To redeem mortgage early?
Discussion
Hi all
Looking for some advice. All being well with an asset sale, I will come into about £500k of cash in the near future.
This coincidentally is the outstanding mortgage on our new house. I have an early redemption penalty of £26k, and the rate is 1.44% fixed for 5 years. I can overpay at 10% of mortgage balance per annum (HSBC are the lender)
I have been struggling to work out what my best options are
1 - pay off the mortgage in full as early as possible to avoid accrued interest - this gives me 1,700 extra a month income (some of which I would put into my work pension as I am a higher rate PAYE tax payer)
2 - make the maximum overpayments allowed each year and invest the balance in secure products with a higher interest rate than the mortgage. I think this would mean that I would pay 55k in mortgage interest over the period but have not factored in interest on the savings.
3 - keep the cash and look for another investment opportunity (or do a mix of overpayment and investment)
I have been struggling to get my head around the interest saving vs redemption penalty on option 1
I have a 3 year old son and am 46 this year, so having extra income for holidays and education would be welcome - we do ok at the moment but don't have an extravagant lifestyle (which I know is highly subjective).
I would be very interested to know what others would or have done in my situation!
Looking for some advice. All being well with an asset sale, I will come into about £500k of cash in the near future.
This coincidentally is the outstanding mortgage on our new house. I have an early redemption penalty of £26k, and the rate is 1.44% fixed for 5 years. I can overpay at 10% of mortgage balance per annum (HSBC are the lender)
I have been struggling to work out what my best options are
1 - pay off the mortgage in full as early as possible to avoid accrued interest - this gives me 1,700 extra a month income (some of which I would put into my work pension as I am a higher rate PAYE tax payer)
2 - make the maximum overpayments allowed each year and invest the balance in secure products with a higher interest rate than the mortgage. I think this would mean that I would pay 55k in mortgage interest over the period but have not factored in interest on the savings.
3 - keep the cash and look for another investment opportunity (or do a mix of overpayment and investment)
I have been struggling to get my head around the interest saving vs redemption penalty on option 1
I have a 3 year old son and am 46 this year, so having extra income for holidays and education would be welcome - we do ok at the moment but don't have an extravagant lifestyle (which I know is highly subjective).
I would be very interested to know what others would or have done in my situation!
Zstar said:
Hi all
Looking for some advice. All being well with an asset sale, I will come into about 500k of cash in the near future.
This coincidentally is the outstanding mortgage on our new house. I have an early redemption penalty of 26k, and the rate is 1.44% fixed for 5 years. I can overpay at 10% of mortgage balance per annum (HSBC are the lender)
I have been struggling to work out what my best options are
1 - pay off the mortgage in full as early as possible to avoid accrued interest - this gives me 1,700 extra a month income (some of which I would put into my work pension as I am a higher rate PAYE tax payer)
2 - make the maximum overpayments allowed each year and invest the balance in secure products with a higher interest rate than the mortgage. I think this would mean that I would pay 55k in mortgage interest over the period but have not factored in interest on the savings.
3 - keep the cash and look for another investment opportunity (or do a mix of overpayment and investment)
I have been struggling to get my head around the interest saving vs redemption penalty on option 1
I have a 3 year old son and am 46 this year, so having extra income for holidays and education would be welcome - we do ok at the moment but don't have an extravagant lifestyle (which I know is highly subjective).
I would be very interested to know what others would or have done in my situation!
My suggestion based on rising interest rates, inflation, and a likely recession, is to make the maximum overpayments until the end of your 5-year fix. Then assess the interest rate and decide. If they're high, you're better off settling the balance. Looking for some advice. All being well with an asset sale, I will come into about 500k of cash in the near future.
This coincidentally is the outstanding mortgage on our new house. I have an early redemption penalty of 26k, and the rate is 1.44% fixed for 5 years. I can overpay at 10% of mortgage balance per annum (HSBC are the lender)
I have been struggling to work out what my best options are
1 - pay off the mortgage in full as early as possible to avoid accrued interest - this gives me 1,700 extra a month income (some of which I would put into my work pension as I am a higher rate PAYE tax payer)
2 - make the maximum overpayments allowed each year and invest the balance in secure products with a higher interest rate than the mortgage. I think this would mean that I would pay 55k in mortgage interest over the period but have not factored in interest on the savings.
3 - keep the cash and look for another investment opportunity (or do a mix of overpayment and investment)
I have been struggling to get my head around the interest saving vs redemption penalty on option 1
I have a 3 year old son and am 46 this year, so having extra income for holidays and education would be welcome - we do ok at the moment but don't have an extravagant lifestyle (which I know is highly subjective).
I would be very interested to know what others would or have done in my situation!
What you will want in the interim is some form of safer investment to protect against inflation (buying into the market right now might not be bad given the bloodbath of the last few weeks).
i.e. option 3 essentially.
I suspect you will be able to get near 1.44% after tax in the buildo within 5 years.
Personally I would consider putting a fair bit into a private pension to reduce the higher rate tax.
If you have an idea for an asset that will yield a lot more than the mortgage interest, consider doing that.
Otherwise, spread it around various investments, not all in the UK.
Personally I would consider putting a fair bit into a private pension to reduce the higher rate tax.
If you have an idea for an asset that will yield a lot more than the mortgage interest, consider doing that.
Otherwise, spread it around various investments, not all in the UK.
1700 pm x60 payments (5 yrs) is £102,000. It may well be worth paying a 25k penalty to save 75k in lost cash flow over the next 5 yrs and enjoy life.
BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over £36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over £36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
Mirroring the comments above, I'd do the following:
100k in PB (assuming you have a partner who can have an account)
85k in marcus paying ~1% interest
250k in chase paying 1.5% interest (more than your mortgage rate!)
25k to spend/enjoy initially
50k/10% off your mortgage initially (assuming that's your erpc limit)
If you have any other savings I'd be considering IM/vanguard funds/SIPP to trickle into.
Then 10% off every subsequent year, starting with removing funds from your lowest paying interest account.
100k in PB (assuming you have a partner who can have an account)
85k in marcus paying ~1% interest
250k in chase paying 1.5% interest (more than your mortgage rate!)
25k to spend/enjoy initially
50k/10% off your mortgage initially (assuming that's your erpc limit)
If you have any other savings I'd be considering IM/vanguard funds/SIPP to trickle into.
Then 10% off every subsequent year, starting with removing funds from your lowest paying interest account.
Caddyshack said:
1700 pm x60 payments (5 yrs) is 102,000. It may well be worth paying a 25k penalty to save 75k in lost cash flow over the next 5 yrs and enjoy life.
BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over 36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
Thanks for all the input. You are correct in that the redemption penalty reduces from 5% to 1% over the 5 years. BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over 36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
Having ready cash does appeal to me in case we see another project, especially if the recession starts to bite and some assets are sold off 'cheaply'. If we can outperform the mortgage interest in 'safe' investments (net of tax) then we would have the optionality of paying down our main home or reinvesting into property or similar.
I guess the main reason for posting was just to sanity check that my man maths was right - rather than pay off in full, keep the cash in instruments yielding at least the mortgage interest rate (net) rather than being asset rich and cash poor. My brain tells me that this is almost like the old offset mortgages that seem to have gone out of fashion
One other thing to add is that I am a bit short on pensions, having worked overseas for years and cashed out what would have been a private pension equivalent to fund the house purchase, so I would like to be increasing my pension contribution as much as possible ad as soon as possible - not having a mortgage commitment would make me feel more comfortable about this although my wife is very anti-stock markets, so its a tough sell!
Zstar said:
Caddyshack said:
1700 pm x60 payments (5 yrs) is 102,000. It may well be worth paying a 25k penalty to save 75k in lost cash flow over the next 5 yrs and enjoy life.
BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over 36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
BUT in pure mathematical terms it is only the interest over the 60 months that is truly lost so as others have said pay off the 10% allowance. Check the penalties are not dropping year on year - some do but some are a fixed % for all years. (Some go 5%,4,3,2 1 etc over the yrs)
The interest is over 36k in 60 months if my brain is working correctly so that coupled with the cash flow benefits needs to be compared to what you can make after tax and net of costs in comparison elsewhere and then at what risk?
Have a look at the illustration with the amortisation over the the 60 months and compare.
Thanks for all the input. You are correct in that the redemption penalty reduces from 5% to 1% over the 5 years.
Having ready cash does appeal to me in case we see another project, especially if the recession starts to bite and some assets are sold off 'cheaply'. If we can outperform the mortgage interest in 'safe' investments (net of tax) then we would have the optionality of paying down our main home or reinvesting into property or similar.
I guess the main reason for posting was just to sanity check that my man maths was right - rather than pay off in full, keep the cash in instruments yielding at least the mortgage interest rate (net) rather than being asset rich and cash poor. My brain tells me that this is almost like the old offset mortgages that seem to have gone out of fashion
One other thing to add is that I am a bit short on pensions, having worked overseas for years and cashed out what would have been a private pension equivalent to fund the house purchase, so I would like to be increasing my pension contribution as much as possible ad as soon as possible - not having a mortgage commitment would make me feel more comfortable about this although my wife is very anti-stock markets, so its a tough sell!
The wife may want to consider a SIPP or SSAS to have freedom and control to invest in areas non stock market.
We still do a lot of Offset mortgages, mainly with Barclays or Scot Widows.
When I paid mine off it did not matter which way I did it the bank would get roughly - give or take a few hundred quid - the same money in interest or fees.
Carefully work it out.
But basically dont let the big headline 26k fee put you off because once you work out interest over 5 years even with 10% overpayments you might find there is very little in it.
Basically the bank always get paid!!
As such we took the decision to pay ours off after we sold our BTL. That was 3.5 years ago and it was the right decision for us and now its made things so much easier.
YMMV!
Carefully work it out.
But basically dont let the big headline 26k fee put you off because once you work out interest over 5 years even with 10% overpayments you might find there is very little in it.
Basically the bank always get paid!!
As such we took the decision to pay ours off after we sold our BTL. That was 3.5 years ago and it was the right decision for us and now its made things so much easier.
YMMV!
gotoPzero said:
When I paid mine off it did not matter which way I did it the bank would get roughly - give or take a few hundred quid - the same money in interest or fees.
Carefully work it out.
But basically dont let the big headline 26k fee put you off because once you work out interest over 5 years even with 10% overpayments you might find there is very little in it.
Basically the bank always get paid!!
As such we took the decision to pay ours off after we sold our BTL. That was 3.5 years ago and it was the right decision for us and now its made things so much easier.
YMMV!
I did the very rough calcs above.Carefully work it out.
But basically dont let the big headline 26k fee put you off because once you work out interest over 5 years even with 10% overpayments you might find there is very little in it.
Basically the bank always get paid!!
As such we took the decision to pay ours off after we sold our BTL. That was 3.5 years ago and it was the right decision for us and now its made things so much easier.
YMMV!
I could work it out based on the 10% allowance etc. fag packet would be based on interest only to make it simple and that does suggest that you may as well pay the penalty...BUT the OP then needs to consider the lost opportunity cost of not having the money for other projects.
Caddyshack said:
I did the very rough calcs above.
I could work it out based on the 10% allowance etc. fag packet would be based on interest only to make it simple and that does suggest that you may as well pay the penalty...BUT the OP then needs to consider the lost opportunity cost of not having the money for other projects.
I happen to have got very lucky with a speculative investment and I am not sure if I should quit whilst I am ahead and live a comfortable life or try and do it again and risk losing some or all of it!
Similar question yesterday with my wife.
The fixed rate on one of the houses we own comes up soon. £112k (this is my midweek accommodation which we will sell when I retire in approx 5years
If we continue to pay at the current rate, we will owe £70k in 5 years and current valve is £200k
Next year the fixed rate on a BTL we own, comes up. We will owe about £60k . Current value is £170k
Wife has £200k from an inheritance.
She is determined to pay off the BTL.
I've said, well yes, but we need to reinvest the full rent paid. So £700 a month for 4 years. Approx £30k. Otherwise I won't be retiring at 60.
I've also said don't pay off the mid week house. Just sell it when we retire (it wouldn't make a great BTL) that way there's £130k equity to further fund retirement. (don't worry I'm maxing my pension too)
By not spending her inheritance it gives her choices.
The fixed rate on one of the houses we own comes up soon. £112k (this is my midweek accommodation which we will sell when I retire in approx 5years
If we continue to pay at the current rate, we will owe £70k in 5 years and current valve is £200k
Next year the fixed rate on a BTL we own, comes up. We will owe about £60k . Current value is £170k
Wife has £200k from an inheritance.
She is determined to pay off the BTL.
I've said, well yes, but we need to reinvest the full rent paid. So £700 a month for 4 years. Approx £30k. Otherwise I won't be retiring at 60.
I've also said don't pay off the mid week house. Just sell it when we retire (it wouldn't make a great BTL) that way there's £130k equity to further fund retirement. (don't worry I'm maxing my pension too)
By not spending her inheritance it gives her choices.
dmahon said:
You can work out the optimal figures in 10 minutes on Excel. I suspect it would be paying the 10% allowed overpayment though.
My current provider suggested I could spend £999, to reduce the interest rate by 0.2%Over 5 years excel proved this would save £500 in interest. The break even was a loan of £250k
dmahon said:
You can work out the optimal figures in 10 minutes on Excel. I suspect it would be paying the 10% allowed overpayment though.
Yes, but you would need to do a daily interest amortisation table as the capital to interest split is not linear. We would also need to know the remaining term of the current mortgage.Many good comments on her, all focusing, perhaps rightly, on logical and mathematical calculations and assumptions. The only thing I would add is that it is a really good feeling, that lasts, to be free of debt and owe nothing to anyone ( I am old school though). Just a slightly different perspective
Zstar said:
I happen to have got very lucky with a speculative investment and I am not sure if I should quit whilst I am ahead and live a comfortable life or try and do it again and risk losing some or all of it!
Rob_125 said:
Mirroring the comments above, I'd do the following:
100k in PB (assuming you have a partner who can have an account)
85k in marcus paying ~1% interest
250k in chase paying 1.5% interest (more than your mortgage rate!)
25k to spend/enjoy initially
50k/10% off your mortgage initially (assuming that's your erpc limit)
If you have any other savings I'd be considering IM/vanguard funds/SIPP to trickle into.
Then 10% off every subsequent year, starting with removing funds from your lowest paying interest account.
I've just had an e-mail form Marcus saying the rate's gone up to 1.05%, woohoo 100k in PB (assuming you have a partner who can have an account)
85k in marcus paying ~1% interest
250k in chase paying 1.5% interest (more than your mortgage rate!)
25k to spend/enjoy initially
50k/10% off your mortgage initially (assuming that's your erpc limit)
If you have any other savings I'd be considering IM/vanguard funds/SIPP to trickle into.
Then 10% off every subsequent year, starting with removing funds from your lowest paying interest account.
I hadn't realsied Chase were offering 1.5%, looks like rates are starting to creep up. Another option for the OP might to be stick some in a 2 year fixed bond, which you can get about 2.5% on at the moment, so you could pay off the extra 10% for a couple of years and beat the mortgage interest rate with the rest. I guess the risk is that rates shoot up and 2.5% starts to look like a bad idea within the 2 year period.
OutInTheShed said:
Easy to work out if you know inflation figures for the next 5 years....
Does it matter though? As long as I have enough cash to pay the mortgage off, and I can return more than the interest rate on the debt net of tax, then I am quids in. Maybe not as optimised as I could be, but the debt including interest is still covered, even if the value of the house will only pay for a loaf of bread in 5 years time...ETA that I sincerely appreciate the feedback and it generally supports my supposition that we would be better off overpaying at 10% per annum and having cash spare for emergencies, projects and a fun car (the latter is not yet wife approved)
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