Would you repay mortgage in full

Gam2015

Hi all i currently have a mortgage of £52k at 5.25% with an early repayment charge of 2% the mortgage doesnt finish until May 2026. I have various funds available i have max holdings in premium bonds and only won £925 in the 8 months so far this year. Would it be wise to pay the mortgage off in full and pull money out of premium bonds.

BarelySentientAI

Treat the two decisions as independent.

Is there something better than premium bonds for your investment?  If so, get out of premium bonds.

Is the best thing for the investment paying off the mortgage (including ERC)?  If so, do that.  If not, do something else with it.

Inbetweeners

Does the ERC drop after May 25?

As mentioned above, could that £52k work better for you. Have you maxed out other savings such as ISA and utilised personal savings allowance?

Brie

As I read it you want to have your money in something that will get you more than the interest you are paying on your mortgage.  So interest of more than 5.25% which is difficult.  So paying off the mortgage might be the better idea.  But that will cost you 2% so you only save 3.25% by paying it off.  

Is there a small amount you could pay off without a redemption charge?  Many mortgages seem to allow 10% overpayment per year.  It's not a lot but it's a bit of change in your pocket instead of the bank - unless you can make more elsewhere as others have suggested.  

And then there's the peace of mind of not having a mortgage to worry about.  My mortgage was small but affordable but paying it off happily erased one line off my financial spreadsheet.  Bliss.

Exodi

Gam2015 said:

Hi all i currently have a mortgage of £52k at 5.25% with an early repayment charge of 2% the mortgage doesnt finish until May 2026. I have various funds available i have max holdings in premium bonds and only won £925 in the 8 months so far this year. Would it be wise to pay the mortgage off in full and pull money out of premium bonds.

Lots of variables and things to consider, but I'll suggest that incurring ERC is very unlikely to be the correct answer.

A couple of useful things to know would be:

1) what your current overpayment allowance in £ amounts (most allow 10% of the original balance, so it's likely at least £5.2k)
2) how much Personal Savings Allowance do you have available (this depends on your income - see more here: https://www.gov.uk/apply-tax-free-interest-on-savings)
3) How much of your annual ISA allowance do you have available? (S&S ISA, Cash ISA, LISA, etc).
4) What is the total term of the mortgage and what is your monthly payment?

Answering this allows us to work out a plan. For example, if you had your full overpayment allowance available, you could overpay the maximum for this year (possibly £5.2k) and then again in 2025 (another £5.2k). Depending on the tax you pay on the interest, you could put £40k from Premium Bonds into an 18 month fixed bond paying 4.75% and £5k (for the 2025 overpayment) in a shorter term fixed bond, or EA account paying around ~5%. This would be significantly better than overpaying it immediately and paying £936 in ERC.

Without turning this a questionnaire, another train of thought would be zooming out and looking at your financial plan more generally. Is there a reason you need to overpay the mortgage? You could, for example, transfer the Premium Bonds into a SIPP and get tax relief on it (depending on your income) or drip-feed the Premium Bonds into a S&S ISA over a few years. Of course I understand the emotional aspect to being mortgage-free, but it comes at a financial cost.