Paying a 1% erc

LG26

Hi all would you pay a 1% erc on a mortgage balance of £36500 to settle the mortgage in full? My mortgage rate is 3.96%. Thanks

Woodstok2000

Need a bit more info to answer that properly….when does your fixed rate end? What is the total duration left on the mortgage and what are your monthly repayments?

tetrarch

Depends on whether you're a 40% taxpayer and how long is left on the mortgage

Regards

Tet

LG26

https://forums.moneysavingexpert.com/discussion/comment/82151090#Comment_82151090

My 2 year fix deal ends May 2027 i still have 28 years left and monthly payments are currently £199pm

LG26

https://forums.moneysavingexpert.com/discussion/comment/82151091#Comment_82151091

basic tax payer and 28 year left 2 year fixed deal ends in May 2027.

Woodstok2000

Ignoring all other factors, and assuming you have £36,500 spare cash sitting around, I would pay it off.

The 1% fee is £365, so you'd be paying £36865. Between now and May 2027 you'd save £199 per month (and maybe earn a bit of interest in a regular saver) so by May your total outgoing would be around £35,200.

If you pay it off in May you would spend £1592 between now and then in mortgage payments, and then about £35,800 to pay off the mortgage. That's about £37,400 in total. You could earn between £1100-1300 in interest (depending if your £36,500 is in an ISA) so best case scenario you've spent £36,000.

By my calculation paying it off now and investing the monthly payment saves you about £800 between now and May.

LG26

https://forums.moneysavingexpert.com/discussion/comment/82151230#Comment_82151230

thanks for that my money is held in premium bonds max holdings but i don’t have a guaranteed return per month obviously.

tetrarch

The following calculation is predicated on the assumption that there is no redemption penalty after your 2 fix ends.

Note: I would also check with your lender whether the 1% fee is chargeable within 3 or 6 months from the end of your lock-in. Sometimes these fees are waived

The simple rule-of thumb calculation is as long as you can earn (after tax) more than your fixed rate then it is worth running the fix to term.

In this case your penalty of 1% is actually the equivalent of an annualised rate of ~1.50% so you need to factor this into the calculation as well

Regards

Tet