That 10% ERC

HandD

Hi all.

I'm pulling together a plan to be mortgage free within 9 years starting October 2020 (I currently have a few 0% cards I want to clear off, I want to squeeze in a family holiday before I start plus, October is my mortgage anniversary date).

I currently owe £90,257.90 over 22 years at 2.14% = £429.02 per month. I'm 1 month into year 2 of a 5 year fixed deal.

I've come across an issue with my plan which I hope you might be able to help with:

I have a 10% allowance on overpayments in my current mortgage which is based on 10% of mortgage balance owed at the anniversary date each year. If I overpay my planned amount of £500 per month I will exceed the 10% limit after October 2024. As it happens, my fixed term also ends in 2024. If I maintain £500 OP until October 2024 I'll be at less than 60% LTV.

What options could I consider to help me keep on track when it comes to remortgaging in October 2024 (or before). I think one would be to reduce the term of my mortgage at renewal however would this mean that more of my overall amount (mortgage payment + overpayment) would be subject to interest?

Grateful for any help understanding options at this point.

ian1246

I have a simple solution for you - don't overpay the mortgage.

Instead, stick that £££ into Regular Savers, which will have a higher interest % on them than your mortgage, when they mature in 12months then put them into a Fixed Saving Account, fixed for X amount of years. Again: The Fixed Savers will pay a higher % interest than you pay on your mortgage.

X Amount would be the number of years/months left on your mortgage fixed deal. I.e. if you have 2 years left on your fixed-mortgage, put your saved £££ into a 2 year fixed saver paying a higher interest rate than your mortgage. This way your fixed saver will mature at around the same time as your fixed mortgage deal.

You can then assess whether you want to use the saved £££ to pay off a chunk of the mortgage (with no ERC due to being outside of the fixed term) and then fix the remaining amount again, or whether you want to continue to hold off overpaying the mortgage and instead keep the £££ saved.

Remember: Right now for every £1000 you pay off your mortgage, your saving £21.14 in interest a year.

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

You can get a 2 year Fixed Saver at 2.17% currently - so paying you £21.70 a year for every £1000, effectively off-setting the interest your paying on your mortgage (if you had used that £££ to overpay the mortgage). Incidentally, there are fixed savers which pay 2.32% - £23.20 for every £1000 saved - over 3 year fixed deals, or 2.36% over 5 year deals.

In terms of the best Regular Savers (which mature after 12months) - https://www.moneysavingexpert.com/savings/best-regular-savings-accounts/

You can save up to £300 & 250 a month at 2.75% interest at 2 banks. After they both mature, you can take the £££ and then overpay the mortgage, of if there are fixed savers (fixed until your mortgage deal comes out of its fixed period) with better % than your mortgage, stick them in that.

Alternatively, you could overpay the mortgage (Useful for building up equity if you plan to move before your fixed deal ends!) and then when you hit the ERC limit, stop and stick the £££ into regular or fixed savers (or some other combination).

kinger101

What's outlined above is a sensible alternative (though hardly worth the effort).

Financially, it usually makes more sense to save more in to a pension. Historically, the stock market performs much better than the money market over the long term. On top of that, pensions savings are much more tax efficient than mortgage overpayments. Particularly for higher rate taxpayers, and anyone who has a salary sacrifice arrangement with their employer.

ilselm

With <60% LTV at end of your current term you will be able to secure lowest available rates at that time with most providers so why not then consider a product that allows unlimited overpayments (either repayment or offset mortgage)?

lexington013

Could you request to increase your payments and shorten the term? I was able to do that even though I was on a 10 year fixed term.
I'm so pleased I did it when I had a very good salary.
I agree with the bit about pension. Much better to invest money into a sipp or company scheme and get the tax benefit and growth.

A_Frayed_Knot

Something is not adding up - when does your fixed rate finish - Oct 2023 or 2024, that may change your calculations. (Just going by your in month 1 of year 2 in a 5 year deal)

All advice given above is great. You don't say what age you are, and what would excite you more, but presume young so maybe the way to go is pensions.

And once you have paid off your c/c debts you will have extra ££'s to throw at whatever you decide.

My penny worth would be to o/p the mortgage, I tried the savings lark for a year, got me about £36 interest - so didn't try that one again :mad: meant much more to me to see the mortgage going down.

Up your monthly payment and reduce the years, say you o/p £500 each month, well (if me) I would up my payment by maybe £350-£400, giving you scope to still o/p at least £100 and maybe more once c/c debts are cleared, (that is if you have an emergency fund in place).

Watch out nearer the end of your mortgage as the 10% may be achieved far too soon, thus restricting your o/p's I ended up on svr as another 2 year deal would have restricted me far too much, plus paying svr really gives you the incentive to o/p as much as you can without restrictions and clear it off asap.

If one month there is no o/p on the horizon, then try to end your mortgage balance to 00.00, this is the one that was addictive to me the ££'s just dropped off, (wish it was that easy with the weight) :rotfl: and best part was interest was reducing at some rate

Good luck - if you have a plan and focus - you will get there. :j

ps - oops, ranted on a bit there.

HandD

Thanks for all of the advice. Yeah fixed rate ends Oct 23, perhaps I need more help than I originally thought :embarasse :laugh:

The mortgage is really the focus for us I think. We're 43 & 46 now and would like to clear this within 9/10 years to allow a few years to build up some retirement savings and to enjoy the wages without the mortgage - see some of the world etc. If we invested elsewhere we might be tempted to spend rather than repay, but thank you for the food for thought.

Looking at doing a diary when we start, I think it would be good for motivation, to look back and see whether we stuck to plan and to share our journey incase there's anything that's useful for others.