Pay off mortgage in full with ERC?

velgor

I'm clear on the bigger picture here but I'm tying myself in knots with this one, so any advice/ideas appreciated!

Mortgage balance is around 220k with on property worth 650k. Fixed at 3.99% until Jan 2030. ERC of 5% applies until Jan 2027 (when it reduces by 1pp/year). Overpayments allowed without charge up to 10%/calendar year. I have 15k 'free' overpayment allowance left this year and this resets on 1st Jan.

Due to inheritance I'm in a fortunate position to be able to clear the balance in full, though we've outgrown the house and there's some pressure to buy somewhere bigger. One way or another there is a bigger mortgage in my future, so this isn't an endgame.

My view, partly to keep things simple, is to clear the mortgage now/soon (maximising overpayment allowance) and put everything that would otherwise go towards monthly mortgage repayments into savings (probably ISAs). But the ERC is of course a problem...

Thanks

tacpot12

I think the obvious solution is to use up the existing overpayment allowance for 2025 (£15k) immediately. This will reduce the interest you are paying on your current mortgage, and then take the hit of the ERC as and when you want to move house. You may not even need to take any ERC hit, if you need a mortgage of at least £198K to buy the new house - your existing mortgage might allow porting to the new house, and if you also pay off £20K from your  current mortgage on 2nd Jan 2026, your existing mortgage will be down to about £198K, so that is what you would pay the ERC on if you cleared the mortgage to buy the new house. Port that amount to the new house and there would be no ERC. 

Keeping your inheritance in ISAs until it is needed is sensible; remember couples can currently put £40K into an ISA each year and don't forget you have dividend allowances and personal savings allowances/rates, although these seem likely to be adjusted at the Budget later this month.

Although you might receive more interest/income than you would save by paying off your mortgage (because your rate is quite low), other factors such as charges and risk mean that repaying the mortgage is a very sensible option.  

lfc321

I agree with the poster above. You might not quite be able to get a savings rate that matches your mortgage rate, at least not once you’ve paid tax on the savings interest. But the difference between the two is unlikely to be as much as the ERC (which I’m guessing is around £11k?). 

In your shoes I would pay the maximum overpayment for this year now, pay the maximum allowed for next year in January, and put the  rest in savings to be the deposit on the new house (also to cover moving costs and fees). 

When it comes time to move you can make a calculation on whether you are better off porting your existing mortgage or paying the ERC. 

velgor

Thanks @tacpot12, @lfc321 for the advice. Really helped me see through the brain fog!

I guess the calculation I need to focus on is cost of keeping the mortgage vs cost of clearing it. First year only as a reference point, allowing for some estimates/roundings (correct me if I'm wrong!):

180k (after 2x large overpayments + 2x monthly repayments) on 1st Jan x 5% = 9k

vs

3.99% mortgage charge less interest earned @ 2.5% net = 1.5% x 200k mortgage = 3k

After the first year this will change somewhat as I'll have a new 10% overpayment allowance and ERC goes down to 4% but that's for another day!

I was hoping to keep it simple and clear the mortgage in one go but the numbers are quite compelling...

BikingBud

Ask the lender for a settlement figure and that will give you an accurate baseline from which to look at options

V3cash

That ERC is way too big to pay mortgage off for sure, definitely agree with others on here.
pay 10% each year, rest in savings then pay off at end of fixed period.
or if buying bigger just add money to existing mortgage to upsize.
i was tempted to pay mine off as it’s only £900 ERC but i still won’t give bank anything extra as they get enough of my hard earned cash already 🤣