Should I overpay on my mortgage or get a new reduced mortgage with my inheritance?

There should be no need to go to the trouble of taking out a new mortgage. Most lenders are quite happy to recalculate the monthly repayments when you make a significant capital payment and the effect is the same as if you had taken out a new mortgage.

It will. What I'd do in your situation is pay off a substantial sum (perhaps not using all of the inheritance if you'd feel more comfortable having some savings), ask the lender to recalculate payments and then overpay each month to reduce the term of the loan and pay it off quicker.

Mike.

Although you don't have to take out a new mortgage just because you want

30K instead of 50K, you may find that you can arrange a better deal than you've got now. Consult a mortgage advisor. Ask him if he will recommend a mortgage without charging fees if it doesn't proceed.

Rob Graham

Closing one and taking out a new one is silly unless there is an added incentive such as a reduced interest rate (even just for a while). It's otherwise just as well merely to pay the lump sum into the existing loan account and keep it going the same way.

The thing to watch out for if taking a new one is to make sure the term of the new one isn't going to be a whole new 25 years. It would cost you more in the long run than keeping the end date the same.

You would. The more you overpay the less interest you pay.

Sorry. What rest? Aren't you using the whole inheritance to make a single lump sum overpayment?

But having done so, you would still be well advised to keep your payments at your pre-existing level, i.e. to overpay regularly each month a sum equal to the difference between what you have been paying and what you would be paying by reducing the debt.

If the currently outstanding debt is 50k and you reduce it to 30k and the interest rate is the same and the terms are the same, then the repayments will go down by 40%.

Instead of overpaying (which might carry an administrative overhead and charges associated therewith) you could achieve the same effect by simply rescheduling the term.

Depends on what your overall objectives are.

Yes, of course. But unless the mortgage is flexible enough to let you re-extract overpayments, you might like to consider the wisdom of keeping a reasonable contingency fund to deal with "emergencies" such as your suddenly developing that unfortunate affliction called a craving for an expensive holiday.

Indeed. That can't hurt.

There's no need to ask this, since the law forbids him taking a fee if it doesn't proceed. OK, not entirely, but it limits it to some trivial amount, which IIRC is about £5.

I think it depends on the rate of your mortgage, and the rate of your savings account.

You should be able to get a mortgage for not much more than 5%, but you'll be lucky to get a savings account for more than 4%.

According to

the interest payments on a 50k mortgage (at 5%) are 208/month, while the interest on a 30k mortgage (eg, after paying off 20k) are 125/month. If you can get a return of more than

83/month (208 - 125) on savings then go for it. (and remember that you have to pay 20% tax on interest earned from savings if you're a standard rate tax payer - that means you'd need to find a savings account with paid about 6% net).

Historically, the FT100 has done about 7%, so if I were you, I'd top up a tracking ISA for this tax year, and put the rest on the mortgage. If you don't fancy risking the money on the stock exchange, simply get a cash ISA and top that up.

Some mortgages (A&L for example) will allow you to overpay, but still withdrawn the money from the mortgage if necessary. IMO, you can't loose with one of those as you're effectively getting 5% tax-free on your savings (off set mortgages, such as the One Account are the same as far as I know).

Have a play with a mortgage and savings calculators are

to see what figures you get.

Cheers, A.

Bloody hell. What's the world coming to?

You need a *website* to tell you that a twelfth of 5% of £50k is £208?

And that a twelfth of 5% of £30k is £125?

And that a twelfth of 5% of X is Y% of a twelfth of 5% of Z, when X is Y% of Z?

Oh, look: £30k is 60% of £50k. Oh, look: £125 is 60% of £208.

What a surprise!

Incidentally, the figures you supplied are obviously for interest-only loans, an assumption which is not necessarily appropriate here.

If you pay down a loan on which the amount outstanding is 50k *now* by 20k, without changing the term, and assuming the payment is immediately applied, then the repayments will also drop immediately by 40%, but by rather more than £83, the exact amount depending on how long the deal has left to run.

The trick is to decide what's best for you. Would you rather lower the payments and keep the term the same, or keep the payments the same thereby shortening the term (i.e. paying the mortgage off sooner), or somewhere inbetween?

Well there's no need to get your knickers in a twist about it!

It's obviously a personal choice, which is why the OP asked for opinions. However from a financial point of view there is little doubt it's financially better to pay off the mortgage, unless he can get an unusually high rate of return on his savings.

I think you should have a sit down and take a chill pill!

A.

Before you overpay or get a new mortgage, check your current mortgage for redemption penalties and things like that. If there are some, pay as much as you can without incurring those penalties, and put as much into ISA's, and then high interest accounts (you can get 5.15% in some cases). Then, when the redemption periods are passed, remortgage, and pay off as much as you can (and the interest accrued on the cash should be quite a tidy sum too)

I'll have you know I get my knickers custom-made with the twist already built-in.

Heaven forbid! I have a cold already.

There's no doubt about that, but he needs to focus on the wider picture, and might feel that it's prudent to retain instant access to some rainy-day money, and thus to use only part of the 20k to pay down the loan.

A similar consideration applies when deciding whether then to overpay regularly, without lowering the standard of living to which he's become accustomed, or whether to opt to become accustomed to a higher one, and just spend the money saved by not overpaying.

I agree, lower debt = less interest

I don't understand the difference, you have still reduced the debt, or are you talking about overpaying your mortgage by x pounds a month? this may be worth considering if there if a penalty for overpaying your mortgage by more than x pounds.

I think you should consider the following:

1) Is there a penalty for paying a lump sum off your mortgage?

2) Is there a penalty for paying off the mortgage in full and going to another provider?

3) What rate are you paying on your current mortgage, what is the best rate you could get if you change your mortgage, and what is the best rate you can get in a savings account. Note that if you are a tax payer you will pay tax on the interest you earn, so you need to take this into account when you compare the rates.

4) Are you likely to want the money for something else in the near future, and if so, how easy will it be to increase your mortgage again.

Note that there are costs involved in transferring a mortgage to another provider. Often the bank you are transferring to will pay some (maybe all) of these, but with a mortgage as small as 30k you will need a very large reduction in interest rate to recover any of these costs.

I recently paid a lump sum of my mortgage leaving ~30k, and although there were lower rates available, it worked out better to stay with my current provider and take out a new offer. Also less hassle.

I would suggest you speak to your current provider and see what they can offer, and what they can charge you if you decide to go elsewhere.

Very wise. Saves all that mucking aroud.

Yes, that's a fair point. However my point is that many mortgages these days to allow for instant access of funds back up to your original mortgage amount. Not just offset mortgages like the One Account, but also more standard flexible mortgages. With my mortgage, I can overpay as much as I like (turning it from interest only to repayment), and yet still withdrawn funds from the mortgage if I so wish. It's a good way to save money as I'd need a savings account which paid *way* over 5% (+ tax) to match.

You're quite right though, *if* the extra paid into the mortgage couldn't be taken out if necessary (rainy-day money), then I probably wouldn't do it (well, actually I'd change my mortgage to one which did).

A.

That's a fair point too, but often you'll find that those which do allow reborrowing tend not to have the most competitive interest rates.

Heh, teach me to suck eggs, why don't you? I have one of those too, called a "flexible reserve BTL" which was originally interest-only for £66.4k. When I sold another property I had £65k spare which I paid off it, so I now only pay £7 a month interest and have the ability to re-borrow £65k at about a week's notice for any purpose. The downside is that the flexibility and the BTL aspect make the interest rate 6% which is not perhaps the cheapest way to borrow, but it's probably the cheapest available to me in my circumstances, as I don't own any other property, nor am I in gainful employment.

There's a slight downside in that I'm "paying" tax on the mortgage interest I'm saving, because in a letting business, often the mortgage interest is the largest expense one can set against rental income. With that missing, it means I pay income tax on a larger slice of the rent coming in.

There are gradations of take-back-out-ability. I once had a normal mortgage from the dear old Bowler hat brigade. It wasn't "flexible" but I was nevertheless able to extract some money by way of a "further advance". However, there was a bit of red tape associated with it. Their rules were that the total debt could not exceed 75% of property value (as this was an "any-purpose" loan -- they would have allowed a bit more had it been for "home improvements") and so they insisted on getting it valued. Fortunately (I didn't believe it at first) they paid the valuer's fee. So I got my yacht.

Sigh. My rainy-day reserves were pretty low back then. Talk about sailing close to the wind. Awful pun, sorry.

"Ronald Raygun" wrote

I think we've come to agree, so only one comment:

A&L are worth a look on this note. I'm currently paying 5.05%, which is their discount rate and set to only just above base for two years. My two years are up again soon, but I just keep phoning them whenever it's due and switch back to a cheap mortgage - I know this isn't of interest to you, but may be for others.

No connection other than I've never been able to find a cheaper flexible mortgage elsewhere (and would move if I did... loyalty to financial institutions is for suckers).

A.

That used to be the case, but AFAIK is no longer.

Rob

Really? Since when? Where was it announced?

Can't say but it was something I gleaned. It may not be correct. I'll try to find out.

Rob

Won't it be something to do with the new mortgage regime (Oct/Nov 04) whereby an independent mortgage advisor needs to offer a fee option as opposed to a commission option?

It seems that although this rule existed in the days of the Mortgage Code, the rule wasn't carried over into the FSA rulebook when the FSA took over regulation. So, it wasn't announced anywhere. It just died a death.

Rob Graham

In message , Rob graham writes

It was nothing to do with the Mortgage Code or the FSA. It was the Consumer Credit Act that introduced that rule and that Act is still in force.