Early repayment penalty vs. interest

Wilseus

getmore4less said:

looks like I lost the previous attempt at doing this so will do another one.
there is a post somewhere with it in but can't find it.

The base calculation is interest saved against the erc payment

As the ERC drops 1% each year we only have to look at a year(12months).

if you overpay just after the ERC drops you get the full 12months saving and that drops to nothing if you overpay just before the next 1% drop(each year after that you get the full saving.

For yours using a £10k overpayment(it scales) and a reset month of Sept.

Amount	£10,000
rate	1.71%
erc break	1.00%
erc cost	£100.00
month	saving	ERC month
1	£171.00	September
2	£156.75	October
3	£142.50	November
4	£128.25	December
5	£114.00	January
6	£99.75	February
7	£85.50	March
8	£71.25	April
9	£57.00	May
10	£42.75	June
11	£28.50	July
12	£14.25	August

Once you get to Feb you save less than the ERC so best to wait till the next drop

It can get a bit more complicated,
You can factor in savings, you only need ~0.71% to break even over optimum ERC

You then have the ERC free effect which needs to be done over the 5years, more important for those that have a lump sum that is  maybe only 2-3 years worth of ERC free

Wilseus said:

getmore4less said:

its pretty straight forward once you know what you want to knock up a spreadsheet. 

I did actually try doing that, but eventually gave up when I couldn't get the spreadsheet to agree with the default monthly payments/term.

 Why not put up what you did(or your numbers and the discrepancy) and we can see if it can be fixed.

I am trying to get my head around this. Are you saying that I should be making a £10K per month overpayment in the months Sep-Jan inclusive? Or just one £10K overpayment ASAP after each September (i.e now  for this year)?
Also the drop-off is 1% but the ERC this year is 5%, so really the savings aren't what it says in the chart. Or am I fundamentally misunderstanding something?

I'll see if I can find the spreadsheet I did.


EDIT: I think I get it now. Are you saying that I need to make one overpayment per year, ideally in September but not after January, that is an amount that is chosen such that I still have enough cash left to be able to make the full ERC-free overpayments each year for the full 5 years?

Obviously for you to tell me what that yearly figure is, you would need to know what my mortgage balance is, and how much cash I have, right?

getmore4less

The £10k is just to get some numbers you scale for any size of overpayment.

in a full year you save the 1.71% for the 1% cost per year so make a saving.

When you get to Feb you don't save enough in the rest of the year(to sept) to cover the 1% extra you would pay

The next bit of the calculation is you still have ERC free 10% so you need to keep some back for those.

Another option to explore is what it would cost to shorten the full term on some or all of the debt 

Don't know how flexible Natwest would be for that that is broker territory 

Wilseus

Just to update this, and to say thanks to @getmore4less, I ran some calculations with the figures you gave me, but then my financial adviser said it would make more sense to not overpay the mortgage, but instead invest the money for the 5 years.
So I've put the money in a unit trust, which in the past has made significantly (several times) more than the 1.71% that the debt is costing me. Hopefully I should beat inflation and the mortgage interest.