Paying a chunk off the mortgage, is it ever the wrong move?
Discussion
I've been thinking about paying a small chunk of my mortgage off recently from some savings.
I have looked at some of the calculators and they seem to suggest that I would be worse off paying off the mortgage than if I was to take the same money and put it in a savings account for a year.
I understand the basics that if the saving interest rate is higher than the rate of my mortgage then it can make more sense to put the money in savings.
However we are only on a low rate until May next year when our mortgage term ends. We expect to put the house on the market a couple of months before the mortgage terms ends with the goal being to get it sold and an offer accepted on our next house shortly after meaning that I won't be taking out a new mortgage product on the current house and can just stomach the higher costs on the standard rate until we complete.
My thinking is that the money I would use is currently sitting in premium bonds not doing a huge amount and I would feel better seeing a lower mortgage balance. The amount I would be paying off would not be more than 10% of the total amount to avoid early repayment charges.
I also think that when we do come to sell that because we have a smaller amount left on the mortgage we will also have more equity for the next place. I appreciate that if I don't pay it off I could put that money into the purchase of the next one when it comes to it making that extra equity somewhat irrelevant.
Feeling a bit confused...Kind of feels like it makes no difference whether I do pay it off or not now I have written it out.
I have looked at some of the calculators and they seem to suggest that I would be worse off paying off the mortgage than if I was to take the same money and put it in a savings account for a year.
I understand the basics that if the saving interest rate is higher than the rate of my mortgage then it can make more sense to put the money in savings.
However we are only on a low rate until May next year when our mortgage term ends. We expect to put the house on the market a couple of months before the mortgage terms ends with the goal being to get it sold and an offer accepted on our next house shortly after meaning that I won't be taking out a new mortgage product on the current house and can just stomach the higher costs on the standard rate until we complete.
My thinking is that the money I would use is currently sitting in premium bonds not doing a huge amount and I would feel better seeing a lower mortgage balance. The amount I would be paying off would not be more than 10% of the total amount to avoid early repayment charges.
I also think that when we do come to sell that because we have a smaller amount left on the mortgage we will also have more equity for the next place. I appreciate that if I don't pay it off I could put that money into the purchase of the next one when it comes to it making that extra equity somewhat irrelevant.
Feeling a bit confused...Kind of feels like it makes no difference whether I do pay it off or not now I have written it out.
Assuming your mortgage is under ~3% I would just keep the money saved in PBs or another savings product and then use this plus equity from your current house for the new place.
It should be a pretty basic calculation to establish this is worth doing, based on your current mortgage rate and what you’re getting from PBs/another savings account.
It should be a pretty basic calculation to establish this is worth doing, based on your current mortgage rate and what you’re getting from PBs/another savings account.
We weren't on a fixed deal due to apathy and leaving it too late to switch, plus we were getting towards the end of the repayment period anyway. Our rate went up to just over 5% last time we got a notification, the best (non risky) savings rate we could get at the time was less than that, so it made sense to clear it when my wife received some inheritance.
I know some sages would say we were wrong to do it for some other reason, but I don't believe it was the wrong move in our case. Not like we're planning to move again and need the credit rating, though I could understand younger people thinking that way. There are plenty of reasons why it's not the best move for some people though. Not having that extra monthly outgoing has made early retirement easier to manage, so was worth it for us.
No one size fits all answer.
I know some sages would say we were wrong to do it for some other reason, but I don't believe it was the wrong move in our case. Not like we're planning to move again and need the credit rating, though I could understand younger people thinking that way. There are plenty of reasons why it's not the best move for some people though. Not having that extra monthly outgoing has made early retirement easier to manage, so was worth it for us.
No one size fits all answer.
OldSkoolRS said:
Our rate went up to just over 5% last time we got a notification, the best (non risky) savings rate we could get at the time was less than that, so it made sense to clear it when my wife received some inheritance.
I know some sages would say we were wrong to do it for some other reason, but I don't believe it was the wrong move in our case.
I know some sages would say we were wrong to do it for some other reason, but I don't believe it was the wrong move in our case.
Sounds like a no brainer decision from you at that rate!
jfis89 said:
Assuming your mortgage is under ~3% I would just keep the money saved in PBs or another savings product and then use this plus equity from your current house for the new place.
It should be a pretty basic calculation to establish this is worth doing, based on your current mortgage rate and what you’re getting from PBs/another savings account.
Current interest rate is well below 3% at 1.74% so yes on the face of it I understand that if I put the money I have in mind in a savings product that earns more than 1.74% interest I am "up".It should be a pretty basic calculation to establish this is worth doing, based on your current mortgage rate and what you’re getting from PBs/another savings account.
However another thing I have been thinking is that the mortgages I have had seem to charge you ERP's if you overpay any more than 10% of the balance in one year.
So a part of me thinks by not paying the chunk off that I am effectively "missing out" a year that I could have used to get the mortgage reduced quicker if you see what I mean.
Boo-urns said:
Quick question: are you delaying the house move because you want to avoid remortgaging at a higher rate? If so, it might be worth checking whether your current deal is portable and moving earlier, if you want.
It's more the fact that we have just had a baby, wife is on maternity leave with quite a poor package so going through a mortgage application at the moment wouldn't be ideal. This time next year she will be coming up to being a few months back at work, all being well.Al U said:
Current interest rate is well below 3% at 1.74% so yes on the face of it I understand that if I put the money I have in mind in a savings product that earns more than 1.74% interest I am "up".
Bear in mind if you’re a higher rate tax payer a 3% gross on savings soon becomes a paltry 1.8% after tax. In that case it’s not too dissimilar to the interest rate you’re paying.If you’re in doubt why not hedge your bets, and pay off 50% of what you were intending to, and keeping the other 50% in savings.
Al U said:
It's more the fact that we have just had a baby, wife is on maternity leave with quite a poor package so going through a mortgage application at the moment wouldn't be ideal. This time next year she will be coming up to being a few months back at work, all being well.
Most lenders will use her pre mat leave salary as long as she will return on the same T&CsAl U said:
Current interest rate is well below 3% at 1.74% so yes on the face of it I understand that if I put the money I have in mind in a savings product that earns more than 1.74% interest I am "up".
However another thing I have been thinking is that the mortgages I have had seem to charge you ERP's if you overpay any more than 10% of the balance in one year.
So a part of me thinks by not paying the chunk off that I am effectively "missing out" a year that I could have used to get the mortgage reduced quicker if you see what I mean.
You have maybe considered this but the 10% restriction is usually just during the fixed period I think, so you will be able to reassess when your deal expires and put more than 10% in at that point if you want. Your T&C’s may help here as your deal could be different etcHowever another thing I have been thinking is that the mortgages I have had seem to charge you ERP's if you overpay any more than 10% of the balance in one year.
So a part of me thinks by not paying the chunk off that I am effectively "missing out" a year that I could have used to get the mortgage reduced quicker if you see what I mean.
Paid all of mine off after being offered a 5.89% fix a few months back, coming off a 1.79% fix. Things have settled a bit since then but I proceeded with it anyway. Probably would have made money on the proceeds some other way however nothing beats the security of finally owning your home.
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