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does anyone know the advantages and pitfalls of paying a lump sum off the mortgage?

(18 Posts)
MrsShrek3 Sun 21-Jul-13 16:11:58

DH to inherit a sum of money. If it were paid off our repayment mortgage (we are not in any "products" or deals atm) it would mean we have only 13k left on the mortgage. Are we likely to get somehow penalised for this? we would also want to continue paying our current rate and could, in theory at least, pay off the remainder within two years.
DH has had cancer and our credit rating is likely to be shot to bits, our aim is to be mortgage free! We're a bit confused at it all. Any advice or pointers would be very welcome.

YoungBritishPissArtist Sun 21-Jul-13 16:18:06

No idea, but Google 'Frugal Queen' blog. She paid off a massive amount of debt and no overpays her mortgage regularly and blogs about it.

nannynick Sun 21-Jul-13 16:49:05

Having done this recently, there was no problem doing it with my repayment mortgage.

First check with the mortgage company with regard to any early repayment fees. Often if you are no longer in a fixed rate deal then the only repayment fee comes when you pay off the entire loan, a closing account fee.

When you pay a lump sum, they recalculate the mortgage payment amount so your monthly payment will go down. What I then do is go into the branch (as my mortgage is via a local building society, now bank) and they fax off a request to their mortgage division requesting the payment amount is increased to what I was paying before. This then means that each month I am overpaying the mortgage, thus helping reduce the outstanding mortgage time. Hope that makes sense.

LIZS Sun 21-Jul-13 16:52:23

Check the maximum you can pay off each year with no penalty , it may be about 10% if the capital balance. You may find even the penalty outweighs the interest but if not pay the maximum and set aside the rest to do so again as soon as the year is done or keep repayments the same and overpay.

MrsShrek3 Sun 21-Jul-13 20:09:15

thanks all
nanynick with recent experience, fab info ta smile

MrsShrek3 Sun 21-Jul-13 22:18:59

So it could be calculators at the ready to see what to pay off and when? trouble is.... dh is concerned he'll spend it it is better paid off the mortgage than save any.

AlphaBetaOoda Sun 21-Jul-13 22:23:22

Nationwide give us the option or shortening term or reducing payments. There is a limit to how much some companies let you pay each year but I don't think we have one.

Money saving expert have an overpayment calculator which is useful.

hermioneweasley Tue 23-Jul-13 19:55:43

Given interest rates you'd probably be better paying off a mortgage than putting it in savings, unless you were planning to invest it for income?

LadyIsabellaWrotham Tue 23-Jul-13 19:58:41

Almost certainly the best thing you could do with the money, but do make sure you've got an accessible emergency fund left over, perhaps in ISAs.

CogitoErgoSometimes Wed 24-Jul-13 07:45:00

Agreeing with many of the points above. Check with your lender if there are any penalties to early redemption and do the maths. If there is a restriction on how much you can pay off in one lump, put any spare money away where you can't get at it for a fixed period of time. Fixed term Cash ISAs or fixed term bonds, for example. This makes it far more difficult to fritter away the balance.

You would probably be better off than if you put the money into a savings account.

The only downfall is that it would be hard to reclaim the cash if you needed it - you would be asset rich but cash poor.

The other thing is to see what it will do to your credit score - I would really look to get some financial advice

adagio Wed 24-Jul-13 07:56:54

Maybe consider keeping some aside in a hard to access account 'just in case' e.g. an ISA each which is in branch/passbook only or something like that? I would guess if your credit rating is shot, then getting a new mortgage or increasing it again in the future might be hard to do?

If you have some aside then if something major needs doing, I dunno- roof starts to leak or something - then you have the cash to do it without having to remortgage? However, caveat is savings interest is rubbish so do this with the smallest amount that is sensible, pay off most of the mortgage and don't dip into it!

Could you pay a lump sum off your credit cards (if any)

lljkk Wed 24-Jul-13 08:14:59

Check your mortgage terms whether there are penalties. Even if there are penalties, it's probably still a good investment.

Like a load of people I know we are mortgage free. No one has voiced any regrets, yet! My only worry would be if had other debts (like credit cards with higher repayments) or other

lljkk Wed 24-Jul-13 08:15:09

...or other big expenses to plan for.

FasterStronger Wed 24-Jul-13 08:19:16

1) pay off any higher interest debts.
2) have an emergency fund as others have said, in a cash Isa or similar
3) pay off mortgage

LadyIsabellaWrotham Wed 24-Jul-13 08:46:33

Oh yes, obviously pay off other debts first.

MrsShrek3 Wed 24-Jul-13 22:21:54

wise words, thank you.
We don't have any credit cards or other debts, not even a car loan, so only have the mortgage and bills to pay each month. (and obv dc who cost us a fortune - but that's part of the deal innit?!) We would be better with minimal savings in the short term, having such a small mortgage will mean that I can save £££ quite quickly. We both work and our income covers everything adequately. We don't have any expensive hobbies or habits, luckily smile

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