Overpay max amount or keep money in premium bonds?

dbyers

Hi all,

I’m very fortunate to be able to pay a lump sum into my mortgage this month so I could put in the full overpayment allowance amount before the year starts again in December. Currently, the funds are in Premium Bonds and I consider myself a person with above average luck in that regard! My mortgage rate is 3.04% fixed for 10 years about 5 years ago. I’m planning to pay off the mortgage completely next year using the remainder of my bonds (and swallow the 2% ERD). So is it worth paying the extra £6k now so I’ve used up my overpayment allowance for the year, or does it not really matter that much?  I’m hesitating because with fewer bonds, I have a lesser chance of winning. 

Newbie_John

If your mortgage is 3% for another 5 years, then there is no point of paying it off, neither now nor next year.

dbyers

Newbie_John said:

If your mortgage is 3% for another 5 years, then there is no point of paying it off, neither now nor next year.

Care to elaborate?

svensjr

I think it's marginally better to make the overpayment:

2% of £6K = £120 (saving on ERC next year)
3% of £6K = £182.40 (interest saved this year
4.65% of £6K = £279 (average winnings this year.
Difference = £23.40

This is slightly off as it doesn't take into account that your mortgage interest reduces over the course of the year, or the compounding of your premium bonds, assuming you reinvest, but they more or less cancel each other out..

Newbie_John

dbyers said:

Newbie_John said:

If your mortgage is 3% for another 5 years, then there is no point of paying it off, neither now nor next year.

Care to elaborate?

Is there a reason why you'd like to pay off your mortgage next year?
The £50k in bonds per average gives you £2325 a year right now, the cost of interests in your mortgage for the £50k part is £1520 - so you actually earning £805 every year.
So if there isn't a specific reason why you would like to pay off your mortgage - like willing to sell soon, advanced age etc. then it's financially more beneficial to keep it open - not overpay, neither try to pay it off.

If interest rates change and premium bonds "average luck" rate drops below 3% then it may be worth overpaying/paying off.

But, if there is reason to pay off your mortgage fully right now, then check the comment above - the difference is quite negligible - only £23 gain if you overpay 10% now.

dbyers

Thanks for your responses, much appreciated.

basically, I have quite a stressful job at the moment, and I’m under threat of being moved to a company that doesn’t have a good reputation.  I’m overpaying by £1000 per month while at the same time adding (and reinvesting) to premium bonds in the hope of “meeting in the middle” and paying off the mortgage, mainly so I don’t have to worry about it anymore (if I lose my job I’d just need a part time job to pay the bills, or, I can get a lower paid job that’s not as stressful).

The ERC will be 2% from December, and I feel like that’s a small price to pay to be able to say I’ve paid off my mortgage and don’t have to worry about it anymore. I used to have a huge amount of debt, which I managed to clear off years ago (mostly thanks to following the advice of Martin Lewis!). So when I’ve paid off the mortgage, I’ll be saving the monthly payment and the £1000 overpayment AND the usual savings I’m adding to premium bonds (which has gone up massively due to me quitting smoking). Opens doors you know? I’ve not been abroad for 13 years, so that’ll be my little treat for paying the mortgage off 11 years early. I’ve worked HARD for this. 🙂

So regarding the question, my assumption was that overpaying the remaining allowance of £6600 now will mean less owed when I settle and therefore (marginally) less of an ERC?

I hope that makes sense. I know it may not be the most financially savvy thing to do, but in terms of lightening the load and removing worry from my life, i think it’s worth it. 

South_coast

If the plan is to pay off the mortgage fully (understandable, from what you have said), then yes it makes sense to make the most of your fee-free allowance each year until then. No point being charged on the repayment when you don't have to be. It will also lower the amount of interest you're paying each month, thus freeing up more cash for the savings

Newbie_John

I guess you have three paths:
a) save money don't overpay - combined bonds + ISAs - most savvy option
b) pay mortgage max allowed now, and fully soon - what you're asking about
c) pay mortgage up to the allowance every year - probably mix of both 

If your mortgage next year is about £50k - ERC would be 2% which is £1000.

Assuming you would have 5 years left next year, £50k mortgage, and interests rates don't change:
a) You would be about 5x£800 = £4000 better off
b) You will stop earning interests and stop paying interests - and pay ERC of £1000 so you will be down by -£1000
c) Assuming you don't top up savings and they all go slowly towards max yearly overpayments, you will earn some interests, less than £4000

Reagrding paying 10% to pay less ERC now, check @svensjr post - doing so and having less in bonds you save £23

Really up to you to decide what's best for you but financially you will end up somewhere between £4k up or £1k down.

Anyway, it's a great place to be in!

dbyers

Thanks all!

while I think of it, is there anything I need to be aware of in terms of doing the final payment when the time comes? I think I basically talk to the lender, get a settlement figure and pay on a particular day. Other than that, anything I need to be aware of?  For those that have done it, does it change your outlook, or the way you feel about work for example?