Mortgage Dilemma

paul25

Hello,

I have a mortgage currently at £163,500, my fixed rate of 5.24% ends February 2009. I am making overpayments of £500 per month and hope for the mortgage to be appx £158,000 come Februaury.

Heres the dilemma ;

In February I hope to have appx £25,000 in savings with Isa's (£22,000) and premium bonds (£3,000). I don't know whether to use my savings to pay a chunk of my mortgage off or to keep the Isa savings earning a reasonable interest rate. Or maybe going for an off-set mortgage would be better option for me.

Please help with any views.

Thanks
Paul.

ragingbass

The offset mortgages are a great idea in principle, but the consensus at the moment seems to be that it's only worth it if your savings are a significant percentage of your debt. In your case, come february, it looks like your savings will only amount to 15% of your mortgage, so my gut reaction would be that you could probably get a better deal elsewhere.


If you can comfortably overpay £500 a month and also save on top of that, it sounds like you'd be better off reducing your mortgage term. This would save you significantly more than overpaying. Use some of the comparison sites like moneysupermarket.com to play about with the mortgage terms and compare the true cost at the end of the term. In my case, I worked out that by paying over 15 years instead of 25 years, this would save me about £60k.


The trick is not to over extend youself so you end up struggling and can't take interest rate changes. But I think you might be surprised at the amount you have to pay each month. Again, in my case, reducing the term from 25 to 15 years, only put my monthly payments up £330!!

Optimistic_Saver

It's difficult to know what to do isn't it, whether to hang on to your savings or pay a chunk off your mortgage?

I am in the same boat, i.e. have a mortgage of approx £143k. Shortening the mortgage term from 23 years to 9 years has had the effect of paying £500 extra off the mortgage each month - as suggested by 'raging bass'. It is saving me a huge amount in interest. That said I have still hung on to some of my savings (around £20k). Anything over and above this will go into paying off the mortgage. But it gives me peace of mind knowing the money is there should I need it.

Good luck with whatever you decide to do!

ragingbass

I think it's definitely a good idea to keep hold of your £20k 'rainy day' fund too. You would save a bit more money if you did use it to pay off more of your mortgage, but that extra cash buys you piece of mind in case of the unexpected

setmefree2

ragingbass wrote: »

If you can comfortably overpay £500 a month and also save on top of that, it sounds like you'd be better off reducing your mortgage term. This would save you significantly more than overpaying.

Excuse me for being thick - but don't really understand this how is reducing your term better than overpaying?

English_Bob

It's a difficult one as no-one knows your financial situation as well as you.
You could get another low(ish) rate mortgage and keep the cash in savings, giving you the security of it should you need it quickly.
You could get a normal mortgage and continue to pay money into it as you are now. Although as mentioned above, when you work it out, if it doesn't reduce your term then its a bit of a waste. For each £500 paid off, the bank will recaculate your repayment schedule and reduce your normal repayments to ensure you have the mortgage for the full term, and make them the maximum amount of money.
I like the offset mortgage idea, as this gives you a lot more flexibility. All the savings in there will essentially be earning the same rate as the mortgage (around 6.7% tax free). Trouble is as the rate is higher this type of product will actually cost you more to have (around £200 more a month than your current mortgage).
workings: 163k x (6.7% - 5.2%).
However, if you earn enough to be overpaying, you may still win long term as you will pay the mortgage off early. And you can still take your savings out if you need to short notice.

My advice (for what it's worth), get a pen and paper and run a couple of scenarios with the different mortgage and savings rates for, say, the next ten years. (acutally there are a few mortagage calculators and savings calculators on the web and on this site that can help)
Calculate how much you would save and how much your mortgage would cost and come to a final figure. You don't have to be super accurate, just roughly give your self and idea. Dont forget to add in the fees for remortgaging every few years.
Tricky one....... the only thing not to do is nothing.
Good Luck

ragingbass

setmefree2 wrote: »

Excuse me for being thick - but don't really understand this how is reducing your term better than overpaying?

It's a good question and the key is when your lender recalculates the interest. If your make an overpayment, your lender may only recalculate the interest monthly or annually, in which case you'd still be paying the interest on the originally calculated amount owed, as if you haven't made the overpayment.

As a best case scenario, I think if you managed to get a lender that did actually recalculate the interest daily, then I think overpaying would probably save the same amount as reducing the term

English_Bob

Ragingbass is right, but it's worse than that.
Even if your bank calculates the interest daily, you still lose out.
This is because even though your interest part of the repayment reduces a little, the capital repayment part also does to compensate for the fact that you've got less to pay.
Over the term of your mortgage, this means that overpaying will save you money, but you will not get the same interest rate as you are borrowing at.
eg:
£100000 loan for 30yrs @ 5.75%..... total paid = £209904.30
£90000 loan for 30 yrs @ 5.75% ......total paid = £188913.90
... saving = £20990.40 for £10000 invested at year 1 for 30 years
but £10000 saved at 5.75% = £27663.99 over 30 yrs (even paying tax at the higher rate)
and this is the BEST case scenario.. if your interest is calculated monthly or annually, you lose even more.
This seems to be a point missed by a lot of people (and the articles on this site).

I think this is correct. if it isn't give me a slap on the wrist!

Bob

setmefree2

English Bob,

Are you comparing interest on a mortgage over 30 years to interest on a saving account over 30 years.?Surely, the whole point is that the mortgage will be paid of in less than 30 years So in our case the comparison should be the interest on £250k over 25 years compared to the interest over 10 years (our aim) - the difference is the saving (roughly £142k). In order for us to beat our mortgage rate (as higher rate tax payers) we need a savings rate of roughly 9.5% - in a non-ISA a/c.

I do take the point about the timing of overpayments though.;)

bandraoi

English_Bob wrote: »

Ragingbass is right, but it's worse than that.
Even if your bank calculates the interest daily, you still lose out.
This is because even though your interest part of the repayment reduces a little, the capital repayment part also does to compensate for the fact that you've got less to pay.
Over the term of your mortgage, this means that overpaying will save you money, but you will not get the same interest rate as you are borrowing at.
eg:
£100000 loan for 30yrs @ 5.75%..... total paid = £209904.30
£90000 loan for 30 yrs @ 5.75% ......total paid = £188913.90
... saving = £20990.40 for £10000 invested at year 1 for 30 years
but £10000 saved at 5.75% = £27663.99 over 30 yrs (even paying tax at the higher rate)
and this is the BEST case scenario.. if your interest is calculated monthly or annually, you lose even more.
This seems to be a point missed by a lot of people (and the articles on this site).

I think this is correct. if it isn't give me a slap on the wrist!

Bob

£100000 loan for 30yrs @ 5.75%..... total paid = £209904.30
£90000 loan for 30 yrs @ 5.75% ......total paid = £188913.90

That £20990.40 saved will be saved incrementally over 30 years and will also accrue interesting, effectively you'd could be putting £700 a year into a savings account at 5.75% too, and at the end of 30 years that's worth over £50,000 not £20990.40.

setmefree2

No sorry I don't understand your figures.

I have a mortgage of £250,000 over 25 years. Using your 5.75% figure, it will cost me £471,830 if I pay it off over 25 years. If I pay it off in 10 years the cost is £329,308. Saving £142,522. To beat this savings figure of £142,522 I would have to have a savings rate greater than 5.75% (Tax Free) or 9.5% taxed (I am a higher rate tax payer). The ISA allowance is currently only £7k, so after that I need a savings account giving 9.5% (not too many of these around) - so thus it's better to POYM.:money: