Should we pay off our 5 year fixed deal

kabads

We have just been very fortunate to inherit some money which allows us to pay off our mortgage. We have cleared all our other debts, and the mortgage is the only one left. It is a considerable payment each month (£850), with our meager public sector wages (we are teachers).

We have a 5 year fixed deal with Leeds Building society at 5.29%. We have 4 years left to pay it off. We are allowed to make an overpayment of 10% of the outstanding balance at the beginning of the year, which is roughly £9,800 for this year, without any penalty. However, if we go over this amount we are charged 5% on the rest of the overpayment. Leeds have quoted us about £4400 to pay off the mortgage early.

So far, we have put the money in higher interest saving accounts, and used both last year's and this year's (08-09) ISA allowance. We are both basic rate taxpayers, so any interest in an account that is not ISA is taxed. We are keeping the money in a mixture of 6%+ accounts at around the £30,000 level (for safety).

The conundrum is that if we pay 5.29% on the outstanding balance for the mortgage for the full term but the money earns this more than this amount somewhere else in a savings account, then we should keep the mortgage for another 4 years and then pay it off without the penalty as the money will be earning more in savings that we are being charged. Is that a correct assumption?

However, the chances of the money earning more than 5% is low as we get taxed on the savings accounts. The other thing we could do is to pay off 10% every year for the remaining 4 years. This would rapidly reduce the interest on the loan and make it a better deal nearing the end of the 5 year deal.

I must admit that I am a little confused and it is a difficult call. Any advice would be greatly appreciated.

A & T

Darka

As you have an early redemption charge that is quite high I would be tempted to just overpay by 10% each year, the redemption charge will probably reduce each year so you could just pay the final overpayment (or clear the mortgage) at the beginning of the fourth year.

This also leaves you with a good emergency fund over those 3/4 years just in case something happens.

madonss

Try asking what the charge is to reduce the term of the mortgage.

If it's only an admin fee (or even better free!) then shorten the term of the mortgage to something stupid like 1 year and make astronomical payments per month out of your savings.


Use their systems and Terms & Conditions against them.

dimbo61

hi like madonss has said check your T&C of your mortgage to see how
much it would be to reduce your mortgage from its current term to say
5 years. ( It cost me £50 to change mine )
use the money in the bank to pay the difference in mortgage payments
and pay off the 10% allowed each year ( check with leeds how much that is each year ) and you will soon have the mortgage cleared.
At the same time consider paying the max you can into ISA,s and paying into
pensions ( you get tax relief 20/40% ! ) for your retirement and enjoy the
feeling of being mortgage free and able to save/ take more holidays, work part time or travel GOOD LUCK
Dont pay the 5% ERC

kabads

Ah, we never thought about changing the duration of the loan. I will call them in the morning and see what they say. My guess is that they won't like it.

kabads

They will change the term of the mortgage to a minimum of the product we already have (4 years approx) for a charge of £30. Is this a good route to go with with overpayments of 10% per year? I guess it will save us years of interest.

madonss

I think so.

Check the figures with a spreadsheet, but I believe that you will be paying less interest by doing it that way instead of waiting for the 4 years to elapse normally (i.e. until the ERC ends) and then paying the remainder off in full.

You will be reducing the capital faster, so years 2,3 and 4 should have a much lower interest charge than they would have done if the mortgage was due to run until the normal end date.

Perhaps someone else can confirm my thinking?

ailuro2

It depends on whether your pension is sorted, and whether you can find a higher rate of interest, and also whether you relish the feeling of being completely debt free. Also, do you trust yourself not to dip into the money you inherited if you put it in an investment of some sort rather than against the mortgage?

It's a nice problem to have, good luck with it, and remember to buy yourselves something nice to remember the person by too.;)

dimbo61

yes kababs and madonss this will save you thousands and thousands
of pounds of interest I know cos I am going to save £50,000 by reducing
my mortgage from 22 years to 10 years so you can save even more !
well done and good luck

kabads

So, the early repayment charge is going to be £4000~ but this site:

http://www.fool.co.uk/mortgages/CalculatorOffsetEarlyRepay.aspx

calculates that with overpayments, I am charged £12000~ in interest over the 4 years left to run on the fixed term.

I'm still unsure what to do.

The good news is that I've paid my 10% for this year, and I get another 10% after 15th July, which is the mortgage anniversary, so I will be making another payment at that point too,.

firesidemaid

if you only pay 10% off per year for the next 4 years you will only save 10% of the interest per year (compounded). if you change the term to only 4 years you will save 1000s in interest.

eg. say your mortgage is currently £100,000. interest is £440 a month. simply, if you overpay by 10%, your interest is now £396 a month - make sure they keep your monthly payments at your normal rate though.

if you reduce the term to only 4 years your interest at the end of year will be at least 25% less etc