Question on paying mortgage off early

skintchick

Me again!

I have decided to overpay my mortgage, with the aim of being clear of it in ten years' time.

I have secured a lodger, and while I have her will commit her rent to my mortgage in addition to what I already pay.

Numbers:

Mortgage is for £52,263 with 22 years, 9 months remaining, at 4.69% fixed till July 2007. I am allowed to overpay by £500 on top of my £312.41 monthly payment each month. Not that I have that much extra floating around.

My question is should I use some of my £1,500 savings (in ING account on 4.75%) to pay off a lump of, say, £1,000 now?

Apparently interest is calculated daily so it would make a difference instantly, which is why I wonder if I should do that and then top the savings up again while still overpaying a bit, then when it's topped up in ten months' time, increase the overpayment.

Or should I just overpay now and leave the savings alone?

Thanks for any advice!

YorkshireBoy

I think it's a good idea to have 3-6 months take home pay in a savings account before making overpayments on the mortgage. Unless of course you are in very secure employment (and if you are - where do you work, and have they any more jobs going?).

Also, if the ING account is your only savings account, why not withdraw the money and start an ISA? Halifax are paying 5% TAX-FREE at the moment and you're possibly only drawing 3.8% net of basic tax on your ING account.

EDIT: Just realised that you're in a similar situation to me*, in that your ISA would pay you more interest than your mortgage is costing you!! So, this might change things a llittle. You need to do some sums to see just how much better off you'd be by putting your cash into an ISA instead.

* Our ISA's are making 5%, whilst our (interest only) mortgage is 4.5% (=BOE)

skintchick

You see, I am a novice when it comes to ISAs and stuff - I really don't want to tie the cash up, and I will NEVER have six month's worth of wages saved up I don't think! If I had that much spare it would be nice not to have threadbare carpets!

Bestthingsinlifearefree

Hi skintchick,

ISA's are just like your ING account....

EXCEPT the interest gained is TAX free...you can put in up to 3K each year and in most ISA's can withdraw it straight away with no penalties (just like your ING).

In regard to reducing the mortgage instead of paying off a lump sum and losing your financial cushion. Why not see if you can reduce the term e.g if you reduce the term to 20 years your monthly payment might go up £30 -£50 ( a guess...your bank will be able to tell you exactly)

and you will finish your mortgage 2 years 9 earlier by increasing your monthly payment by a manageable amount AND still have your cash cushion for emergencies.

If things get tight you can put the term back up or if things go better reduce the term further.The more you reduce the term the faster you reduce the debt / less interest.

Check your mortgage company allows this / with no penalties etc (mine does , its with the halifax)

Its just a different way of doing things rather than having to save up or use a lump sum of cash.

Just a suggestion.

YorkshireBoy

skintchick wrote:

You see, I am a novice when it comes to ISAs and stuff - I really don't want to tie the cash up, and I will NEVER have six month's worth of wages saved up I don't think! If I had that much spare it would be nice not to have threadbare carpets!

I'm not sure I fully understand you (or you don't understand me?) here, but...

You don't *need* to tie up your cash in a "cash mini ISA". If you can't afford to put the max £3,000 in every year (and use it to build for the future) then simply use it as your regular savings account - you'll make an extra 1.2% interest over your ING account. Draw out for emergencies as you would with your ING account.

Your original post mentioned a lodger. What I was referring to in my earlier post was that your have two choices with what to do with their rent money...

a) commit her rent money towards your 4.69% mortgage payments as an overpayment, as you have already stated, or

b) put her rent money in your ISA and earn 5% on it.

If you go for the second option you will make more money. Just make sure you review your finances when your mortgage fixed rate expires in nearly 2 years time. Your next mortgage advance will then be the original advance less your ISA savings and this is how you will start to work towards achieving your aim of being mortgage free in 10 years.

skintchick

Is that better than just overpaying? I'm reluctant to put the amount I HAVE to pay up in case something happens like I lose my job and I can't afford it.

There's no guarantee I will have a lodger for the next eight years after all. Someone may take pity on me and marry me!

Thanks for the advice on ISAs. I thought you had to leave the money in there for five years but obviously I need to find out a bit more about them!

Joe_Bloggs

@skintchick earning an extra 1% over your ing account of £1500 will get you £15. This amount will not change your world. Having a lodger might cause you to reflect on your circumstances and future prospects. Lets hope the two of you can get along.
J_B (AKA Nosey Parker)

skintchick

Joe_Bloggs wrote:

Having a lodger might cause you to reflect on your circumstances and future prospects. J_B (AKA Nosey Parker)

What do you mean??

My circumstances are that I live on my own and don't earn enough to afford luxuries. If I had a husband then there would be two wages and things would be much easier.

At least I have a job, and always have had since I was 19, and I don;t live on the dole like some people. I've always paid my way and I've worked hard to be able to have my own house.

I am forced into having a lodger by rising taxes, etc., and a wage that is static.

Could you explain your comment please?

Joe_Bloggs

You won't be living alone anymore ! You are both going to have to get along.
You may have created tax issues for yourself as the lodger is a source of income. Keep receipts for everything just in case. Getting a remortgage with a different lender might be tricky with a lodger. I could be wrong. I'm sorry to have caused you any anxiety by my post.
J_B.(Rent a Room Tax Relief is good for upto £4250 of gross rental income.)

skintchick

Ok, sorry, I thought you meant something else.

WE have had some long chats and seem to get along. I have had a nightmare lodger in the past so I think I could put up with almost anyone!

Hadn't thought about remortgage difficulties, but it should be OK - plenty of people rent a room? Will look into though, thanks.