5 years fixed rate), then it's cheaper to pay off your mortgage month by month and not all at once. And then pay the mortgage off, penalty free at the end of the Fixed Rate.



One thing to consider is the achievement-factor, which means you get that satisfaction of paying your mortgage off. It might be better for your mentally to know it's done and for it to cost a few quid extra.....



HTH

sjb2016

Thank you amilroy. That's what I was looking for, I just couldn't find it . I knew someone had to have a calculator that showed me the interest v principal, but all the ones I found were too simplistic. I'll have a go this weekend. Thanks.

amilroy

No probs.


I always use Karl's Mortgage Calculator - nothing else comes close.


It's so detailed, you can even see the minute difference in savings by paying the overpayment on Jan 1st rather than at the beginning of every month.


Good stuff and good luck.