Is this a no brainer? Mortgage & savings

[ChimChimeny]

We have a mortgage at 4.39%, enough in savings to pay it off which is 7% interest.
We'd have to pay an early repayment charge (haven't been able to find that out yet) but is it as simple as higher interest rate on the savings than the mortgage so keep it there?
Thanks

You may find the early repayment charge outweighs the benefit of paying it off.

Can you repay x% for 'free' i.e. free of charges off the mortgage, which will reduce the amount owed and reduce the term (if you don't want to reduce payments). For example, I can repay 10% of the outstanding balance each year without penalty on my mortgage.

Yes, pretty much. Wait until you're no longer liable for the ERC, at least. (Most fixed deals allow at least a 10% overpayment per year, have you used that already?)

Even then you could remortgage for a smaller loan amount, paying off a chunk but not all.

Where are you getting 7%?

Not quite so simple depending on the tax treatment of the income you receive from interest - if you have to pay a higher rate of tax your net proceeds may be less than you pay out in interest costs on the mortgage.

But early repayment charges mean you're probably still best off waiting to pay it off until the repayment charges no longer apply.

Another who'd love to know where you are getting 7% on savings.....

Broadly. Mse has a calculator where you can compare overpayment to savings based on rate/tax bracket.

I would also like to know where you get 7%.

Keep it in savings.

Not just the interest rates to consider. Inflation will eat away at that. Sometimes it is better to pay the money now and take the repayment charge hit, rather than seeing your money's ability to buy being cut year on year.

You are gaining 7%. Paying 4.39%. Is inflation reducing the value more than the difference? (Probably yes)

Depends also on how long you have on your fixed rate/penalty on your mortgage. If 1-2 years it is probably best to wait until you are out of contract and pay it off. If your fix is far longer, you need to look at it more carefully, eg inflation, tax on the income etc

I personally have, and would in your position, speak to an independent financial advisor to work out the outcomes of a few scenarios. (Paying off, keeping savings, somewhere in the middle.) We spent 2k and saved 35k and 7 years on the mortgage .

Thanks everyone, to answer a few questions:

• savings interest rate is actually 5.08% (sorry, was thinking of the First Direct regular saver which is 7%).
• mortgage is fixed for another 2 years, at the end of which we'll pay it off anyway, expecting to have about 10k left).
• we overpay by 10% of the balance at the start of the new year (which will be Feb).

You may find the early repayment charge outweighs the benefit of paying it off
That's the crux of it, and what I need to find out I think!

@BeyondMyWits sorry if this is really dumb but what does this mean: Is inflation reducing the value more than the difference? (Probably yes)

I would just leave it and pay it off in 2 years.

The Early Repayment Charge is £566.36
Current amount is £21,903
That seems low (pretty much the equivalent of one monthly payment)

I'd recommend running your scenario through the Money Saving Expert calculator as a first step. As a PP mentioned, it also depends on your tax situation (if you are a higher rate tax payer and are not entitled to full or any Personal Savings allowance)

Current inflation rate (uk) is around 4%.

Today your money is "worth" 4% less than this time last year. You can buy less with it, so the value has gone down. You have savings. You are earning just over 5% on that money. So your money, should you want to spend it today is roughly worth 1% more on goods than it was this time last year.

You are paying out just over 4% on interest... whilst your adjusted for inflation income from interest is 1%.

It is not as cut and dried as all that, so independent financial advice is the way to go.

Inflation is not relevant here. Either way, you don't get to spend the money now. It is either tied up in savings or in mortgage.

What does matter is the after tax interest rate on savings. But you can get £1000 in interest tax free (each) per year. So £2000 per couple. So on 5% that is £40,000 of savings earn interest tax free.

So what might make sense is to get your savings down to that level by paying off mortgage, but no more, assuming you can do that for free. Not otherwise.

Having said all that, the difference in the interest rates is small enough that it probably doesn't make much odds...

Also bear in mind that savings gives you more flexibility. That is both good and bad. It is a buffer against problems. But it might also tempt you to spend them!

You also need to keep monitoring the situation. Mortgage rates and savings rates change. But the decision to pay off your mortgage is more expensive to reverse than the decision to wait.

Also bear in mind that savings gives you more flexibility. That is both good and bad. It is a buffer against problems. But it might also tempt you to spend them!

We'd be left with about £7/8k in savings which would also be replenished monthly with the money were currently spending on mortgage repayments (£550 ish) unless we increase our pension contributions which is another thread probably😂

The difference in interest rates is small & the repayment charge drops to £350ish in April so I'm tempted to just pay it off and be done with it. We won't be moving again so would be lovely to be mortgage free!

This is a no brainer. Just pay it off and be done with it.

That sounds like a pay it off situation.

As well as the financial flexibility it gives you the reduction in stress over having a mortgage would be great.

We’re in same position. Remaining mortgage is £23k at 3.45%, fixed term period ends Nov but early repayment fee is only 0.75% so we’re paying it off in Feb. Repayment fee is less than the interest we’ll pay if we keep it going to Nov.

Whilst it may be financially more sensible to keep money in savings whilst rates are high, paying off the mortgage is priceless.

Depends if you are liable to pay tax in the interest. I think the first £1000 per tax year is interest free but the rest is taxable. So it may be worth overpaying. Some deals allow a certain overpayment without penalty so it may be worth paying off up to that at least.

You absolutely do not need an IFA for this. Just use the mortgage overpayment Vs savings calculator on the Moneysavingexpert site.

How? If anything the no brainer is to keep your savings paying interest at 7% rather than pay your mortgage at 4.89%

Santander's 7% but it is capped at £4k in savings and you need a current account with them.