Mortgage - would this be a good idea?

[MerylSqueak]

We have 14 years left on a variable mortgage of £43 000. We have £25000 savings. These savings have been invested for years and have seen very little growth. They've gone down by about £4000 and then back up several times. In other words, they're not doing much for us apart from being a cushion in case of job loss.

We're thinking of paying off £25 000 of our mortgage as the rise in repayments are really hurting us. Doing this we could get our mortgage down to about £160 a month. Last letter from the bank raised current mortgage to £380. We're expecting the one for the 5% to push it over £400.

We could then save the difference plus another £400 we could stretch to save to replace our savings.

The downside would be having no savings for a while. My job is secure but badly paid. DHs job less secure but better paid. My salary does not cover our monthly outgoings.

Is paying off the mortgage a good idea?

I’d keep back a small amount of the savings for day to day emergencies (new appliances, boiler, major car repairs etc) and then use the rest for the mortgage. It’s more interest effective, and most lenders allow you to take penalty-free payment holidays if you have overpaid your mortgage, so there would be that option as peace of mind in case of the worst.

If it was me I would leave £5000 for emergencies and pay the rest off the mortgage, you'd still reduce payments significantly and have a buffer although smaller incase of emergencies

Yes, Pay off 20k, leaving you enough for a big car repair or a boiler.

Try and keep your monthly payments a little higher than necessary though and overpay, it'll then knock years off the term

Thanks for your replies. It would make sense except DH thinks that if we pay off 90% of our mortgage, our house could not be repossessed. I'm not sure if this is true, (and of course I should read the contract and find out) but I think that's what lies behind his thinking of £25000.

On the whole there are, at least in England, no defences for defaulting on a mortgage so I'm not sure what rationale there is for the idea that repossession is off the cards if the o/s mortgage is, in relative terms, tiny.

We paid ours as off when I got a significant amount of capital from insurance that paid out when my Mother died. If that had not left us with more than enough for boilers, car troubles etc I'd have adjusted what we paid downwards and applied it a portion we'd taken as interest only first.

Would probably kept up repayments so as to reduce the capital reasonably smartly over time.

I agree

It’s unlikely the lender has a written contract clause which states they cannot repossess if the outstanding balance is below 10% but the reality is that repossession is always a last resort and by law lenders must work with you to explore ways of making your repayments affordable - from short term measures like payment holidays to longer term ones like a new mortgage product and extending your remaining term to reduce monthly payments.

As an aside, if you’re worrying about being repossessed if you couldn’t afford a mortgage payment of under £200 a month, are there deeper financial issues going on? Even your about-to-be-increased current payment of £400 is very low by most people’s standards and with you both working it seems like an exaggerated level of concern you have. Have you made sure you’re entitled to all the benefits you could claim, if your income is this stretched?

Agreed

We are in a similar position. We actually went ahead and transferred a chunk of the savings into the mortgage last week, and are currently deliberating how much more to pay and how much to keep back. I was erring towards keeping £10k but with savings getting 3.7% and mortgage now topping 5% it makes more sense to pay off more of the balance.

It's just that DH is a bit of a worrier. He's been stressed about losing his job for 20 years. It's because he's from a country where his job would be very secure and here it's just like jobs are normally here.

It is also in a sector where a lot of jobs have been lost in the last decade, so he's not being totally hysterical.

I think it would be very sensible to pay off £20k of your mortgage and reduce the payments. You can rebuild some savings with the interest you are not having to pay, although I would recommend also that you overpay the mortgage until it is cleared.

The reality is that banks are not going to be in a position to pass through rate rises for at least another 18 months (people assume that as soon as rates rise, banks can pass these through, but nowadays with mortgages fixed it's going to take a long time before income will allow banks to do this. Incidentally, this is also why rising interest rates is having very little impact on inflation yet and it's a shame that dumbass Bailey hasn't worked it out yet). So you won't be getting a return on your savings - the time value of money actually means the value of these savings are depleting fast.

We're on a variable rate, so our mortgage has risen from £26 to £380 so far. We're expecting another ruse next week. Thanks for your advice.

It it were me I agree with the paying off 20k and holding 5 back, but then be ruthless about saving the difference. Also, move them to the best instance access saver to get a guaranteed almost 4% return.

If you are not remortgaging, is there a maximum you can pay off each year penalty free? Often 10%. That might limit how much of your savings you can use.

I too wouldn't go to zero savings.

Also, how about unemployment insurance for the mortgage? When I was on £10k we had a £50k mortgage and took out insurance. I was made redundant and with 80% of the payments covered for a year, i was better off than working.

Thanks for your responses.

There's no limit to what we can pay off.

I've spoken to DH. He's amenable to 20 000.

I'm looking into unemployment insurance but it seems not to be generally available. I've only had a quick look as yet though.

Income protection insurance is available but unemployment insurance may be hard to find, or very costly. Your insurance against redundancy/unemployment is having an emergency fund, of 3 to 6 months of expenses, or even more if you feel it will take longer to find new employment.

With mortgage rates going up, paying off the mortgage to me is sensible. I repaid mine in 2014, so I am all for paying off mortgages. Using all your money to do so, I am against. You need a cushion, for the unexpected. So £20k off the mortgage, keep the £5k as emergency fund, then continue to build the emergency fund up, plus chip away at the mortgage.

Yeah, so in your case you should definitely stop spending all that money on interest. You will save a lot more than you can gain on the savings for the reason I gave above. You are one of a minority on a variable rate but most people are on fixed so banks haven't seen much increase in income yet, hence nothing to pay for interest rate rises on savings.

If you're concerned about rates rising too much, would you not consider a fixed rate for the time being?