Is This The Final Nail In The Coffin For...
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pay lump sum off mortgage
7 Answers
am expecting a red payt of approx 20000. Our mortgage stands at 30000 with 9 years left. Would i be better keeping the money for a rainy day(do have other savings) or setting it against the mortgage. Please let me have any advise.
Answers
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Depends whether you have other debts such as loans and credit cards- these should be paid of first. You also need to keep some for a rainy day, particularly if you may have ato wait a while before getting a job.
If you keep the money as savings you will not get much interest at the moment and will pay tax on the interest (at least in this tax year- next tax year depends on what earnings you have).
If the net interest rate is less than the rate you are paying on your mortgage then it makes sense to pay some mortgage off. I know rates are low and could fall further but savings rates will fall further too and mortgage rates will probably rise again next year.
Finally, you need to check whether tehre is a penalty for paying off your mortgage early and some lenders limit the amount you can repay in any one year.
You could always speculate some in the stock market for potentially good returns over the longer term but only if you can afford to lose some of it if the market worsens.
If you keep the money as savings you will not get much interest at the moment and will pay tax on the interest (at least in this tax year- next tax year depends on what earnings you have).
If the net interest rate is less than the rate you are paying on your mortgage then it makes sense to pay some mortgage off. I know rates are low and could fall further but savings rates will fall further too and mortgage rates will probably rise again next year.
Finally, you need to check whether tehre is a penalty for paying off your mortgage early and some lenders limit the amount you can repay in any one year.
You could always speculate some in the stock market for potentially good returns over the longer term but only if you can afford to lose some of it if the market worsens.
I agree with F30 on many things.
Pay off all loans that are not mortgage first.
Then it depends whether you want access to that sort of money, and whether both of you are basic rate taxpayers (so have to effectively pay 20% on all the Gross rates quoted as AERs on deposit accounts.
Banks have always worked on a margin between the interest charged to mortgage customers and the interest given to savers. That margin doesn't tend to reduce much under 1.5% between the two.
As interest rates have fallen away over the last 12 months (and indeed when they were sat at around 7% gross before that), one always had to reduce the AER by 20% to get at the real net interest figure. So currently it would be very difficult to do better than using the money to pay off part of the loan - having checked that there are no penalties for doing so.
Pay off all loans that are not mortgage first.
Then it depends whether you want access to that sort of money, and whether both of you are basic rate taxpayers (so have to effectively pay 20% on all the Gross rates quoted as AERs on deposit accounts.
Banks have always worked on a margin between the interest charged to mortgage customers and the interest given to savers. That margin doesn't tend to reduce much under 1.5% between the two.
As interest rates have fallen away over the last 12 months (and indeed when they were sat at around 7% gross before that), one always had to reduce the AER by 20% to get at the real net interest figure. So currently it would be very difficult to do better than using the money to pay off part of the loan - having checked that there are no penalties for doing so.
I'm in a similar position, with a lump sum due. Luckily we have no debts apart from our mortgage.
I had a chat with our building society and we can make a lump sum payment of 10% of the value of the original loan without incurring penalties. (e.g. if you took out a mortgage for �120,000 you should be able to pay a lump sum of �12,000).
As the interest on our mortgage is added daily, it makes sense to do this. We are paying a lump sum soon, then as soon as the new financial year for our mortgage starts, we are paying another lump sum.
We both have the maximum invested in cash ISA's, and as has already been pointed out, interest rates on savings are rubbish right now, so we are going to buy Premium Bonds with the balance.
I had a chat with our building society and we can make a lump sum payment of 10% of the value of the original loan without incurring penalties. (e.g. if you took out a mortgage for �120,000 you should be able to pay a lump sum of �12,000).
As the interest on our mortgage is added daily, it makes sense to do this. We are paying a lump sum soon, then as soon as the new financial year for our mortgage starts, we are paying another lump sum.
We both have the maximum invested in cash ISA's, and as has already been pointed out, interest rates on savings are rubbish right now, so we are going to buy Premium Bonds with the balance.
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