Mortgage overpayment penalty

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Ojb
Ojb Posts: 87 Forumite
in Mortgages & endowments
I'm in a 5 year fix with a 4% ERP for the whole term.
Balance is 150k. I can pay 10% a year penalty free.
I have a couple of questions.
If I pay half the mortgage off (75k) and pay 4% on 60k of it would eventually it pay off as I'd be saving the 2.69 interest rate?
To minimise the penalty would I be better doing it sooner?
Lastly could I put the money elsewhere and earn the 2.69% somewhere else?

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  • ACG
    ACG Posts: 23,752 Forumite
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    You can get rates of around 3-5% depending on how long you lock the money away for with some bonds. You are probably better doing that rather than overpaying and almost definitely better than overpaying and incurring the ERC.
    I am a Mortgage Adviser
    You should note that this site doesn't check my status as a mortgage adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • Ojb
    Ojb Posts: 87 Forumite
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    The best savings or ISA I can see is 1.5%.
    If I overpaid and saved 2.69% interest from that moment on, would the 4% penalty effectively only cost me 1.31?
  • 1adf1991
    1adf1991 Posts: 7 Forumite
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    pay 10% off this year I.e. 15000 put the rest in a saving account.

    then pay off another 10% next year and so on and so forth till its paid off...

    savings accounts wise, rather cash or go for stocks and shares, your choice depending on risk tolerance.

    could go Marcus paying 1.5% and if you wanted to go complex drip feed that into several regular saver accounts I.e. first direct, m&s and Halifax paying 5%.
  • Ojb
    Ojb Posts: 87 Forumite
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    The trouble is the 10% a year decreases as the balance goes down.
    So after the 5 years I still have 90k left.
    It seems that I am better off after 18 months by paying the penalty right away.
    Say i paid 15000 now penalty free leaving 135k.
    I could pay 135k off in full for a fee of 5408.
    If I just paid the 15k penalty free then I still pay £303 interest a month which takes 18 months to match the fee to pay the whole lot.
    Does my maths make sense?
  • [Deleted User]
    [Deleted User] Posts: 35,242 Forumite
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    No.

    Because you would be keeping the 135k in an account where it is earning interest, offsetting the £303 interest you're paying.
  • Ojb
    Ojb Posts: 87 Forumite
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    Fair enough.. as an example the 135k costs 3636 a year in interest. In easy access it could earn 2028@1.5%.
    So a loss of 1608 per year.
    The 4% fee to pay it off is 5408 so it would take about 3 1/2 years for the saving in interest to overtake the one off redemption fee.
  • chunkytfg
    chunkytfg Posts: 844 Forumite
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    Ojb wrote: »
    The trouble is the 10% a year decreases as the balance goes down.
    So after the 5 years I still have 90k left.
    It seems that I am better off after 18 months by paying the penalty right away.
    Say i paid 15000 now penalty free leaving 135k.
    I could pay 135k off in full for a fee of 5408.
    If I just paid the 15k penalty free then I still pay £303 interest a month which takes 18 months to match the fee to pay the whole lot.
    Does my maths make sense?


    I was under the impression the 10% rule applies to the original mortgage amount and not the remaining amount. Might be worth checking your T+C's:beer:
    Those who risk nothing, Do nothing, achieve nothing, become nothing
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  • getmore4less
    getmore4less Posts: 46,882 Forumite
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    Don't forget the fee often goes down with some lenders 1% at a time so factor that in as well.
  • Ojb
    Ojb Posts: 87 Forumite
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    It says 10% outstanding balance, I assumed this meant the balance at the time. Anyone know for sure?
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