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Old 23-01-2014, 19:45   #1
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Paying off Mortgage or leave money in bank earning Interest?

Took 10yr Fixed Mortgage out in Jan 2007(when I bought flat) and the plan has always been pay it off in 10 years.
Fixed Interest rate is 5.18% which considering Interest was at 5% at the time was really good.Although if anyone has seen Marty Mcfly and that Doloreon let me know as I would like to go back to 2006 and take that Woolwich Lifetime Tracker of BR+0.69% !!

Monthly payment was £567.45 which is and still is cheaper than renting a flat like I have(the tenants who were renting it from previous owner were paying £600 p/m in 2006.) For the last 7 years Ive been making extra monthly payments under the overpayment limit of £500 of £475 to start with and then £499 p/m. This has meant 7 years in that the balance is now within reach of paying off in full with savings. Normally this would be a no brainer as the Mortgage interest rate is more expensive than the amount of Interest I would loose with the saving rate. The money is in a Santander 123 account earning 3% and looking at the amount of interest a month Im receiving then by using the money in the account I would be loosing around £40 p/m in Interest.

As the mortgage is a 10 yr Fixed then its had an early repayment charge on it and at the moment,if i was to pay it up 3 years early than I was then the early repayment charge would be £1100 plus when you add the interest lost from the saving account of approx £1500 over 3 years of using the money then it works out that it would cost me £2500 in lost interest and early repayment charge. However If continue to keep paying as I have been then over the next 3 years it will cost me approx £2100-2200 in interest but no early repayment charge as I would let it go over the 10 year and then pay it off the month after.

With the problems with the management company and unacceptable way they except this block of 12 flats to fund the whole street from the service charge and their ability to be able to penalise the other residents of the street for dumping rubbish not only in the bin rooms but now they are locked and the relevant flats have the combination then people on the street just seem to pile it up outside now with the obvious consequences.

Once the flat is paid off then Im going to sell the place and pocket the money until I see something else I like the look of and would also use it as a good opportunity to get the **** out of London and Commute in for work.

Over the next 3 years the interest will continue to drop that Im charged on the mortgage.If I was to continue making the payments I have over the last 7 years next years Interest would be approx £1500(Dec 2014) next year and the year after (Dec 2015) £1000 and (Dec 2016) a few hundred probaly as there will not be much left capital then and the early repayment will have then finished as well but this reduces each year and dropped £300 over the last year. As the interest is calculated daily on your new balance then its difficult to work it out to the exact amount monthly as Ive only got yearly interest rate thus my calculations of what the interest would be are estimates.

SO after all that,who is still with me? Do I pay the mortgage off and pay the early repayment charge and loose the interest from the 123 account which would be £1200 ERC and approx £1500 lost interest from the Santander account but would mean its all payed off so the £1000 a month Im paying now £567+499 I wouldnt need to pay anymore for the next 3 years and that can go straight into the Santander account and start earning interest or carry on earning interest on that amount in the 123 and just carry on paying the mortgage as Ive done for next 3 years but paying interest on the balance all the time?

Last edited by Q; 23-01-2014 at 19:53.
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Old 23-01-2014, 22:11   #2
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so its a case of comparing 2 outcomes.

1 is pay off now, which costs £1200. But saving 5% interest on that lump sum and losing 3% (less tax) interest. so lets say net 2.5% saving on interest. Then each month you rebuild the savings.

So think you need to do a quick spreadsheet of the amounts and interest over next 3 years. its is £20k you have to pay off, then you'd save £500 per year interest, over 3 years £1500 and it would cost you £1200. So £300 better off. But then you have no savings for emergencies/redundancy etc.

Though having a paid off mortgage is a great feeling as well.
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Old 23-01-2014, 23:35   #3
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Quote:
Originally Posted by cjanderson View Post
so its a case of comparing 2 outcomes.

1 is pay off now, which costs £1200. But saving 5% interest on that lump sum and losing 3% (less tax) interest. so lets say net 2.5% saving on interest. Then each month you rebuild the savings.

So think you need to do a quick spreadsheet of the amounts and interest over next 3 years. its is £20k you have to pay off, then you'd save £500 per year interest, over 3 years £1500 and it would cost you £1200. So £300 better off. But then you have no savings for emergencies/redundancy etc.

Though having a paid off mortgage is a great feeling as well.

That's exactly what I spent the last couple of hours doing while watching the TV and it has surprised me.Ive worked out my monthly interest as 0.0043166667 which is 5.18%/12. The Interest rate is calculated daily on the current amount and the mortgage is paid by DD on the 1st of every month so Ive worked out the balance on 1st of each month and then deducted the 2 payments and then calculated the new monthly balance.

Also I worked out that the Early Repayment Charge is 3% of the Balance and then a £90 Early Redemption charge.Ive worked out that over the next 3 years upto Dec 2016 that the Interest paid would be £3473 and after Jan 31st 2017 there is no Early Redemption Charge of £90 and no Early repayment charge that by Dec 2016 will only be £122 anyway so obviously if it went that long waiting a few months would save the £90 and early repayment charge as well.

Without going into details,Id still have some of the Premium bonds money left.

At the moment then it would be roughly £1500 in interest lost and £1100 ERC and so 2700 and around a £800 saving and the ability to sell the place,pocket the money and get the **** out of London
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Old 24-01-2014, 07:24   #4
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yes, if it also means you can sell the place and move elsewhere thats quite hard to quantify, though a lot of fixes let you port the mortgage elsewhere (or even have a 6 month gap between selling and buying) so maybe thats an option?
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Old 24-01-2014, 07:45   #5
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Why do you need to pay the mortgage off to sell the place first? I'd be fairly certain you could port the mortgage to a new property, obviously you must have some equity.

No idea if your move would be a downsize or an upsize, but if it is an upsize then you'd probably be better off looking to move now, there is a housing recovery and in three years time I'd hate to guess the increase in London prices.

If house prices rise by 5% a year, you'd be better off moving now rather than the few quid you're saving, possibly paying £30k more for a new place. Your sums are peanuts in comparison.
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Old 24-01-2014, 09:45   #6
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I dont need to pay the mortgage off to move,it just means if I was buying another place I wouldnt be in a chain relying on someone buying mine.I also wouldnt buy again in London but commute in and if I needed to rent in London short term until I saw somewhere I liked then would do that but wouldnt look about moving or selling until Mid 2014-Jan 2015 but if poss dont want to be treating London as my base in 2015.However paying off the mortgage is available to me now and then gives me time to decorate and prepare the place for selling.If Id run across Marty and gone back to 2006,I wouldnt have bought the place been quids in and not living in London anymore(Im right on the border as it is).Happy to stay with a flat but either not leasehold(I know,that'll be hard or shared ownership) or House freehold.

Last edited by Q; 24-01-2014 at 09:46.
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Old 24-01-2014, 10:42   #7
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I'd pay it off. 5%+ over the next few years is way too much to pay on a mortgage. Get debt free, feel the extra cash in your pocket each month and start building up your reserves again.
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Old 25-01-2014, 13:41   #8
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Re: Paying off Mortgage or leave money in bank earning Interest?

Quote:
Originally Posted by Ono View Post
I'd pay it off. 5%+ over the next few years is way too much to pay on a mortgage. Get debt free, feel the extra cash in your pocket each month and start building up your reserves again.
Yep,Thats what Im going to do.Im going to cash the premium bonds in that havent been earning any interest&not won in 6 months with 15k so by using that I'll not be loosing interest on the full amount and then build it up again month by month.I worked out how much Ive spent since 2007 on overpayments and service charge last night that I would have saved,had I rented....Thankfully I had a beer in hand while adding it all up!

When I sell hopefully it will work out roughly the same as having rented for 10 years.

Last edited by Q; 25-01-2014 at 13:42.
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