Pay off mortgage or keep small balance before borrowing more

patchyX2

I have ~18 months left on my mortgage. The outstanding balance is ~10k, and I have enough to pay it off in full.

I'm on the SVR so I'm going to pay a chunk off as the interest is a noticeable chunk. My question is whether I should pay the whole lot off, or leave a small sum on the balance.

Within the next year or two, I'll be getting a new mortgage to pay for an extension. I likely won't be staying with the same lender as their rates aren't that competitive.

Are there any pros/cons for either option? I'm wondering if the admin/application process is simpler/more complex if you already have a mortgage, or perhaps (and more importantly) if you get better rates with either option.

I notice on the MSE mortgage comparison table, they have rates for 'first time buyer' and 'remortgage', with the former currently being ~0.1% better than the latter. Technically I'm not a first time buyer, but I'm wondering whether this is just a terminology thing and it just means 'someone without an existing mortgage'?

Thanks for any advice.

tetrarch

It rather depends on the amount you will be borrowing, but there is a "now" alternative strategy that might work, involving an offset mortgage

I'll give you an example and you can move it to your values:

House Value - £150,000

O/S Balance : £10,000

Extension Cost : £50,000

Get an offset mortgage for £50,000 now (33% LTV) and then fully offset it with the cash released from the remortgage. (I know that Barclays used to allow this with CASH ISA's, so the time really is THIS TAX YEAR)

You then have zero carry cost until you are ready to buiild your extension - you don't then even have to ask, just draw down your offset balance

I know that offset mortgages can look a little pricey, but the flexibility they offer, plus the ability to pay off much more quickly can offset (pun intended) the extra cost

Regards

Tet

patchyX2

Thanks Tet,

We won't know the exact mortgage amount we'll need until we get some quotes in, but it's likely to be between 200-300k, so the rate is going to be very important. So if offset mortgages typically have a higher rate, then that's a bit of a non-stater for us.

poseidon1

https://forums.moneysavingexpert.com/discussion/6667589/pay-off-mortgage-or-keep-small-balance-before-borrowing-more

Its not clear how long ago you applied for the mortgage you are currently paying off.

However, the affordability criteria for new advances from an exsisting lender will be no different compared to approaching a new lender. Both will embark on an in depth forensic examination of your income and outgoings to determine what they believe you can afford and therefore what they are prepared to lend.

With that in mind the following article does suggest exploring your new advance options at least 6 months before the funds are required although in your situation ( a planned major renovation project) I would be inclined to do so sooner, if only to ensure the expected cost of works can be covered by a new advance -

https://moneytothemasses.com/owning-a-home/mortgages/mortgage-affordability-rules-change-how-it-affects-you

In the meantime the primary benefit in my case of sticking with my exsisting lender ( Barclays) on a remortgage following cessation of a 15 year offset tracker , was they paid all legal/valuation fees and of course there was no delay with them securing the new advance since they already had pre exsisting legal charges.

You have an additional complication in securing an affordable loan based on the current value of the property, ignoring any potential value uplift you hope to achieve from the scope of works.

With regard to those costs no doubt, you will have already noted building cost inflation markedly increasing following events such as covid, Ukraine invasion and more recently the Iran war. Who knows what other macro economic shocks await you in the next 1 or 2 years which may increase even further the estimates you have at present.

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