Mortgage Overpayment Advice Needed

Wyvern_Westminster

Hello, I'm looking for some advice on overpayments. We have a large mortgage, but over the course of the next year we will receive money we inherited that will enable us to repay it completely. Probate and sale of assets mean this will probably take 6-9 months.

We will inherit a sizeable amount from cash assets very soon, while illiquid assets will take longer. Our mortgage has two components – an interest only part and a repayment part. What I need help understanding is how should I best repay in the short term.

The rough figures are: £558k interest only; £168k repayment. Term 22 years. Interest rate 5.44

We think we will be able to repay up to £240k next month. On the mortgage, we can repay £73k with no fee, then it’s 1% fee above this. The term ends at the end of March 2026 and it's likely we'll be able to repay either then or soon after.

Having played around with the provider's calculator online, I’ve focused on trying to get the monthly payments as low as possible as my metric (currently we pay £3,600 per month). The best option appears to be paying off the repayment component entirely and then the remainder of the £240k on the interest only part, rather than an equal proportion.

Given we know we’ll repay it all soon, is there a way to determine which is the best way of using the money we will have available next month?

tetrarch

Who is your lender?   - You may well find that the "1% fee" is negotiable within the last three or six months of the mortgage term

If not then it's a maths problem. You'll earn (taxable) interest on your inheritance money. It's whether the difference between your net return until March is greater than your remaing mortgage interest rate less the 1% charge

The same goes for the 73K - it all depends on your mortgage rate as to whether it's worth it or not to pay it off early

Regards

Tet

 

Wyvern_Westminster

tetrarch said:

Who is your lender?   - You may well find that the "1% fee" is negotiable within the last three or six months of the mortgage term

If not then it's a maths problem. You'll earn (taxable) interest on your inheritance money. It's whether the difference between your net return until March is greater than your remaing mortgage interest rate less the 1% charge

The same goes for the 73K - it all depends on your mortgage rate as to whether it's worth it or not to pay it off early

Regards

Tet

 

Thanks, I didn't realise it might be negotiable. The lender is Santander

Mark_d

Wyvern_Westminster said:

tetrarch said:

Who is your lender?   - You may well find that the "1% fee" is negotiable within the last three or six months of the mortgage term

If not then it's a maths problem. You'll earn (taxable) interest on your inheritance money. It's whether the difference between your net return until March is greater than your remaing mortgage interest rate less the 1% charge

The same goes for the 73K - it all depends on your mortgage rate as to whether it's worth it or not to pay it off early

Regards

Tet

 

Thanks, I didn't realise it might be negotiable. The lender is Santander

You have 22 years on your mortgage term.  I don't believe it is negotiable but it can't hurt to ask.

5.44% interest sounds rather high.  Do you pay this rate on both the interest-only and repayment parts of the mortgage?

Whilst you're looking to reduce the amount of your mortgage now, do you have a strategy for paying off your interest-only mortgage at the end of the term?

saajan_12

Wyvern_Westminster said:

Hello, I'm looking for some advice on overpayments. We have a large mortgage, but over the course of the next year we will receive money we inherited that will enable us to repay it completely. Probate and sale of assets mean this will probably take 6-9 months.

We will inherit a sizeable amount from cash assets very soon, while illiquid assets will take longer. Our mortgage has two components – an interest only part and a repayment part. What I need help understanding is how should I best repay in the short term.

The rough figures are: £558k interest only; £168k repayment. Term 22 years. Interest rate 5.44

We think we will be able to repay up to £240k next month. On the mortgage, we can repay £73k with no fee, then it’s 1% fee above this. The term ends at the end of March 2026 and it's likely we'll be able to repay either then or soon after.

Having played around with the provider's calculator online, I’ve focused on trying to get the monthly payments as low as possible as my metric (currently we pay £3,600 per month). The best option appears to be paying off the repayment component entirely and then the remainder of the £240k on the interest only part, rather than an equal proportion.

Given we know we’ll repay it all soon, is there a way to determine which is the best way of using the money we will have available next month?

Why do you care about getting the monthly payment down? If cashflow isn't a problem and you've been affording your mortgage so far, then a higher monthly payment could just means you're paying down capital through the monthly payment as well. I would target minimising interest for the remainder of the mortgage. If the rates are the same, then that'll mean prioritising the interest only element if you can choose. 

What is your respective tax bands and do you have any ISA allowance or existing savings? 

Lets assume: can get 4.75% savings interest / 4.25% ISA interest as a higher rate tax payer
(1) Pay off 73k now on the interest only with no fee
(2) Save the next 20k in an ISA for 6 months - costs you (4.25-5.44) / 2 = 0.6% interest over 6 months, then pay it off the mortgage. Repeat for partner if he also has allowance left. 
(3) Save the next 20k in normal savings for 6 months - costs you (4.75-5.44) / 2 = 0.35% interest over 6 months, then pay it off the mortgage. The interest earned is 4.75% x 20k / 2 = £475 which uses up your savings allowance which is at 0% tax. Reduce if you already have savings earning interest, repeat for partner if he has remaining PSA. 
(4) Whatever is left is going to earn you 4.75% with a tax rate of 40%, meaning net you earn (4.75 x 0.6 - 5.44 ) / 2 = 1.3% of the amount over 6 months. Vs a fee of 1%, it would actually be better to pay it off asap and take the hit on the fee. 

MFWannabe

Wyvern_Westminster said:

Hello, I'm looking for some advice on overpayments. We have a large mortgage, but over the course of the next year we will receive money we inherited that will enable us to repay it completely. Probate and sale of assets mean this will probably take 6-9 months.

We will inherit a sizeable amount from cash assets very soon, while illiquid assets will take longer. Our mortgage has two components – an interest only part and a repayment part. What I need help understanding is how should I best repay in the short term.

The rough figures are: £558k interest only; £168k repayment. Term 22 years. Interest rate 5.44

We think we will be able to repay up to £240k next month. On the mortgage, we can repay £73k with no fee, then it’s 1% fee above this. The term ends at the end of March 2026 and it's likely we'll be able to repay either then or soon after.

Having played around with the provider's calculator online, I’ve focused on trying to get the monthly payments as low as possible as my metric (currently we pay £3,600 per month). The best option appears to be paying off the repayment component entirely and then the remainder of the £240k on the interest only part, rather than an equal proportion.

Given we know we’ll repay it all soon, is there a way to determine which is the best way of using the money we will have available next month?

So your fix is up in March 2026
Until then you can overpay 75k with no charge then 1% charge until the fix ends in March 
You will be able to pay off the entire mortgage next year 
If all the above is correct then your best course of action would be to pay off the 75k (no charges) 
Put the remainder of the 240k in ISA’s and high interest savings until fix ends in march then pay that off the mortgage 
Don’t enter into any new fix in March and pay off the remainder of the mortgage