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Investments newbie and a little bit swimming

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  • jimjames
    jimjames Posts: 17,709 Forumite
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    P1Fanatic said:
    Exodi said:
    TheKDs said:
    Exodi said:
    Albermarle makes some good points above and I'd agree thinking about a clear plan is in order.


    Did reply to Albermarle. The clear plan is what is lacking which is why I made this post. Aware I sound like an idiot. So I feel like I am swimming and I'm not good at swimming! Was also thinking about the savings account, yes. Sorry, also totally aware it is a perennial question. This savings better than mortgage seems obvious to me but there is a 3% charge on early repayment for those 1st 5 years and so I'm wondering how that adds up. I guess I could just continue to save until just before the 5 year period and then pay up a lump sum as much as I can. Review each year. 
    This comes up time and time again, however it doesn't seem intitally obvious.

    If your mortgage rate is 2.4%, but you can get more in a savings account, it would make more sense not to overpay the mortgage, and to put it in the savings account instead - especially if you have access to 5-7% interest rates! Paying £300 a month off your mortgage would save you about £43 in interest after one year. Putting £300 a month into the first direct regular saver would grant you about £136 interest after one year.

    If you're plan is to overpay the mortgage, after 12 months when these 5-7% rates are removed/reduced, you can then dump the new sum+interest into the mortgage as an overpayment.
    Most mortgage lenders allow you to make overpayments without penalty, provided that the total amount across the years is less than 10% of the original mortgage amount each year.

    For example, if you take out a mortgage for £300k, you can overpay up to £30k each year without penalty. If you pay more than that in a year, you are liable to pay the lenders early repyment charge (which as you say, can be 3% of the amount).

    Typically this is only an issue for people who come into a large sum of money (e.g. inheritance/lottery win), or those breaking up (needing to sell the house early). Most people are able to organise their finances in a way they never need to pay ERC.

    Please note: check your mortgage terms and conditions regarding overpayments, while most allow 10% without penalty, it's certainly not all.
    Just to clarify that point - the 10% is from the opening balance of the mortgage each year (at least it is with HSBC). So if you overpaid £30k on a £300k mortgage in the 1st year then the 2nd yr the maximum overpayment would be under £27k depending on how much capital you repaid via your regular mortgage payments.
    Different banks have different rules. Nationwide applies 10% of ORIGINAL balance so it will always be £30k in your example. In later years that can make a massive difference to overpayment and clearing the account. We could now clear our balance with one overpayment if we needed/wanted.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • P1Fanatic
    P1Fanatic Posts: 343 Forumite
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    jimjames said:
    P1Fanatic said:
    Exodi said:
    TheKDs said:
    Exodi said:
    Albermarle makes some good points above and I'd agree thinking about a clear plan is in order.


    Did reply to Albermarle. The clear plan is what is lacking which is why I made this post. Aware I sound like an idiot. So I feel like I am swimming and I'm not good at swimming! Was also thinking about the savings account, yes. Sorry, also totally aware it is a perennial question. This savings better than mortgage seems obvious to me but there is a 3% charge on early repayment for those 1st 5 years and so I'm wondering how that adds up. I guess I could just continue to save until just before the 5 year period and then pay up a lump sum as much as I can. Review each year. 
    This comes up time and time again, however it doesn't seem intitally obvious.

    If your mortgage rate is 2.4%, but you can get more in a savings account, it would make more sense not to overpay the mortgage, and to put it in the savings account instead - especially if you have access to 5-7% interest rates! Paying £300 a month off your mortgage would save you about £43 in interest after one year. Putting £300 a month into the first direct regular saver would grant you about £136 interest after one year.

    If you're plan is to overpay the mortgage, after 12 months when these 5-7% rates are removed/reduced, you can then dump the new sum+interest into the mortgage as an overpayment.
    Most mortgage lenders allow you to make overpayments without penalty, provided that the total amount across the years is less than 10% of the original mortgage amount each year.

    For example, if you take out a mortgage for £300k, you can overpay up to £30k each year without penalty. If you pay more than that in a year, you are liable to pay the lenders early repyment charge (which as you say, can be 3% of the amount).

    Typically this is only an issue for people who come into a large sum of money (e.g. inheritance/lottery win), or those breaking up (needing to sell the house early). Most people are able to organise their finances in a way they never need to pay ERC.

    Please note: check your mortgage terms and conditions regarding overpayments, while most allow 10% without penalty, it's certainly not all.
    Just to clarify that point - the 10% is from the opening balance of the mortgage each year (at least it is with HSBC). So if you overpaid £30k on a £300k mortgage in the 1st year then the 2nd yr the maximum overpayment would be under £27k depending on how much capital you repaid via your regular mortgage payments.
    Different banks have different rules. Nationwide applies 10% of ORIGINAL balance so it will always be £30k in your example. In later years that can make a massive difference to overpayment and clearing the account. We could now clear our balance with one overpayment if we needed/wanted.
    Good to know. Seems the 10% limit is fairly constant amongst UK lenders just not how they calculate it. Calculating on opening balance each year is not so much of an issue in the early years but limits you at the tail end as we have found out.
  • JohnWinder
    JohnWinder Posts: 1,830 Forumite
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    ‘But then I am drawing a blank. …. I may be an information junkie and so I have looked at FIRE and everything and I am a little bit overwhelmed with the wealth of choice and information. … but perhaps I need to wait on that a bit until I know what I'm doing. I have looked at ETFs mostly global but then how does one choose? Where to start? ’
    There’ll be a lot of cringing with the accents, and something for any nit-picker, but this is a comprehensive overview from a useful start to sensible conclusions, in lecture format or read the ‘slides’. https://boglecenter.net/bogleheads-university/
  • Exodi
    Exodi Posts: 2,928 Forumite
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    edited 13 December 2022 at 2:04PM
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    P1Fanatic said:
    Exodi said:
    TheKDs said:
    Exodi said:
    Albermarle makes some good points above and I'd agree thinking about a clear plan is in order.


    Did reply to Albermarle. The clear plan is what is lacking which is why I made this post. Aware I sound like an idiot. So I feel like I am swimming and I'm not good at swimming! Was also thinking about the savings account, yes. Sorry, also totally aware it is a perennial question. This savings better than mortgage seems obvious to me but there is a 3% charge on early repayment for those 1st 5 years and so I'm wondering how that adds up. I guess I could just continue to save until just before the 5 year period and then pay up a lump sum as much as I can. Review each year. 
    This comes up time and time again, however it doesn't seem intitally obvious.

    If your mortgage rate is 2.4%, but you can get more in a savings account, it would make more sense not to overpay the mortgage, and to put it in the savings account instead - especially if you have access to 5-7% interest rates! Paying £300 a month off your mortgage would save you about £43 in interest after one year. Putting £300 a month into the first direct regular saver would grant you about £136 interest after one year.

    If you're plan is to overpay the mortgage, after 12 months when these 5-7% rates are removed/reduced, you can then dump the new sum+interest into the mortgage as an overpayment.
    Most mortgage lenders allow you to make overpayments without penalty, provided that the total amount across the years is less than 10% of the original mortgage amount each year.

    For example, if you take out a mortgage for £300k, you can overpay up to £30k each year without penalty. If you pay more than that in a year, you are liable to pay the lenders early repyment charge (which as you say, can be 3% of the amount).

    Typically this is only an issue for people who come into a large sum of money (e.g. inheritance/lottery win), or those breaking up (needing to sell the house early). Most people are able to organise their finances in a way they never need to pay ERC.

    Please note: check your mortgage terms and conditions regarding overpayments, while most allow 10% without penalty, it's certainly not all.
    Just to clarify that point - the 10% is from the opening balance of the mortgage each year (at least it is with HSBC). So if you overpaid £30k on a £300k mortgage in the 1st year then the 2nd yr the maximum overpayment would be under £27k depending on how much capital you repaid via your regular mortgage payments.
    It varies by lender and that's why I asked the OP to check their T&C's regarding overpayments.

    There are lenders who allow 10% of the original balance every year - but it all depends on the OP's T&C's.
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