Overpaying mortgages / closing one down

[NorthernPud]

We have been overpaying our two mortgage accounts for some time (one is the original mortgage and one for the extension) and got the balances down to an extent that we were able to fix last year below 1.5% for 5 years. We have unexpectedly been gifted enough money to pay off one account and put a dent in the other. There is a fine for early repayment but can't be avoided. We aren't planning to incur further debt. Am I missing something in closing down a mortgage at such a low interest rate when I'm not anticipating needing further credit? Thanks in advance.

I would say close it if you don't need it. But - have you done the maths on whether you would be better off overpaying until the end of the fix (the max allowed) and then paying off the balance at the end? Or would paying it off early plus paying the ERC still work out as you paying less overall?

There may also be a middle ground, if perhaps it's the type of mortgage where the %age of ERC reduces over the term of the mortgage. So maybe you wouldn't need to wait til the end of the 5 years, but there could be a point between then and now where it makes more sense to pay off the full balance.

Thanks a lot. It's swings and roundabouts as we can overpay 10% of the outstanding balance every year but hope we can continue to do so even after the lump sump payment is made.

If you have fixed at 1.5% it might be worth doing the sums and looking at putting the money into a savings account as you can easily achieve over 1.5% interest now and its likely to go up again next week. Plus you won't get hit with an early repayment charge

www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

This might help you decide

If it's fixed at 1.5% don't overpay and pay an ERC, that's madness.

Just put the money in a fixed rate savings product and pay the mortgage off when you can do so penalty free. You'll get more interest than that, so will actually make a profit rather than throw away thousands of pounds.

If you want to free yourself from making payments each month, keep some of the money back and put in a instant access account to pay the monthly amount

Pay down the mortgage as much as possible without incurring fees. Put the remainder of your gifted money into a savings account - there are fixed rate savings paying over 2%.

This. Don’t pay thousands to no longer be able to borrow money at 1.5%!

Appreciate all the advice. I am torn as we are not planning to borrow any more money and actually plan to overpay the remaining mortgage up to the max allowance for the remaining three years anyway. I would love to just see the balance reduce so significantly.

When is the year end? Pay a big lump off now. Wait however many months you need to wait to be in a new year, pay off with another similar large lump.

I know it is tempting to clear the balance but it makes no financial sense. We are in a similar situation on a 5 year fix at 1.14% but could clear with savings. I have put them in chase at 1.5%.with interest rates going up I expect this rate will increase too. Our redemption fee is around £5k so it makes absolutely no sense to pay it. We will just pay down the mortgage when the fix ends.

Ageee it’s madness to pay an early repayment charge if you don’t have to. Put the money in savings above 2% and overpay what you’re allowed to

I was in a similar position a couple of years ago. I definitely did not want to pay the ERC, so I keep my savings for another 2 years, and paid the whole mortgage off at end of term. It made good financial sense, and when I did pay it off, I found there were other things I saved on…I stopped my mortgage protection payment, which was about £30, and when I told my insurer, I was also entitled to a refund…only about £25, but better than nothing. Do your sums, pay of as much you can without penalty, and keep the rest in savings until you can finally pay off the lot.

How much is your ERC? Is it really worth throwing that money away and more just to see a lower balance? <does not compute>

OP, for the last 15-20 years, I've dabbled a little in what became known as 'stoozing', so named after the username of an old financial forum I used to inhabit where 'stooz' became known as one of the early proponents of doing this.

It involves doing just what people are suggesting and deliberately keeping a debt if you can profitably offset it with savings. It's mainly to do with borrowing on credit cards at 0% and zero fee and putting the money in a savings account, making the minimum payment and repaying at the end, and collecting the interest earned on the savings, or more likely, transferring the money again and just carry on. People did this with multiple credit cards and made quite a lot of money. I've not gone into it hardcore but have still consistently made a few hundred pounds a year just for the odd bit of financial admin.

Then when mortgage interest rates were pretty much nothing for the last 10/15 years people have done it on their mortgages, carried on paying the minimum on their mortgages (until very recently our mortgage rate has been as low as 0.48% and has only just in the last few months gone above 1% since 10+ years ago) and then saved or invested their spare money instead of overpaid.

At one point I made back just about all the interest our mortgage cost with £2500 in a Nationwide current account that paid 5%. We also had other savings that paid up to 3%, while our mortgage interest rate was under 1%.

Now because we're still on a lifetime tracker, it's all changed and come next week we'll probably be at the stage where I can no longer beat our mortgage rate with savings - we're currently paying a variable rate of 1.6% so if it goes up again, I'm just going to pay most or all of off with the savings we have - in hindsight we maybe should have fixed a few months ago but because we only owe around £25k, we would have needed a zero fee deal and the rates weren't that great, plus I knew we could just pay it off, but in reality I'm probably going to hedge a little and split the savings between mortgage overpayment, investing and keep some back in cash partly as an easily accessible emergency fund and partly because we could probably do with new, less drafty windows now that heating has become stupidly expensive.

So in short, despite normal MN wisdom to aggressively overpay your mortgage, for the last 10/15 years it has rarely made sense to do so, and for anyone who's currently on such an excellent fixed rate that you have, you're throwing money and financial good sense/luck away for the enjoyment you'd get from seeing you mortgage balance go down.

I could pay off my mortgage in full (I have an interest only one). But I get a higher return from my investments (around 20-25% per year) than the 0.99% interest rate I pay on my mortgage. Even with some hefty stock market crashes, the FTSE 100 (which is a bit of a plodder investment wise) has returned an average of 9% per year since 1985.

I'm happy with the risk of equity investment (which have gone down in value over the last 6 months) but, if you want to play it safe, you should be able to get a decent rate on fixed rate cash accounts over the next year.

Once you've paid off the mortgage, you've lost the flexibility of having access to that money too.