Pay off mortgage and suck up the early repayment charge or...?

MikeWhite

Decisions...

The company I work for looks likely to be bought out. As a shareholder I'll receive enough to pay off my mortgage. It has a balance of £44,800 and a term of 9 years and 1 month. It's fixed at 2.79% and the ERC is 7% (ouch). I can pay back 10% of the original balance ERC free, I believe, per year. The loan at the start of the fix was about £55,000 so I could pay £5,500 ERC free each year.

I feel it's more MSE to just pay the 10% each year and "do something else" with the balance?

Am I right?

Thanks

eskbanker

The key thing to evaluate when considering your options is how much of a return you could make on the share proceeds if you don't use them to pay off the mortgage, but if you invest them then you should be able to beat 2.79% over the nine years.

blue.peter

The thing to do here is to think about what the "something else" is, and whether the potential gain from it is more favourable to you than the interest that you'd otherwise pay on your mortgage. If you put it into a savings account, you might get 1%/year if you're really lucky. How does that compare with paying 2.79% on the balance? Or with no interest on a zero balance, but a one-off cost of 7%? Having said that, it seems to be received wisdom at the moment that interest rates are likely to fo up soon. But by how much will they increase and when? Or you could invest it in stocks and shares. You *might* do a lot better that way. But it's not without risk.

I suppose that what's really needed is a spreadsheet with your three options (do nothing and carry on as you are, pay it all off and pay it off at 10%/year) in columns. Each line would be a year, with the intersections being the net cost in that year. You can then add them up to get a total overall cost for each option.

Yes, 7% does sound like a lot, but it's less than three years' interest. My gut feeling is that if it was me, my natural inclination would be to, as you put it, "suck it up" and get free of the mortgage. However, that is only a gut feeling. I haven't done the arithmetic, and don't have the inclination to do it.

Never underestimate the emotional benefit of clearing your mortgage. It's a wonderful feeling.

socks_uk

I'm not a mathematician so If I was you I would be using a mortgage overpayment calculator to work out the amount of interest you'd be paying to carry on with the monthly payments plus overpayments but I'd also be talking to the mortgage company to find out the amount you would have to pay to close down your mortgage account.   When you've got these two figures you can see how you feel about paying the interest.
I'm sure someone will give better advice!

Brie

Presumably if you are paying 10% that is in addition to the monthly payments so the whole thing would be cleared in less than 4 years?  I agree a spreadsheet to do a comparison for actual costs and savings would be required?

ALSO
How secure is your job if the company is being bought out?  If you were made redundant then there may be a good payout but after that you would very likely be looking for a new job.  Not having a mortgage makes your salary requirements much more flexible.  yes we all want to be paid megabucks but realistically if you don't have many bills you don't need as much salary.

MikeWhite

Thanks for the replies. I just checked with the lender and I can actually repay £8500 per year.

pjcox2005

Don't pay off your mortgage, just put it in an account and pay 10% overpayment each year if you'd prefer. Then pay it off at the end of the fixed term.

I'd personally put it into pension or a global fund as an investment but if you're very risk averse and want it purely for your mortgage then put it into a savings account. Top savings accounts here Savings accounts: 0.66% easy access or up to 2% fixed (moneysavingexpert.com)

Three year fix at 1.85% so not paying it off immediately looks like it would cost £425 per year in terms of interest difference but you keep the ability to access the money quicker in an emergency and you don't pay £5.5k as extra. Even if the total balance (and therefore interest cost) didn't reduce each year, you'd still be better off after 10 years by over £1/£1.5k. Although you do need discipline not to just use the money to buy things.

I'd drop the mortgage as a query, and instead ask how are you set up generally in terms of pension, savings and investments.