Avoid early redemption fees

Jonathanhill100

Hello, We are looking to pay off a significant chunk of our mortgage 200k of a 260k mortgage.  Unfortunately we are only 6 months into our current deal and it only allows a 10% overpayment a year.  Obviously we want to minimise the 5k early repayment but aware we are paying 1k a month in interest. 

Does anyone have any ideas or advice on how to best minimise any additional charges or costs?

TIA   

Hoenir

What rate of interest are you currently paying? 

penners324

Pay the 10% overpayment. Stick the rest in savings accounts. Fixed rate savers, £20k in an ISA

Hoenir

You could apply to have the overall mortgage term shortened. 

lfc321

How long is your current deal? And at what rate?

amnblog

You have not given us full figures to be accurate but the principle is this.

Depending on the Lender you could pay off 10% of the balance this month and 10% next month without penalty.

That totals £49,400

The remaining £150,600 you can take a view on 

If your interest rate is 4.60% and the early repayment charge is 4.00% you save about £900 over 2025 by making the overpayment now.

MWT

amnblog said:

If your interest rate is 4.60% and the early repayment charge is 4.00% you save about £900 over 2025 by making the overpayment now.

.. but you'd also lose the interest that money could earn in a saving account over the year as well...

Even after allowing for any taxes on the interest, it would probably not make sense to pay it all off straight away, but as you said, it does depend on the details, especially how long the current fix is and the actual ERC.

Jonathanhill100

Hoenir said:

What rate of interest are you currently paying? 

4.79 is the rate we are on

Jonathanhill100

ERC is lfc321 said:

How long is your current deal? And at what rate?

The term is quite long and finishes in July 2025.  ERC quoted at 5k and % is 4.79 Thanks 

MWT

Jonathanhill100 said:

The term is quite long and finishes in July 2025. 

July 2025 is only 7 months away, did you put the wrong year?

BikingBud

I take it, given recent commitment to fixed rate deal, that this is money that has just come to you rather than being the result of savings etc. If it was accrued savings what was your previous intent once the pot had grown?

1k per month in interest? Is there a capital element to this as well?

To me there are 3 elements that you can quantify:

1. Interest Saved on £200k - That is saved once you pay it off, it's in your back pocket, it compounds down meaning less interest on interest and can foreshorten the period of the loan significantly. 
2. Interest Lost on £200k from savings - keeps paying until you spend it, possibly elsewhere with less benefit. £200k @4% over 2 years gives roughly £16.5k interest hence tax rates might reduce the growth
3. ERC - Appears to be flat but should be an offset against 1.

And then there are other less tangible considerations such as the removal of the need to generate £1k + Tax every month just to service the interest? Feelgood factor of having a small mortgage with light at the end of the tunnel etc.

If you do reduce the debt can you reallocate the £1k interest payment into pension? Especially Sal Sac to maximise longer term benefits?

You need to take a perspective across these 3 quantifiables as that is a monetary value decision. Perhaps a blended approach, if it is inheritance, would enjoying some, saving some and taking a chunk off the mortgage give you the best overall feel good factor.

In that case allocating some for both this and next year's overspend and seeing what might then occur, as recommended by @amnblog might suit best.