Is it ever worth taking the hit on the ERC?

chocoholic_chick

Morning all.

Hoping for a bit of insight/inspiration!

We bought our home 3 years ago and at the time opted for a 5 year fixed rate at 2.59% which runs to the 31st December 2021.

I've been OP the maximum allowed on our mortgage since we bought our new home almost 3 years ago of £999 a month whilst simultaneous saving money with the idea that, when the fixed rate ends, we will completely clear the mortgage.

Current mortgage balance is £96,440.99 and I have around £48k in my "mortgage pot" which is building each month towards paying it off ( I have some other savings too, but don't want to wipe out all my savings ).

I've dug out the paperwork to see what the early repayment charges would be and they are 2% up to 31st December 2020 dropping to 1% from 1st January 2021. My question is, is there ever a tipping point when it makes more sense financially to take the hit on the ERC to repay early? I'm assuming it has something to do with interest earned on savings, I've got a few savings accounts on the go:-

-First direct (just opened) to save £300 per month (maximum allowed) at 2.75%. Fixed savings account for 12 months then it closes
-Cash ISA earning 0.55% AER. £60k+ in there (rolled over from previous years)
-Barclays Bond opened August 2018. £20,000 in there at 1.8% interest. Locked in until August 2021

I'm currently getting around £66 per month in interest on my savings.

Can any of you financial wizards share some insight?

sst1234

Tipping point is when you would pay less in ERC than you would save in mortgage interest by paying off principal amount early.
Key it of information missing from your post is how long is left to left to run on on your mortgage, the remaining term. That will allow the calculation that shows if you should take the hit on ERC to make a net saving. If you have 25 years left to run, your are likely to save more by overpaying, but if you have only 5 years left to run, then it may not be worth it.
It sounds like you do not have the full £96k to pay off the entire mortgage so even if you did make a large overpayment or switched to a cheaper rate, there would still be mortgage interest to pay each month. Which then brings me to the next question, what is your house worth? If overpaying gets you to below 60% LTV, taking a hit on ERC and moving to a cheaper deal would definitely be worth it. If it’s, say, 80%, not so much.
So a little more info needed to really give you a concrete answer.

chocoholic_chick

Sorry about the missing info. Hopefully this covers it all

5 year fixed rate taken out on 31st December 2016. Length of mortgage was 20 years

Purchase price for the house was £184,000. I think house prices may have increased slightly since then, and we have done some improvements (new carpets, bathroom, boiler etc.) but just assuming they have remained static and the value is the same then we have around £88k equity in the house

Monthly mortgage payment is £769. We are overpaying by a further £999 per month so I think balance owed is being reduced by circa £1550 per month. We are, in addition, saving around £450-£500 per month in an overpayment pot. We have approximately £48k in that pot currently, though could divert other savings into there if it makes sense to.

I know that we couldn't currently afford to, but I'm just wondering if we reach a point where we're mortgage neutral, should we use the savings to pay it off, but incur the ERC, or just leave it to run to the end of the fixed period then pay it off then (Assuming we have the cash available to)

es5595

https://drive.google.com/file/d/1W0ETlpxfIyEoNtsc7ZWvP2VYJnZEZ3tL/view?usp=sharing

Theres a quick PDF comparing your mortgage and savings, and looking at the ERC.

Realistically, until December your savings don't match up to your mortgage balance, but you mention moving savings from another account over.

If so, its realistic paying the ERC from January 2021, if you can stump your savings up, as whilst the ERC is £799, you'll save £1969 in interest over 2021.

Octobergirl

I was tied into a 5 year fix when interest rates were 5%, and we thought the rate was really good and as low as it was likely to go.......they then dropped to 2%. We happily paid to get out of the fix.

chocoholic_chick

es5595 - That's amazing, thank you so much for doing that, it's just what I was trying to get my head round!

MaxiRobriguez

Depending on your age you may want to consider leaving as is and using the money you're currently paying as overpayments and divert them into (additional) pension contributions, which would in a purely financial world would be a better choice by at least 18%, depending on your income tax rate.

If you're nearing pension access point (so let's say anything over 50) you could then use the tax free allowance to pay off the mortgage in one go.

Food for thought.

Geebsie

es5595 wrote: »

https://drive.google.com/file/d/1W0ETlpxfIyEoNtsc7ZWvP2VYJnZEZ3tL/view?usp=sharing

Theres a quick PDF comparing your mortgage and savings, and looking at the ERC.

Realistically, until December your savings don't match up to your mortgage balance, but you mention moving savings from another account over.

If so, its realistic paying the ERC from January 2021, if you can stump your savings up, as whilst the ERC is £799, you'll save £1969 in interest over 2021.

es5595 - that is an incredibly helpful PDF! Is there an online calculator from which you produced that? Would be keen to plug in my own figures and see where I get to!