Take the hit for ERC or stick with current mortgage

MrECat

I'm currently 2 years in to a 10 year deal fixed at 2.49%.  The mortgage has a 5% ERC until Nov 2028 which would currently cost about £2500 if I was to remortgage to try and take advantage of a lower rate.

I'm in a position where I could pay off a lump sum of approx £30000 and then remortgage the remaining balance at a lower rate.  This would have the effect of reducing the remaining mortgage term from about 7 years down to 2 years whilst keeping the repayments the same.

It seems to me to that it would make sense to pay off the current mortgage and take the hit with the ERC and then remortgage the remaining balance at a lower rate.

Is my thinking correct or am I missing something?

ddonq1412

do you currently have any free allowance to use before ERC is counted. what is the values of existing mortgage.

MrECat

I can overpay 10% of the balance per year without penalty.  This has been done for the last 2 years but it will be another 12 months before I can make any more penaly free overpayments.

Mortgage balance is currently £50000.

ddonq1412

How long is left on the mortgage at present. from what i see you so far you are gonna pay about 4900 on interest over the 7 year period. What is the numbers your working with. if your shorten 7 into 2 your monthly payments would be also rising.

MrECat

Apologies new term would need to be about 2.5 years to keep payments roughly the same e.g £688 p/m vs £650 p/m currently.

Mortgage was taken out Sept 2018.  11 year term, fixed at 2.49% for 10 years.  Overpayments were made over the last couple of years so the balance is now £50000.  ERC is 1% per year of remaining fixed term capped at 5%, i.e. it will be 5% until Sept 2023.

Basically I'm trying to figure the best way to use the £30000 I have available to reduce the overall cost of the mortgage whilst balancing that against the ERC.

getmore4less

Looks like they are letting you keep your payment the same even after a 10% overpayment.
Some lenders treat that as going over the 10%.

You are left with £22500* after paying the ERC and £30k  £650pm is closer to 3years term(£640pm @1.5%)
*  + any other costs with switching and a no fee 2y deals will be 1.5%+

Looking at your current situation over 5years with 10% overpayment and £650pm
you could lock the saving up for at least 1% (there are 5y fix savings at 1.5%)
year amount rate payment left interest  savings   interest  net cost 
1y £50,000 2.49% £650pm £43,400 £1170 £30,000 £300 £870
2y £39,060 2.49% £650pm £32,150 £895 £25660 £256 £1,500
3y £28,935 2.49% £650pm £21,750 £640 £22445 £224 £1,925
4y £19575 2.49% £650pm £12,178 £404 £20270 £202 £2,127
5y £10,960 2.49% £650pm £3,350 £186  £19052  £190 £2,123
Net position end of year 5  £15700 in savings having  paid out less  than the ERC in interest.

Even if they cut your payment after a 10% overpayment I think you are going to struggle to save much if you can get a reasonable savings rate.