Paying a lump sum off my mortgage - when?

[Shakermaker]

My mother in law has just given my wife and I a very generous chunk of money from the proceeds of selling her old house, which comes with the strict instructions to only be spent on our own house. Which i am happy with.

But i want to know what our best options are, in this situation.

The total money is £50k

At the moment I am just over 16 months into our fixed-rate deal on the house. We can pay up to 10% of the value without any penalty, and this means I can pay a few pounds over £30k off now. In December when our deal ends we can then use the other £20k when the time comes to see if we want to renegotiate our deal.

Until that time, the remaining money will feed our mortgage and both my wife and I will use the cash to pay off other debts, credit cards etc and the general expenses of having been married from our salaries to the same amount that we currently spend on the mortgage.

Or, do we just keep the £50k until December and use it all then, by which time we will have paid off another £9k in mortgage payments leaving us with circa £41k?

How much can we leave in our joint account before the tax man gets interested, as we don't want s surprise tax demand in April next year!

Or is there an option we haven't considered?

Thanks in advance for your help

[Saleen836]

I would guess the reduced monthly mortgage payment by paying off £30k now will be more than any interest accrued by keeping the £30k in your bank

[Ilovejapcrap]

What's the penalty if you just pay the 50 k I know it will cost you a couple of quid but takes away the ease of access shall we say.

Hard earn easy spent and all that

[Sheets Tabuer]

What type of mortgage is it? most mortgages charge the interest up front so seems a no brainer to me, pay it off your mortgage.

[MisterJD]

I would expect that making the biggest overpayment possible now will mean that your future regular payments will have a lower interest element (because the balance of the mortgage is less) so if you keep your monthly payment the same you will be reducing the capital balance in each of the remaining 16 months of the fixed term.

At the end of the current fixed term you'll have reduced the capital balance by the £30k one-off and to a lesser extent because of the reduced interest paid on the regular payments.

[Shakermaker]

Thanks so far
Just to clarify a couple of points that might be relevant:

We only bought the house last year so I expect we are still paying off a load of interest more than we are capital. It was a two year fixed term but based on when we set the product up, so we are able to change it in December this year. So if I pay off now, am I just paying off a load of interest on my current loan, rather than paying off a chunk of capital which I could do in December when we could take out a brand new mortgage and refinance the whole lot?

We bought with only a 10% deposit from selling my old house, knowing this money would come in, but it does me we aren't on the best mortgage rate (still below current variable but not as good as if we had used a 15-20% deposit)

The reduced payments, initially, is certainly more than any interest we would get probably, and would be very helpful as we have only just got married, would like to pay off some debts and then family etc.

Not sure what the penalty would be for overpayment but I'd rather not pay a penalty if I can avoid it.

i do understand the concern over ease of access, but I think I should be OK, managed a few months between sale and purchase of my old house and the only stupid purchase I made was an engagement ring...

[CrouchingWayne]

I think any overpayment you make is capital as your base monthly payments includes the interest charged.

If it was me, I'd pay roughly £30k down as an overpayment and continue the monthly payments at their current level. This would pull the date of repayment forward quite a lot and would put you in a stronger position come December re-negotiation.

In December is put the remaining £20k in assuming that was allowed.

[caziques]

CrouchingWayne said:

I think any overpayment you make is capital as your base monthly payments includes the interest charged.

If it was me, I'd pay roughly £30k down as an overpayment and continue the monthly payments at their current level. This would pull the date of repayment forward quite a lot and would put you in a stronger position come December re-negotiation.

In December is put the remaining £20k in assuming that was allowed.

Agree. The extra 20k will then mean extra equity, which should mean a better rate.

Then continue to pay the amount you are at the moment - will shorten the term by many years.

[towser44]

Have a look at this and see the difference making a lump sum payment makes on the term and amount of interest saved.

http://www.moneysavingexpert.com/mortgages/mortgag...

[Magic919]

Pay off the maximum allowed now.

Don't make mortgage payments using the remaining money.

Use the rest of the money as soon as any mortgage deal allows you.

[Voldemort]

It might be worth getting in touch with your present Mortgage provider and telling them your circumstances have changed... As they panic, thinking you've lost your job, you tell them you've come into a large sum of money and you are looking at the best way to reduce your mortgage whether that be by negotiating with them or going to a new provider. Ask them for the next available slot for a chat with the mortgage advisor.

[foxsasha]

Reduce the period of the mortgage to massively increase monthly payments. We've done this twice to allow us to over pay by a huge amount without penalty. First time it just took a phone call and there were no fees, second time with a different provider was a little more difficult and there was a minimal fee but the fee was insignificant compared to the interest savings made.

You can extend the term once you've used up the £50k.

[foxsasha]

When you say you can pay off 10% of the value I'm taking that to mean you can over pay each month's payment by 10%?

[Shakermaker]

swerni said:

foxsasha said:

When you say you can pay off 10% of the value I'm taking that to mean you can over pay each month's payment by 10%?

it's based on a 12 month period, you can do it in one lump or smaller increments.

Correct. If I pay the maximum it will reduce my monthly payments, or I can pay a smaller lump and keep the payments the same.

[ikarl]

Yeah but as foxsasha says, does it mean a 10% overpayment each month (that you can pay all at once) or that you can pay off 10% of the total value of the mortgage each year?

For my mortgage I can only overpay by 10% each month on my repayment - I.e. 600/month means I can pay an additional £60 per month

[Shakermaker]

ikarl said:

Yeah but as foxsasha says, does it mean a 10% overpayment each month (that you can pay all at once) or that you can pay off 10% of the total value of the mortgage each year?

For my mortgage I can only overpay by 10% each month on my repayment - I.e. 600/month means I can pay an additional £60 per month

I spoke with them yesterday and it was 10% each year of the original mortgage value so they lent me just over £300k I can pay up to £30k this year without penalty. At the end of my fixed term period i can then pay off more with no penalty

[DonkeyApple]

Shakermaker said:

I spoke with them yesterday and it was 10% each year of the original mortgage value so they lent me just over £300k I can pay up to £30k this year without penalty. At the end of my fixed term period i can then pay off more with no penalty

I'd just whack in the 30k that you can and stick the 20k remainder in the bank. If they lower your monthly charge as a result put that difference in the bank with the £20k. At the end of the term just transfer the £20k+ to your mortgage account for the logical reason that the return is much better while you look for a new deal.

Two things I would not me is that if you are on a 90% LTV at the moment then 80% may not offer massive rate savings. But you can check that now by doing a quick shop around online to see what level LTVs need to currently be at for that.

Secondly, if your MiL passes away within the next 7 years what provisions do you have to cover the IHT requirement that would arise? https://www.gov.uk/inheritance-tax/gifts

Something that caught my eye in your original post gave me the impression that you'd racked up personal debt since buying this house? I didn't quite understand the bit about the using of the £20k to pay that down but I am assuming this is about paying down expensive debt but replenishing the £20k over the coming months out of future income? Which seems logical so long as you have the discipline to just not continue living in excess on consumer debt and conveniently forgetting to pay back the £20k?

[Sarnie]

ikarl said:

For my mortgage I can only overpay by 10% each month on my repayment - I.e. 600/month means I can pay an additional £60 per month

Thats not correct Karl

[Shakermaker]

DonkeyApple said:

Shakermaker said:

I spoke with them yesterday and it was 10% each year of the original mortgage value so they lent me just over £300k I can pay up to £30k this year without penalty. At the end of my fixed term period i can then pay off more with no penalty

I'd just whack in the 30k that you can and stick the 20k remainder in the bank. If they lower your monthly charge as a result put that difference in the bank with the £20k. At the end of the term just transfer the £20k+ to your mortgage account for the logical reason that the return is much better while you look for a new deal.

Two things I would not me is that if you are on a 90% LTV at the moment then 80% may not offer massive rate savings. But you can check that now by doing a quick shop around online to see what level LTVs need to currently be at for that.

Secondly, if your MiL passes away within the next 7 years what provisions do you have to cover the IHT requirement that would arise? https://www.gov.uk/inheritance-tax/gifts

Something that caught my eye in your original post gave me the impression that you'd racked up personal debt since buying this house? I didn't quite understand the bit about the using of the £20k to pay that down but I am assuming this is about paying down expensive debt but replenishing the £20k over the coming months out of future income? Which seems logical so long as you have the discipline to just not continue living in excess on consumer debt and conveniently forgetting to pay back the £20k?

Thanks, sounds like the right kind of idea.

The debt thing.... Yeah, I've got a few quid on credit card that I would like to pay off as does my wife. So I think what we will both do is to have £20k in the bank, and until the end of the year, that will pay mortgage but still give us another chunk in a few months. Whilst this is going on, the money I normally pay from my salary into my mortgage I can divert in to credit cards instead, as can wife. Come next year will have paid them off too and switch back to normal manner of things

[DonkeyApple]

As credit card debt is stupidly expensive would it not make sense to clear all of that crappy debt first? Seems out of step to have the logic to pay down mortgage debt that is heftier than any suitable cash return and then reverse that logic when it comes to the even more expensive credit card debt.

I'd think it more logical to pay £30k into the mortgage to knock off a chunk of that debt and simultaneously use the remaining £20k that you cannot yet offset against the mortgage debt to remove all consumer debt then use your onward income to replenish that element of the £20k ASAP along with adding the interest you are saving on the new lower mortgage amount ready for 8 months time when you can use the £20k when you remortgage.