Overpaying with penalty

Ojb

I'm a few months into a 5 year fixed mortgage @2.69 interest only. I got the remortgage as was looking to buy another property but have been put off by stamp duty and not finding anything I like in my price range.
So I am left with a penalty of 4% for the whole term if I overpay above the 10% allilowance.
The balance is 150k with 2k being a fee added.
So I can overpay 14800 now penalty free.
That leaves 135200. I have about 70k I could use to overpay in total and about 2k a month after that.
If I am correct if I am going to pay the penalty then the earlier the better? Because the longer it goes on the more interest I'll be charged?
If I pay 4% now to save 2.69% per year then it's actually costing me 1.31% which doesn't sound so bad?
After about 18 months I believe the interest cost would be higher than the penalty.? But I may be wrong.
If anyone here good at maths could help please jump in.
I know it might make more sense to stick to the 10% each year but i kind of want to pay asap rather than waiting but I would appreciate some views. Many thanks.

getmore4less

though this was familiar tagged on the end of another thread.

better on its own thread.

here is what I said then

If you have £70k why did you get such a big mortgage?
(could have got a better rate than 2.69% if you had 5y fix should be closer to 2%)

if you have £2k per month free why not a shorter term?

just crunch the numbers,
If 40% tax payer some pension contributions will be worth looking at.

Picking just one fix rate savings provider Tesco
5y fix at 2.2% making the cost 0.49% per year that's 2.45% over 5 years why pay 4% ERC.(20% tax makes it 4.65% extra )


Between savers(fixed & monthly) ERC free overpayments and pension you can probably find enough places for the spare money.

OK an aborted BTL project.


But the numbers

The 10% now and the £2k fees(should be no ERC on them) is the first chunk.


Is the ERC really 4% full term?
What's the best net savings rates you can get
What's the current full term?
How many months into 5 years


I would check with the lender if they will let you change the full term to a shorter one and what the fee would be.

If you really will have 2k per month and £70k in cash(

£150k 2.69% 5y £2680pm you have loads to cover that.

Still needs a number crunch with all the details but there should be ways to mitigate some of the 4% if that is your goal rather than look for an alternative investment.

Ojb

I asked about the 2k fees and was told I couldn't pay them now they are added to the loan.
Yes the 4% is the whole term it's virgin.
It's interest only so the term length has no effect.
I'm 3-4 months into the deal.
Best instant access savings I can get is 1.5% or 2-2.5% between 2-5 years..
Cheers.

kuratowski

Personally I would max out pension tax relief and S&S ISA allowance, but of course it depends on your risk appetite.

Even if you saved in cash at 2%, you lose net -0.69% and that's a saving against the -4% ERC.

Ojb

Am I right in saying the 4% is high but after 18 months it would be covered by saving 2.69%? Then obviously after another year or so it would cover any interest earned on the money elsewhere?

kuratowski

I assumed the alternative would be to save it at 2% in which case you lose net 0.69% annually and that means the net cost takes over 5 years (roughly 70 months) to reach 4%...

The ERC is only comparable to the full interest cost 2.69% if you assume you would otherwise be earning 0%.

Ojb

1.5% is available without any tie in so if it's compared to that it would be 1.19% instead of 0.69% I think?