To pay or not to pay...

Dagsyrugg

Hi,

Just wanted to know what the best course of action is please:

I'm in the fortunate position that I now have enough cash to redeem my mortgage once and for all, approx. £51,000

I have no other debts whatsoever

However, there is a penalty charge for redeeming 2 years into a 10 year fix [approx. £2000 all together] but from using the various calculations and my own, I will save about £11,000 in interest charges over the remaining term

So, to get to the crux, do you think I should pay off or just carry on investing/saving the lump sum ?

Appreciate your help

lisyloo

Where is your £51K right now?
What rate is it earning?
Whose name is it in?
What tax rate do you pay?
Do you have a spouse?
What tax rate do they pay?
Have either of you used your ISA allowances this year?
What is your mortgage rate?

Sorry for all the questions but they are all relevant.

but from using the various calculations and my own, I will save about £11,000 in interest charges over the remaining term

This may be true, however you will also make a return by intevesting the £51K elsewhere over the next 8 years.
The question is - which will generate the best return?

I can't answer that without more information as above.

Dagsyrugg

In reply:
Monies with ING
4.75%
In spouse's name
Non tax payer - interest gross
ISA allowances used
Mortgage rate 5% APR

Thanks

lisyloo

OK I have done the following calculations.

I am assuming you have the £2K available to pay the penalty so I have compared.

a) £53K in ING at 4.75% for 8 years
b) £51K paid off the mortgage @ 5% plus £2K spent on penalty.

The results with compound interest are

a) £76,825
b) £75,350

which means that leaving the money in ING currently gives the best return.
You should review this if either you can get a better savings rate, the savings rate changes (rate drops?) or your penalty reduces (sometimes they reduce over the lifetime of the mortgage).

I have used 5% as the rate on the mortgage and this may not be the actual rate as APR includes fees etc.

If you want to reproduce calculations then it's
a) 53000 then multiply by 1.0475 8 times
b) 51000 then multiply by 1.05 8 times

Dagsyrugg

Thank you for this - appreciate your time in preparing this

It clears my cloudy mind now!

robnye

couldnt you overpay your mortgage every month, that way you are still earning interest with ING

of course if your mortgage is annual interest, dont overpay until december, just before they recaculate for the new year

Hobo_2

Hi, so really you can 100% offset in effect, but can do better on the saving (spouse gross) rates with Dripping into Regular Savers where possible, but time & effort reqired to chase the rates!

Dagsyrugg

Thank you for your advice

dunstonh

Check your mortgage terms. There may be an allowance to overpay a limited amount extra each year without penalty.