Overpayments

[mike9009]

Hi

I feel embarrassed bearing some of my financial details, but the advice and options offered on PH seem good.

I have a slightly strange mortgage deal with a well known lender. Essentially I have two mortgage accounts with the lender, detailed below

1. 1. Amount borrowed (currently) is approx. £75k. The rate is BoE base rate lifetime tracker +0.25%. £60k mortgage is interest only and I have about £40k investments (FTSE and old endowment) covering the capital. This is also being overpaid slightly by historic overpayments (£8k).

1. 2. About £37k left as a typical repayment mortgage. Currently on a 2 year deal (2.09%). I am overpaying by about £4k per annum.

The issue is that the lender has changed the overpayment from a max of £500 per month, to 10% of loan per annum. My main aim is to be mortgage free 'quickly' but this change I see limiting my ability to pay off the higher rate mortgage early.

My strategy was to pay off mortgage #2, ASAP, whilst the capital growth on the investments and low interest rate just eat mortgage #1 away over a longer period. I would like to be mortgage free, in my mind, in about 7 years.

The two year deal is about to end on mortgage #2. What is my best line of attack. I would just like to know my options....

Could I claw the overpayments out of mortgage #1 and upon a new deal being organised, offset this capital against a new mortgage #2 deal? House is around £300k if it has any relevance?

Thanks for reading and TIA.

Mike

[nct001]

Can't you just change the term of the mortgage instead of making over payments?

Seems the easiest solution - just done this with mortgage express as rental on btl increased from £895 to £1495.

[Ozzie Osmond]

I can’t really follow your figures on the mortgage amounts. However,

mike9009 said:

My strategy was to pay off mortgage #2, ASAP, whilst the capital growth on the investments and low interest rate just eat mortgage #1 away over a longer period. I would like to be mortgage free, in my mind, in about 7 years.

Sounds a good strategy, but why not just pay the whole of that one off now, or at least as much of it as you can? Do you have some special attachment to the old endowment? What are its terms?

Depending on your highest tax rate (40%/32.5%?) the FTSE dividend income will only just cover that 2.09% mortgage and your capital is “at risk”. It may not be worthwhile holding the investments, depending how you feel about the risk.

mike9009 said:

#1. The rate is BoE base rate lifetime tracker +0.25%.

This money is soooo cheap at present (0.75%) that you’re in the unusual situation of having a pretty good chance of making more from safe-ish investments than that mortgage is costing you. Again, it depends in part upon your income tax rate and whether you actually want to run any risk at all when your home is involved.

Just an aside – if you’re a 40% taxpayer, how’s your pension? Because if you can borrow at 0.75% and then invest in pension which delivers 40% tax relief that’s well worth a look. But it would have to fit your overall situation since clearly interest rates may rise and once money goes into pension it has to stay there until age 55+.

[toastyhamster]

What's the penalty for exceeding the overpayments? HSBC allow 10% overpayment annually but then over that there's only a 1% charge, so it still makes sense (to me anyway) to press on overpaying and in fact throwing a lump sum at it to pay it off.

I owe just under 100k and when it comes down to my savings level (probably Spring next year) I'll just lump sum pay it off, pay the 800 ish quid repayment charge and then fill my savings up pretty quickly. On that sum owed I'll be paying around £130 a month in interest, with another 6-7 years to run. (At this point I'll start cursing savings rates instead of praising mortgage rates!)

Don't rule this out if the repayment charge isn't excessive.

[mike9009]

Ozzie Osmond said:

I can’t really follow your figures on the mortgage amounts. However,

mike9009 said:

My strategy was to pay off mortgage #2, ASAP, whilst the capital growth on the investments and low interest rate just eat mortgage #1 away over a longer period. I would like to be mortgage free, in my mind, in about 7 years.

Sounds a good strategy, but why not just pay the whole of that one off now, or at least as much of it as you can? Do you have some special attachment to the old endowment? What are its terms?

No special attachment, but it is 19 years old and was due to run to 25 years. I thought there were penalties to coming out early? Also, I would still need a vehicle to pay the capital on the interest only part.

Ozzie Osmond said:

Depending on your highest tax rate (40%/32.5%?) the FTSE dividend income will only just cover that 2.09% mortgage and your capital is “at risk”. It may not be worthwhile holding the investments, depending how you feel about the risk.

I am in the higher tax bracket. Fairly risk adverse, especially when it comes to our home.

Ozzie Osmond said:

mike9009 said:

#1. The rate is BoE base rate lifetime tracker +0.25%.

This money is soooo cheap at present (0.75%) that you’re in the unusual situation of having a pretty good chance of making more from safe-ish investments than that mortgage is costing you. Again, it depends in part upon your income tax rate and whether you actually want to run any risk at all when your home is involved.

Just an aside – if you’re a 40% taxpayer, how’s your pension? Because if you can borrow at 0.75% and then invest in pension which delivers 40% tax relief that’s well worth a look. But it would have to fit your overall situation since clearly interest rates may rise and once money goes into pension it has to stay there until age 55+.

I am 42 and pension is about £100k, paying in 10% with 1% employer contributions. So an option could be to up pension payments and sacrifice paying into the investments to cover the interest only part. I suppose the risk there is the probability of interest rates rising significantly over the next 13 years (...... ummm, crystal ball time), versus the tax relief I get on the pension. Might do some sums and scenarios.

Thank you!

Mike