Flexible Mortgage & Overpayments
Discussion
Ok guys,
I've got something in mind which I think adds up and would welcome any opinion. I have a flexible A&L Mortgage @ their SVR of 4.99%. There is no cap on overpayments and I can borrow back any overpayments made at any time. The mortgage stands at approx. £34k.
Now, I am soon to have £34k cash which I would normally invest in the highest internet instant access account available (currently circa 3%) and then bleed off approx. £3k/mth to my current A/C to cover bills/mortgage etc.
It dawned on me that i'd be much better off to lump the £34k into the mortgage account, thereby almost totally eliminating any interest acrued. I would then borrow back £2.5k each month, which equates to the £3k less £500 which is my normal mortgage monthly payment, to my current A/C.
As a higher rate tax payer, i've calculated that doing this would save me quite a bit of cash over the year.
As I receive a dividend at the start of each tax year, I would place another lump sum in the mortgage a/c in 2010/11 and do same unless saving's rates have improved ......... yeah right!
Any thoughts?
I've got something in mind which I think adds up and would welcome any opinion. I have a flexible A&L Mortgage @ their SVR of 4.99%. There is no cap on overpayments and I can borrow back any overpayments made at any time. The mortgage stands at approx. £34k.
Now, I am soon to have £34k cash which I would normally invest in the highest internet instant access account available (currently circa 3%) and then bleed off approx. £3k/mth to my current A/C to cover bills/mortgage etc.
It dawned on me that i'd be much better off to lump the £34k into the mortgage account, thereby almost totally eliminating any interest acrued. I would then borrow back £2.5k each month, which equates to the £3k less £500 which is my normal mortgage monthly payment, to my current A/C.
As a higher rate tax payer, i've calculated that doing this would save me quite a bit of cash over the year.
As I receive a dividend at the start of each tax year, I would place another lump sum in the mortgage a/c in 2010/11 and do same unless saving's rates have improved ......... yeah right!Any thoughts?
Bounty Hunter said:
JRM said:
There are very few investments that are better than paying off the mortgage!
Even if you are point something above or below the base rates tracker? I got one thats .16 above base. I must be able to get better interest than .64%?It just feels wrong to put money into a taxable account rather than the offset though.
I had virtually all of my savings, plus about 30k from credit card 0% deals that wasn't actually mine, offsetting my Northern Rock mortgage the week they were bailed out. If they hadn't released my overpayments on request (they did, immediatly and without question) I'd have been in deep poo.
Edited by Seight_Returns on Thursday 26th March 14:45
Bounty Hunter said:
JRM said:
There are very few investments that are better than paying off the mortgage!
Even if you are point something above or below the base rates tracker? I got one thats .16 above base. I must be able to get better interest than .64%?
d fixed rate mortgage!! 
Although even if rates are low now, you must be due off that rate in the next year or so and in 5 years time rates couold be through the roof, so long term it might make more sense. I'm just obsessed about reducing mine.
JRM said:
Bounty Hunter said:
JRM said:
There are very few investments that are better than paying off the mortgage!
Even if you are point something above or below the base rates tracker? I got one thats .16 above base. I must be able to get better interest than .64%?d fixed rate mortgage!! Although even if rates are low now, you must be due off that rate in the next year or so and in 5 years time rates couold be through the roof, so long term it might make more sense. I'm just obsessed about reducing mine.
In the OP's case, on a 4.99% mortgage he would have to earn that rate tax free (not likely on any ISAs I've seen) or earn 8.32% in a taxed savings account to break even with paying the mortgage off.
Of course, that ignores any liquidity implications of paying the mortgage off vs having the money in an instant access savings account, for example.
As others have mentioned, it's rare that a taxed savings account will outperform paying off a mortgage in pure interest terms.
This is logical if you think about it, because both products come from banks, which make money on the margin between them. If they paid out interest on savings at higher rates than they charge on their loans, they'd soon go bust.
That margin is increased for the mortgage holder by the effect of taxes on savings interest.
Edited by youngsyr on Thursday 26th March 15:27
swerni said:
My mortgage is at 5.49 fixed
I have an offset account which in theory also pays 5.49% hence 0 interest lost or gained on overpayments.
I feel better all of a sudden - there is someone in the world in the same boat as me - phew (albeit on a better rate - git!). I was beginning to think I was the only one who was fixed!I have an offset account which in theory also pays 5.49% hence 0 interest lost or gained on overpayments.
For better or for worse, I'm about to abandon my substantially overpaid fully flexible SVR (4.79) and commit to a new fix at 3.99 with no allowed overpayments - requiring me to lock in a third of my overpayments and look for suitable investments for the rest. Hope that doesn't turn out to be a mistake !
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