I have a lump sum and would like to use it to help reduce my mortgage. Would it be better to use the money and pay off a chunk of it in one go or spread it over a few years of monthly overpayments? Thanks for your help in advance.
2006-09-28 22:40:42 · 12 answers · asked by Michael T 3 in Business & Finance ➔ Personal Finance
If you're sure you won't need to dip into this money again, then you would save more money by paying off in one chunk. You'll effectively be saving 6% every year on what you pay off (and paying off more of your principal, which will save you yet more in turn), whereas if you put the money on deposit you'll earn maybe 5% but pay only 4% after tax (unless you have ISA capacity spare).
It also depends on your mortgage - some make a charge for overpaying, and again that might favour paying a single lump.
However, if you think you might need this money for another purpose - "rainy day" money - it could be worth your while holding some back.
Have you thought of transferring to a combined banking solution where your net balance in a current account reduces the interest on your mortgage? That can give you the best of both worlds.
2006-09-28 22:49:40 · answer #1 · answered by gvih2g2 5 · 1⤊ 0⤋
As stated by others check your mortgage about early payment. But if you do decided to do a chunk make sure you tell them otherwise they will not take it off the mortgage and reduce the time you have to pay it in.
Mind you if you only have 4/5 yrs to run then this is not a good idea, because the amount of lump sum would not benefit you but the mortgage company, and it would be best to invest the lump sum in something for your enjoyment.
2006-09-29 08:13:29 · answer #2 · answered by vmaddams 3 · 1⤊ 0⤋
Unless you can find a way of making the money make more than the mortgage is costing you it is a good idea to pay off some of the mortgage. You immediately reduce the interest to pay and more goes into paying off the capital borrowed again reducing the amount of interest payable in the future. It is unlikely that you will find any ordinary savings account that will pay more interest than you are paying for your mortgage so the only real alternative is the stock exchange and hope prices go up or buy more property and rent it out. Very popular at the moment and Nationwide reckon the price of houses will rise by 40% in the next few years
2006-09-28 22:58:24 · answer #3 · answered by Maid Angela 7 · 1⤊ 0⤋
Depends on your mortgage - you need to check with your provider.
Some providers will charge an overpayment fee or early redemption fee that might make the lump sum approach uneconomical.
Your suggested alternative is a good one. You could invest the money in ISAs or a high interest account (preferably at a higher rate than your mortgage) and then spread the overpayments out while earning interest on that lump sum.
2006-09-28 22:43:42 · answer #4 · answered by BadShopper 4 · 1⤊ 0⤋
you need to check the terms and conditions for making overpayments. It is hard to earn a return after tax which will be higher than the interest you pay on borrowings, without taking risks.
If you are very risk averse ( and my guess is you are or you wouldn't even consider paying this lump sum into the mortgage), you are probably better off paying in one go.
Be sure that you don't need the money for other things though.
2006-09-29 00:42:36 · answer #5 · answered by bw_r005t3r 2 · 1⤊ 0⤋
It depends on your mortgage company and how it calculates interest. The interest on my mortgage is calculated daily so the sooner you would put in that lump sum the less interest you would be paying.
It makes more sense financially to put the lump sum into the mortgage than a savings account as you have to pay tax on the interest you earn in a savings account whereas putting it into the mortgage knocks more off the interest you have to pay on your mortgage.
I don't see any value at all in spreading it over a few years to be honest, I just don't think you'd gain anything over putting it straight in.
2006-09-28 22:56:08 · answer #6 · answered by Anonymous · 1⤊ 0⤋
It would depend on your mortgage company, if you are in a special scheme, e.g. fixed rate or tracker then they would normally penalise overpayments, however most companies now allow some overpayment, usually 10% of the balance, some limit it to £500 per month. So, best to check with your provider and ensure the interest is calculated daily otherwise it would do better under your bed!
2006-09-30 20:58:03 · answer #7 · answered by peter.clarkson16@btinternet.com 1 · 1⤊ 0⤋
I would say pay off a big chunk at once. That way your mortgage company could reduce the monthly payments as you have less as a whole to pay off - or the monthly repayments could stay the same but with fewer years left paying it!! You would be mortgage free sooner!!
2006-09-28 22:48:37 · answer #8 · answered by shazza86_uk55 1 · 1⤊ 0⤋
In principle, the earlier you reduce the mortgage, the better. However, check with the lender if they will accept the payment you are proposing without any penalties. You never know, banks are a devious lot.
2006-09-29 14:15:12 · answer #9 · answered by Anonymous · 1⤊ 0⤋
If you can use the whole lot at once, I would do this, however check with your mortgage company first, as some companies charge for early repayment. If this is the case, try and spread it evenly over the new few months. good luck
2006-09-28 23:29:47 · answer #10 · answered by Anonymous · 1⤊ 0⤋