A Quandary...

smudge2006

Please can you offer me some advice?

I have had a critical illness payout of 70k. My mortgage is 17k and is on 1.09% fixed for another three years. I have been overpaying £87 per month.
I'm thinking it's daft to pay off my mortgage as the 70k is in a savings account getting 5%. I'll have to use some of that money to live on as my income is reducing but I can offset it a little bit by canceling the overpayment to my mortgage. Am I on the right track or is there something I'm not thinking about?

Thanks

MX5huggy

As you can get more interest on savings than you’re paying in mortgage interest you should only make the minimum mortgage payments. I would probably put £17k in the best paying 3 year fixed savings account, ready to payoff the mortgage if that is the best thing to do in 3 years. 

Bigwheels1111

I would ditch the overpayment right away.

I would set aside an emergency fund, say 10k, you decide.
Stick that in a Shawbrook easy access account at 4.83%. Dip into as needed.
Select rate order.
https://moneyfactscompare.co.uk/savings-accounts/easy-access-savings-accounts/?quick-links-first=false

Then lock the rest away for 5 years fixed with annual payout to nominated account.
Should stop you paying tax on interest.
5 years at 5.8% today United Trust bank = £3480 interest a year, or £17400 after 5 years, mortgage paid and 60k in the bank.
I know you deal is for 3 years, but the mortgage amount is so low even if rates are high the savings should negate that
for two more year. Each year when you interest arrives make the max overpayment, is that 10%.
In 3 year it’s down to 12k and after 5 years under 10k. With some interest left over and 60k matured.

grumbler

Bigwheels1111 said:

Then lock the rest away for 5 years fixed with annual payout to nominated account.
Should stop you paying tax on interest.
Each year when you interest arrives make the max overpayment, is that 10%.
In 3 year it’s down to 12k and after 5 years under 10k. With some interest left over and 60k matured.

Unless it's an ISA, I don't understand why this should  stop paying the tax. And if you can make a big lump sum overpayment in 3 years, when mortgage fixed rate ends, it makes no sense to make annual overpayments instead of letting the savings interest to compound. 3-year fixed rates are higher than for 5 years. Put about £14K into a 6% account for 3 years and the final balance will be more than sufficient for paying the mortgage off.
I agree that the OP should "ditch the overpayment right away."

km1500

all the above is excellence financial advice

however the other side of the coin is of course the good feelings you have when your mortgage is paid off so if you pay it all off now you will feel good about owning your house outright!

Sg28

km1500 said:

all the above is excellence financial advice

however the other side of the coin is of course the good feelings you have when your mortgage is paid off so if you pay it all off now you will feel good about owning your house outright!

However, how much are you willing to sacrifice for that nice feeling? 

17k mortgage at 1.09% is about £185 a year.

17k in fixed rate at 6% pays £1020 a year. 

Personally I'd rather have the extra £69 a month. 

km1500

well it's £42 a month after tax but in general I agree with you but some may prefer a warm feeling.

grumbler

km1500 said:

well it's £42 a month after tax but in general I agree with you but some may prefer a warm feeling.

I've been mortgage-free for 10 years, but the warmest feeling was at the last few years when I had more than enoght savings to pay my tracker mortgage off, but the savings rates were higher and I was making money from it instead. It was good while it lasted and a big disappointment when it ended.

Qyburn

grumbler said:

Bigwheels1111 said:

Then lock the rest away for 5 years fixed with annual payout to nominated account.
Should stop you paying tax on interest..

Unless it's an ISA, I don't understand why this should  stop paying the tax. 

Paying the interest out means it would be taxable annually, using each years allowance. Rather than paid out in one big lump at the end, which will exceed that one year's SPA.

BooJewels

I'm with @km1500 on this from an emotional point of view.   Future health wise too - it gives you choices.

I'm sorry to hear that @smudge2006 has been in a position to have to make a critical illness claim and am happy to hear that it got paid out for you - that in itself can be a tortuous process.  I realise this is going to sound a bit insensitive, but the reason for the financial windfall should perhaps be part of the decision making process going forwards - it's about more than just a balance sheet.  Use the money to put yourself into the best practical position for your future.  

My mortgage was paid off by a critical illness payment and my husband who qualified for that, was extremely comforted in knowing that the house was ours and would become mine when the time came.  Plus, our mortgage payments had been a significant part of our monthly outgoings and that in turn meant when he wasn't sure he wanted to continue with full time work, we could afford for him to go part time, as our expenses were pretty much halved without the mortgage payments.  Then when he wasn't really well enough to work, it meant we could manage on the benefits he then qualified for - it would have been very difficult with the mortgage still in place.

So my personal take would be to pay off the mortgage in full and be done with it and you'll still have the decent balance of your payout, plus each month going forwards you'll have a bit more in the pot to either build it back for a decent emergency fund or to reduce your work commitment by being without the mortgage payments, plus the extra you'd been overpaying.  Also, your remaining [but set to grow] lump sum will earn you over £200/month, even in an Easy Access account.

Paying off a mortgage early tends to attract Early Repayment Charges, but ours were waived because it was paid with a critical illness settlement - so depending if the two accounts are related, that is certainly something to ask and make a case for.  Ours were waived, as it was part of our mortgage, for that purpose.  A quick look suggests that some mortgage lenders will waive ERCs if the critical illness payment and mortgage are in the same name.

LHW99

Good feelings are nice, but having 3 years left to go on a fix probably means there will be a penalty for early repayment. May not be much, but if there's no need to pay it, I (personally) wouldn't.

I would certainly do as suggested above and put £17k into a 3-year fix, so there's no temptation to spend what you need to use in future to pay off the mortgage.