Reply With QuoteJust leave it.
I will be in a position in the next few months to pay off our mortgage, problem is I have 3 years of a fixed rate mortgage still with a penalty fee for early payment question is should I pay off early or leave it to run
Just leave it.
Does the interest you could earn on the money used to pay off the mortgage exceed the early repayment charge?
What is the fee? We paid our mortgage off in a fixed term and the fee was a very small amount.
If the fee is large what is your overpayment allowance?
I asked my bank this very question as I’m in the same position as you. They told me to leave a pound a month on the account and let it run it’s course. That’s what I’m doing anyway as my early payment fees are quite high. I’m ok with letting it run it’s course for what it costs per month. I suggest you ask the bank, I’m sure they’ll advise you on your options.
Last edited by oiljam; 26th April 2021 at 16:33.
Our outstanding mortgage is £113000 and I think the early repayment fee is 2.5k the mrs would like to have it payed off for piece of mind but I’m not that worried if I can save a chunk of cash I suppose it depend s if the interest on the mortgage over the next 3 years would be more than 2.5k
This. Pay as much as you can without penalty every mont/year until you finish your current fixed term, and pay it off then.Originally Posted by NikGixer750
'Against stupidity, the gods themselves struggle in vain' - Schiller.
Ask for a quote to close the mortgage down and take a view after. You may have penalties but you may also have saved on interest.
If you have got the cash to pay it off, put as much as you can into ISAs for you and wife, (if not already done) and put that and the rest (outside the ISA wrapper) into a few nice simple passive tracker funds. In 3 years, you ought to have a reasonable amount more than you need to pay the mortgage off.
Many people would argue that at that point, you could have all the money in ISAs and you should just let it run whilst remortgaging the house again and again.
While you can borrow the money at circa 1.5% and you can reasonably safely get a tax free return that's 2/3/4 times that from the stock markets, why pay off the loan?
Leave any emotions behind and do the maths.
The best savings bond currently on the market is 0.85% for 3 years, so your £113,000 will be worth £115,906 at the end of year 3 when you pay off your mortgage. So your opportunity gain is the £2.5k you don’t pay in fees plus the £2.9k you gain in interest, or £5.4K total.
Then see if the extra mortgage interest payments outweighs the £5.4k.
The interest part of a 3% fixed rate mortgage for example is £325 per month, or £11.7k for 3 years.
In the above case, it is by far cheaper and makes financial sense to pay the £2.5k fine and lose any interest on savings and get rid of the mortgage. In the above example you’d be £6.3k better off over 3 years.
However, if your savings are tied up at a higher rate, or the interest on your mortgage is lower than the example above, YMMV.
Last edited by noTAGlove; 26th April 2021 at 18:13.
What is the fixed rate? What is the maximum overpayment allowable each year?
Probably it will work out cheapest to make the maximum overpayment each year then pay off the remainder at the end of the term.
Is having the cash sitting in the bank not all the peace of mind required?
It all depends on your situation but there are often better solutions than paying off mortgage debt if you have spare capital. All depends if you can accept a little risk.
I’m soon to be in this position for a second time (don’t ask)
My fixed rate is up in November I am going to pay it up but I need to calculate if it’s worth taking the penalty (£1200 I think) or banking the funds till November-
I need to sit down and do the math
Last edited by lewie; 27th April 2021 at 06:33.
I'd be very surprised if it wasn't more as that would require a mortgage rate of well below 1%. But as others have said, you need to compare cost of paying off (so your £2.5K) vs the interest payments you would pay LESS interest you could get on savings. Since most secure 3 year savings accounts are no more than about 1%, I suspect it will mean that if your mortgage interest rate is higher than about 1.7% you'd be better off paying it off now
Some excellent replies on how to do the financial analysis. Don't forget to subtract tax on any interest on savings/ investments
Reading through the paperwork I got the fee wrong it is 4.2k and the interest rate is 2.5%
Most mortgages allow up to 10% overpayment each year so I’’d look at using my wife and I’’s ISA allowances and the rest in a term bond for the meantime
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Last edited by Halitosis; 27th April 2021 at 19:57.
Tell the mrs you have paid it and spend the cash, perfect solution!
If either of you are low tax rate, you earn £1000 savings interest tax free.
Even if you are both higher rate you still get £500 interest tax free, so shove £40k of it in an ISA and you’ll pay no tax on the rest even if you are both higher rate.
Depends if you have other savings of course.
Is it not worth considering putting a chunk of cash into a personal pension and getting the HMRC top up allowance?
I think he is in one of the better ones already, University pension.
Quite right, I’m also thinking about paying extra in to it when the house is payed off but that’s another thread
This is a simple calculation.
If it's cheaper to pay it off, do so, if not, don't.
M
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I’d add a 3rd option, would the capital do more for me invested ...
Depends on appetite for risk. As per the thread, risk free investment currently stands at around 1% p.a for 3 years, yes there is certainly the propensity to generate more, but that then depends on whether the OP wants to put capital at risk that is earmarked to pay off a mortgage.
I think I would get divorced if I suggested something like that for the house money
True, there is no return without risk.
There is certainly something nice about the feeling of paying off the mortgage.
Would love to be mortgage free
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Being mortgage free has a huge psychological effect that can't be underestimated.
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Not for everyone, meant little to me.
I'm in the exact same position as the OP myself:
Interest due over the remainder of the fixed term is c.£5k.
Penalty to repay early is c.£9k.
I asked Santander if they'd accept the balance-owed plus £5k and they said "no" so ****'em they can wait.
ie: exactly this.
I actually agree with this and having been repossessed twelve or so years ago it's not even about saving the interest for me now but paying even more than the interest just goes against my grain too much.
Last edited by spuds; 30th April 2021 at 08:39. Reason: Typo
Yeah, paying off the mortgage has been ingrained in our brains for generations. But when interest rates hit freaky long term lows it makes little or no sense if you are looking to maximise your wealth.
I think part of it depends if the payments no longer going towards the mortgage go into the black hole of spending/flittering away or not.
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