Pay off 10% each year or in one lump sum at end of the fixed term?

[ImportMeHappy]

Hi, we're 6 months months into a 5yr fixed 2.2% mortgage with UB and wondering whether it makes sense to pay off the max 10% at the end of each year or just use those same funds to pay down part of the loan at the end of the 5yr fixed rate period when remortgaging?

I get the opportunity cost of not using the money elsewhere (ie max out pension AVCs with the cash), but lets say thats already done, I'm wondering is there any difference in the total amount you'll end up paying whether you pay 10% each year, or use the same amount as one lump sum to pay down ~40% at the end of the fixed rate mortgage period?

 

[Zenith63]

There's a difference yes, because you'll be paying interest on those 10% chunks you're not paying off for 3-4 years if you go with the lump sum at the end.

To take an example (using the DrKarl Mortgage calculator), €300k mortgage, 2.5% interest, €10k early repayment over 4 years vs €40k at the end of those 4 years looks like this -

Total cost of mortgage with:
No overpayment - €426.7k
Overpayment €40k in year 18 - €415.1k
Overpayment €10k in years 15, 16, 17 & 18 - €413.2k

 

[Brendan Burgess]

I have to say it yet again. Stop looking at mortgage repayments! Look at the interest only.

If you have €10,000 in your current account today and you have a mortgage at 2.2% fixed for five years.

Paying it off today will save you €10,000 X 2.2%^5
Without compounding, that is 11% of €10,000 or €1,100.
If you know how to do the formula in Excel it's €1,149.

That assumes no break fee.

Brendan

 

[ImportMeHappy]

Thanks folks!

 

[dosull]

Thanks folks!

All of this assumes no opportunity cost, if for example you can get a higher than 2.2% p.a. return on the 10K, then you may be better off investing the money. It also assumes you won't need the 10k sometime in the future e.g. maybe you will need to buy a new car in the future and will that new car will require finance as a result of using that 10K.