Pay down mortgage - what should we do
Discussion
Hi,
I have sought professional advice but it has been contradictory so I thought I'd bring it to PH.
The recent arrival of twins and consequent loss of income from my wife, probably for life, has changed our circumstances.
My wife and I have £50k in savings and a mortgage with 115k still oweing and 15 years to run. The rate on the mortgage is BoE base rate plus .23% so currently .73. The rate is for life. £36k of the mortgage is interest only which was supposed to be covered by an endowment which costs £60 per month and currently has just under £10k in it (almost exactly what a savings account would have if I had paid in £60 per month) but is clearly going to fall short.
If we cashed in the endowmment and paid-off £10k off the interset only part and converted the remaining 26k of interest only to payment then our montly rate (at today's rates) would only rise by £120 per month and £60 of this would be covered by not paying for the endowment anymore. We could comfortably pay this.
We don't need the savings - though it would be nice to keep £10k for terrible emergencies - so we could pay of all £36k or even more. However, I currently get about 1.5% on the savings, which is more than the interest I pay on the mortgage.
We like our current lifestyle and worry that, when the interst rate goes back up to normal we will not have so much money (before the crash the mortgage was about twice what it is now). I had assumed at that point we would use some or all of the savings to pay down the mortgage so that our mortgage stays about the same.
We plan to move house in 2-3 years, proabably to a slightly more expensive house but I can't see it being massively more expensive as I won't be earning radically more. It would be a shame if we had to take out more mortgage at a less favourable rate, I assume that our current rate of BoE plus .23 will always be a pretty good rate.
We don't really need to worry about the very long term - we have good pensions and other policies which will pay out on retirement.
What would you do?
I have sought professional advice but it has been contradictory so I thought I'd bring it to PH.
The recent arrival of twins and consequent loss of income from my wife, probably for life, has changed our circumstances.
My wife and I have £50k in savings and a mortgage with 115k still oweing and 15 years to run. The rate on the mortgage is BoE base rate plus .23% so currently .73. The rate is for life. £36k of the mortgage is interest only which was supposed to be covered by an endowment which costs £60 per month and currently has just under £10k in it (almost exactly what a savings account would have if I had paid in £60 per month) but is clearly going to fall short.
If we cashed in the endowmment and paid-off £10k off the interset only part and converted the remaining 26k of interest only to payment then our montly rate (at today's rates) would only rise by £120 per month and £60 of this would be covered by not paying for the endowment anymore. We could comfortably pay this.
We don't need the savings - though it would be nice to keep £10k for terrible emergencies - so we could pay of all £36k or even more. However, I currently get about 1.5% on the savings, which is more than the interest I pay on the mortgage.
We like our current lifestyle and worry that, when the interst rate goes back up to normal we will not have so much money (before the crash the mortgage was about twice what it is now). I had assumed at that point we would use some or all of the savings to pay down the mortgage so that our mortgage stays about the same.
We plan to move house in 2-3 years, proabably to a slightly more expensive house but I can't see it being massively more expensive as I won't be earning radically more. It would be a shame if we had to take out more mortgage at a less favourable rate, I assume that our current rate of BoE plus .23 will always be a pretty good rate.
We don't really need to worry about the very long term - we have good pensions and other policies which will pay out on retirement.
What would you do?
I'm in a similar position in that my mortgage rate is less than what I get on my savings, although I get way better than 1.5%!
When did you take out the endowmment? I ask as not the best savings vehicle
Your OH will soon enjoy interest paid on savings tax free, I'm in a similar position so have no savings in my name, instead they're all in OH's.
Instead of overpaying our mortgage I pay money into a savings account that will be used to pay down the mortgage when a/ the mortgage rate becomes greater than the savings rate, or b/Our mortgage term ends. You do have to be disciplined enough not to touch it!!
When did you take out the endowmment? I ask as not the best savings vehicle
Your OH will soon enjoy interest paid on savings tax free, I'm in a similar position so have no savings in my name, instead they're all in OH's.
Instead of overpaying our mortgage I pay money into a savings account that will be used to pay down the mortgage when a/ the mortgage rate becomes greater than the savings rate, or b/Our mortgage term ends. You do have to be disciplined enough not to touch it!!
Get rid of the endowment. Not only is it underperforming, it's costing you fees. But read the small print first, carefully, about costs for early termination. You may have to 'freeze' it rather than cash it in.
Don't pay off the mortgage from savings unless and until rates rise and you get a mismatch between the cost and whatever you can get in savings interest.
Put your savings accounts in your OH sole name to get interest tax free. Max out your ISAs. Consider a shares ISA for the benefit of the higher annual savings limit.
As you have a known long term repayment schedule you can look at savings bonds options which will give you a higher rate for a lock up. You have to take a view of course on the future timings of interest rate movements. moneyfacts .co .uk is a good rate comparison site.
Don't underestimate the psychological satisfaction of being debt free. Maybe bump up your monthly payments a bit to bring the term down by a few years without impacting your monthly budget too much.
Don't pay off the mortgage from savings unless and until rates rise and you get a mismatch between the cost and whatever you can get in savings interest.
Put your savings accounts in your OH sole name to get interest tax free. Max out your ISAs. Consider a shares ISA for the benefit of the higher annual savings limit.
As you have a known long term repayment schedule you can look at savings bonds options which will give you a higher rate for a lock up. You have to take a view of course on the future timings of interest rate movements. moneyfacts .co .uk is a good rate comparison site.
Don't underestimate the psychological satisfaction of being debt free. Maybe bump up your monthly payments a bit to bring the term down by a few years without impacting your monthly budget too much.
Shoestringracer said:
OP here. Do I convert the interest only to a normal repayment?
Depends. The rate you've got is pretty damn awesome TBH. You have the money to pay off the full portion of the interest only bit in the bank, plus £10k for the endowment. With 15 years to run the endowment may actually do what it's supposed to do and pay it off for you. With your savings rate above your mortgage rate you are better off putting the minimum into you mortgage and every penny you can into the savings IMO. Only consider paying the mortgage down if the mortgage rate climbs above the savings rate.
With such a large amount of money involved it's probably best to ask someone who isn't sitting in their pants in the back bedroom of their Mother's house though.
from a slightly different angle; have you checked to see under what terms your rate can be ported to thenext property. Some of the term flexi trackers allow you to port and borrow more (Santander spring to mind) and others won't let you top up on the current deal (Woolwich). If you cannot increase the loan when you move I wouldn't convert any of the IO to repayment as you'll want to maintain the maximum amount at the low rate.
Save the surplus money in cash ISA or OH name (tax free) and use the monies towards the moving costs or deposit on the new pad. Ultimately rates will rise and when they do you can chuck the savings at the mortgage for the best of both worlds.
so first thing to do is check the t&c's of the current deal to see what the porting terms are.
as for the endownment, they aren't great and you probably will be better off getting shot and saving the cash instead. much will depend on what funds it's invested in and any penalties for cashing in. Just remember if you do cash in you might need to replace the life cover (also get some more if you've just had twins!)
Save the surplus money in cash ISA or OH name (tax free) and use the monies towards the moving costs or deposit on the new pad. Ultimately rates will rise and when they do you can chuck the savings at the mortgage for the best of both worlds.
so first thing to do is check the t&c's of the current deal to see what the porting terms are.
as for the endownment, they aren't great and you probably will be better off getting shot and saving the cash instead. much will depend on what funds it's invested in and any penalties for cashing in. Just remember if you do cash in you might need to replace the life cover (also get some more if you've just had twins!)
westberks said:
from a slightly different angle; have you checked to see under what terms your rate can be ported to thenext property. Some of the term flexi trackers allow you to port and borrow more (Santander spring to mind) and others won't let you top up on the current deal (Woolwich). If you cannot increase the loan when you move I wouldn't convert any of the IO to repayment as you'll want to maintain the maximum amount at the low rate.
Save the surplus money in cash ISA or OH name (tax free) and use the monies towards the moving costs or deposit on the new pad. Ultimately rates will rise and when they do you can chuck the savings at the mortgage for the best of both worlds.
so first thing to do is check the t&c's of the current deal to see what the porting terms are.
as for the endownment, they aren't great and you probably will be better off getting shot and saving the cash instead. much will depend on what funds it's invested in and any penalties for cashing in. Just remember if you do cash in you might need to replace the life cover (also get some more if you've just had twins!)
Thanks for all the replies. The mortgage is with Woolwich and they won't let me have any more money (I have asked) but they will let us port it - this is why I am reluctant to pay it down becasue we might want to borrow more in the future and it would be galling to pay a "normal" rate. However, if we convert the £36k they will give us it at our current rate. However, If we don't pay off some of the mortgage our replayments would go up by £200, affordable but not desireable. (this is a bit of a wierd thing to say as we would aim to save £200 or more on a typical month but I don't want to be tied to it). Save the surplus money in cash ISA or OH name (tax free) and use the monies towards the moving costs or deposit on the new pad. Ultimately rates will rise and when they do you can chuck the savings at the mortgage for the best of both worlds.
so first thing to do is check the t&c's of the current deal to see what the porting terms are.
as for the endownment, they aren't great and you probably will be better off getting shot and saving the cash instead. much will depend on what funds it's invested in and any penalties for cashing in. Just remember if you do cash in you might need to replace the life cover (also get some more if you've just had twins!)
The endowmnet is way below where it would need to be in order to pay off the full amount - the company are predicting £17 to 24k. We have lots of life assurance, but thank you for the tip
On the other hand, there is something attractive in the idea of being debt free too.
Froomee said:
cashmax said:
The boe rate isn't going far for a long time.
+1Your mortgage is cheap. Dont lose the optionality you have from liquid savings.
Id also reconsider your endowment. An ISA with corp bonds will pay nearer 5%, just throw cash in there each year and keep some cash in a savings account for emergencies.
Look at ways to increase your earnings, part time work, ebay sales, etc. Maybe the Mrs can work from home?
My 2p. DOYR etc
ringram said:
Froomee said:
cashmax said:
The boe rate isn't going far for a long time.
+1Your mortgage is cheap. Dont lose the optionality you have from liquid savings.
Id also reconsider your endowment. An ISA with corp bonds will pay nearer 5%, just throw cash in there each year and keep some cash in a savings account for emergencies.
Look at ways to increase your earnings, part time work, ebay sales, etc. Maybe the Mrs can work from home?
My 2p. DOYR etc
ringram said:
Shoestringracer said:
thanks but we don't need any more money. Only question is how to use what we have.
Quoted for posterity.Ill check back with you in 10 years on this topic
ringram said:
Froomee said:
cashmax said:
The boe rate isn't going far for a long time.
+1Your mortgage is cheap. Dont lose the optionality you have from liquid savings.
Id also reconsider your endowment. An ISA with corp bonds will pay nearer 5%, just throw cash in there each year and keep some cash in a savings account for emergencies.
Look at ways to increase your earnings, part time work, ebay sales, etc. Maybe the Mrs can work from home?
My 2p. DOYR etc
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