Mortgage Payoff query?

kassy64

Hi,
Trying to get my head around whether to pay off mortgage when rate changes in December.
I have the funds to pay off my mortgage which has a balance of about £36,000. I'm currently on a fixed deal of 1.04%, fixed until December this year. I've had a letter from HSBC stating that rate will go up to 6.99% when that ends. So, my current payments are £422 per month of which I pay about £32 debit interest (according to my statements) per month. Letter says my payments will increase to £458 per month with new higher rate, so an extra £36 per month. If I assume this is additional interest then my total monthly intertest payment will be about £68 per month. Now, from my reckoning I can earn about £1800 per year in interest if I just leave the money in an ISA or bond (forgetting extra income tax implications) so about £150 in interest per month on the £36,000 funds I have to pay off mortgage. So, am I right in thinking I'm better off keeping the money in the bank over paying off the mortgage, or am I missing something here.
Hope you can help, thanks.
Ps - the rate they've quoted is their variable rate so could probably get it down to a slightly better rate if that's the way forward.

Brie

Simple calculation gives me that you currently are paying about £31.20 a month on £36k at 1.04%

Another simple calculation give me that when the rate changes to 6.99% you will be paying interest of about £209.70 a month.  So I think they must be changing something about the mortgage term, less being paid on principle so it will take longer to pay off or something.  

Personally for me, if you have the money to clear the mortgage then I'd be going for that.  It's such a relief to know it's gone.  

amanda1024

6.99% of £36k is about £2,500, or about £210 per month - although the interest will get lower each month because you're repaying the capital. To make more money by keeping the money in the bank you'd need to find a savings account paying more than 7% - if you find one please let the rest of us know! You'd need to find a mortgage deal charging less than 5% to be able to make this work - assuming you'd be putting most of the cash in a fixed rate isa and you're a basic rate taxpayer 

kassy64

I agree with what you are saying however the letter I've had through indicates I will be paying an additional £38 per month on top of the £32 interest per month (that's what my online banking with HSBC shows I currently pay in interest per month). I had always planned to pay off the mortgage when this 1.04% deal ended but this rate change letter has made me question if that is the correct decision. I have been overpaying up to the maximum permitted until recently would that be the reason 

400ixl

Something in the original numbers does not add up.

I doubt you will be getting more than 6.99% interest on your savings so can't see how you will be in a positive if your mortgage and savings have equal amounts.

Providing you would have enough savings left for a decent emergency fund then I personally would be looking at getting rid of the mortgage. You can then start diverting those payments to other things, be that into savings, or increasing pension contributions (and getting the additional tax relief which would beat any savings interest (except for non tax payers)) or spending on what you want to spend it on.

kassy64

The £36,000 quoted is the balance at present, from what I remember it was about £70k when we last moved in 2019.
I agree with what your saying but I can only go by the letter HSBC have sent me through which shows a monthly increase of only £36 per month going from 1.04% to 6.99% - monthly payments £422.07 up to £458.34.
As I said I always planned to pay it off when the 1.04% rate ended but not sure now. 

kassy64

This is the letter showing the change in monthly payments !

amanda1024

If you've been overpaying that explains it - if the rate wasn't going up, your new repayments would be lower, because there's less capital to repay over the rest of the term. So the c. £180 extra interest is partially cancelled out by a c. £140 lower capital component because that's capital you've already paid back by overpaying. 

kassy64

Makes sense, yes we were overpaying up to the maximum allowed (10%?) of balance at start of each year so 4 years ago we were over paying about £7k that year. Thanks for help, think I will carry in with my original plan and pay it off as soon as I’m free from the current fixed rate of 1.04%. 

Sncjw

Id pay it off. You will the have the mortgage payment plus your overpayment money left to use for savings up .