Should be pay off mortgage, or wait?

northern_star

I have a 5 year discounted Repayment mortgage product with the Abbey – 1.35% discounted from their Standard Variable Rate. The mortgage has 13 years to run and approx 37k outstanding (monthly payments £350 at pres) but OH and I will soon be in a position to repay this in full. However there is a tie-in with this particular discounted product (which is due to run until March 2011) and if we repay in full we will incur penalty charges (currently quoted as almost 1k but rising each month as the mortgage continues). There is also a £225 exit fee.

Would we be better paying off in full and being mortgage free? Abbey are quoting settlement currently around £38,225 – of which almost 1k is the product fee (for closing a discounted product early) and £225 exit fees. Or would we be better putting the money into savings and continuing to pay the mortgage until the discounted product comes to an end in March 2011.

I guess what I’m really asking for is help with the maths! If we bank the 38k instead of paying off the mortgage, would the potential interest offset the product charges, or would the juggling of the savings be more hassle than the financial rewards merit?

Just to add, we don’t have this money at present, it’s due to us in a few weeks and we’d planned to pay off the mortgage and be ‘mortgage free’ but now we’re wondering if that’s the best move for us in light of the above product charges.

Any advice/help would be appreciated..

dimbo61

I would pay off the mortgage
The money you save each month on the mortgage you could then
put into isa,s for you and your OH
£1225 in fees is not to bad to be mortgage free !!
how much interest will you pay over the next five years ??
you will not be able to match the 6.24% interest you are paying to abbey.
life will be easier with no mortgage and your home will belong to you.

good luck:T :T

Bonbon

Pay it off ! I am in a similar situation with a £35.000 mortgage.I'm no good at maths but my intuition tells me to pay it off and put the equivalent money into savings.I'm definately going to do it. It's much better to get rid of that debt and not have to worry any more,and.......you will completely own your whole house!!!!!

andysdad_2

Northern Star
to help you with the maths if I take the figures from above, with the loan of £37k at 6.24% finishing in Jan 2021, then by the end of your fixed period you will pay just over £13,500 in payments and owe £30,500. Putting the £37k in to one of Martin's best savings accounts and assuming you pay basic rate tax then you will end up with just over £43k.
The cost to you ,over the absolute mortgage value now: using the savings method is £670: to pay it off now is £1000. So the question you are left with is being mortgage free 3 years early worth £330?
My opinion for what it is worth is the same as dimbo61 pay it off and save into ISA's

Jonbvn

IMHO, you should disregard most of the above posters, since they have given you poor advice. At your current low mortgage rate your money is better spent on mini cash ISA's coupled with index linked savings certs. With both these products, you will get a better return than your current discount mortgage rate. The important thing is to avoid the penalty fees, which represent a significant portion of the mtge amount.

Once you can make mtge over-payments without penalty then you must review your situation.

Jonbvn

Bonbon wrote: »

Pay it off ! I am in a similar situation with a £35.000 mortgage.I'm no good at maths but my intuition tells me to pay it off and put the equivalent money into savings.I'm definately going to do it. It's much better to get rid of that debt and not have to worry any more,and.......you will completely own your whole house!!!!!

Sorry, but you have poor intuition..............

The ERC's + tax-free returns on ISA's completely invalidate your position.

CLAPTON

you have missed out the one most important figure... that is what interest rate are you actually paying.

looking at the abbey website their standard rate seems to be 7.59% so less your discount of 1.35% you are now paying 6.24% for the discounted mortgage.

So if there were no penalties it would be a about possible to achieve this rate in a cash ISA...... depending upon whether you already have cash ISAs However, if your ISAs limits will be filled anyway then after tax you wont achieve this.

The penalties of 1000 plus 225 represent about an interest rate of only about 0.06% over the 5 five period for a sum of 37000.

All seems a bit marginal to me so I'ld pay the lot off.

northern_star

Thanks to all for your help and advice.

To clarify; the current mortgage rate is 6.24% and there is an option to make overpayments of up 10% of the balance owing each year.

Does this affect the figures?

Thanks again, NS

AMIOUS14

I am new to the forum but am enjoying very much!
My £60,000 mortgage has 10yrs to run , monthly repayments are £450 (rate is 6.450%) with the Alliance & Leicester.
18 months ago I was diagnosed with CML (Chronic Myloed Leukemea) and my critical illness insurance plan has just payed out the full amount (£60,000).
Should I pay off the mortgage in one `swoop` and be mortgage free and £451 per month better off , or invest the £60,000 and use the interest to pay towards the monthly mortgage payments?....this way when the mortgage is payed off in 10yrs time I will still have the £60,000!

CLAPTON

AMIOUS14 wrote: »

I am new to the forum but am enjoying very much!
My £60,000 mortgage has 10yrs to run , monthly repayments are £450 (rate is 6.450%) with the Alliance & Leicester.
18 months ago I was diagnosed with CML (Chronic Myloed Leukemea) and my critical illness insurance plan has just payed out the full amount (£60,000).
Should I pay off the mortgage in one `swoop` and be mortgage free and £451 per month better off , or invest the £60,000 and use the interest to pay towards the monthly mortgage payments?....this way when the mortgage is payed off in 10yrs time I will still have the £60,000!

You will not be able to achieve a saving rate of 6.45% after tax on your savings so pay off the mortgage with the money.
If you dont need to spend the 451 per month then save that in the best savings account you can find and in 10 years time you will have more than 60,000 in the account

dimbo61

Northern Star
We don't know what your personal circumstances are, ie you could be 60 and want to retire or you could be 30 and have numerous dependents, a small house and an old car.

You need to balance all of the options, as to whether you need disposal savings or want to be mortgage free. Needless to say if you paid off the mortgage you could then save in the higher rate savings accounts, put into ISAs, etc, and NOT have to even think about a mortgage. You are paying 6.24% on your mortgage, and if you have to pay tax you would have to be put savings in on interest of around 9%, and unfortunately there aren't alot of these about.

If you were in the situation that you became unemployed and had savings, the Government expects you to use this to live on, but if you paid off your mortgage the house would be yours, and you would qualify for benefits.

Your decision. Good luck.