Best advice regarding a remortgage: lump sum or not?

bandd123

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Good afternoon everyone, I was wondering if someone out there could help.

We’ve had our mortgage with HSBC since October 2012. We borrowed £297.000, at 4.99 fixed for 2 years. Our payments have been £ 1735 per month but as we took advantage of the fact we could pay an extra 20% every month, we have increased our payments to £2081 since September 2013.

In October this year, we will go back to variable rate of 3.94% reducing the payments to £1558.

We will have £279.000 left to pay in October.

Now, we are also in the process of selling our BTL flat, expecting to make a profit £80.000.

My questions are:

- Are we better off paying a £80.000 lump sum from our mortgage?
- Is it more financially sound to increase the monthly payments instead. And how much by?
- Should we remortgage with a better interest rate?
- Should we reduce the term?
-
I am not mortgage savvy and don’t know where to start, there is so much information but unless I use my example, I can’t make up my mind…

Our plan is to pay off our mortgage as quickly as possible but also try to keep our monthly payment around the £1500 mark, if possible as we have now got a son!

We do have money on the side in case of a “crisis”, so this question is only about the mortgage. I hope I have given you enough details.

Thanks very much for your help!
 
You have put forward 4 options. There is no standard response to each option and a decision can relate to your need to access these funds or to repay your mortgage asap. I will try to advise you as best I can on the various options:
1. Paying 80K off the mortgage will obviously reduce the outstanding balance by this amount. You have the option then of paying a reduced monthly sum and retain the original term or paying a higher sum (perhaps what you are currently paying) and reducing the term of the mortgage.
2. You can do either or both. Financially sound will mean that your interest bill will be reduced as you reduce the mortgage amount. In effect you are getting a 3.94% return on the capital element of repayments. Difficult to achieve elsewhere. Downside is that you cannot access these funds if you need them in an emergency.
3. Of course you should if you can. There may be more competitive interest rates out there. However, remember that the legal costs involved in remortgaging may not make this worthwhile if differential is low.
4. See earlier responses.
If you can afford it, reducing the term will certainly save you money.
 
Should you use the €80,000 to pay down your mortgage?

YES. You will get a guaranteed after tax return of 3.94%. Unbeatable!

The other questions boil down to one question. How much should you repay each month. The answer is you should overpay each month by as much as you are comfortable with. Again you are getting the same excellent 3.94% afer tax return. It should be possible to arrange this monthly with the bank as you are on a variable rate.

You have also asked should you reduce the term on your mortgage. The effect of overpaying will be to reduce the term, but you should not make any arrangement with the bank to do this. There is nothing to be gained from committing yourself to a shorter term.
 
Can I just ask a follow up question on this. I am coming off a fixed rate with AIB and reverting to standard variable. I want to pay a lump sum off my mortgage. Now on the form it has the below options.

Reduction in Scheduled Repayment Amount

(a)
Your scheduled mortgage repayments will reduce in line with the reduced balance of the account. The remaining
term and prevailing rate of interest remain unchanged and your scheduled repayments will adjust in line with any
future rate increases or decreases, as normal.

Maintain Current Level of Scheduled Repayment Amount
(b)


Your Mortgage loan term will be reduced to keep the scheduled repayments at the same level as they were prior to
the lump sum payment. The prevailing rate of interest remains unchanged and your scheduled repayments will
adjust in line with any future rate increases or decreases as normal.


Based on the advice here, I would select option A but maintain payments at the current level so am effectively over-paying the mortgage. As I understand it, this will then allow me at a later date to reduce the payments if necessary. Maintaining the repayments will have the net affect of reducing the term anyway?
Are the savings in interest the same whether I reduce the term or not?

Thanks

 
bandd123, because you are paying such a high interest rate it is a good idea to use the lump sum to reduce your total debt. And it's also a good idea to reduce the interest rate, but you have to be careful that you understand the full costs of switching.

Boe, what is your interest rate and could you give us as much detail as bandd123 did.
 
Hi Bronte,

We are just coming off a fixed rate and moving on to standard variable 3.40% with 21 years and €235k left on the mortgage.

I was thinking of paying around €25k off the mortgage. From Karl's mortgage calculator, it looks like this will save us approx €33k in interest and reduce the term by 3.5 years give or take a month or so (if we did reduce the term). I would like to maintain payments at the current level.

So, my question is, what's the best way to do this?

Thanks
 
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