UKC

ok heres one for the mathmaticians,
mate of mine has £34, 200 left on his interest only mortgage and has 52 payments left (april 2019) This would work out at approx £650 p/m .would HE BE BETTER OFF financially paying off his mortgage NOW (one lump sum)or putting the £34,200 in the bank and getting 1.5 percent interest and keeping up the monthly commitment till 2019.
if that makes sense

he may be able to get 3% interest with Santander so same scenario

In reply to colina:

He could model it in excel.

You would probably need to know the mortgage rate he's paying. And whether it's variable or fixed.

In reply to colina:

He should also read the small print to see if there is an early redemption charge

In reply to colina:

On the face of it better off keeping the cash so long as he can trust himself!

In reply to colina:

So if it's an interest only mortgage then as you're only paying off the interest in the mortgage each month (not any of the capital) then it's a no brainer decision. Otherwise we need to know the mortgage interest rate to help with the calculation.

In reply to colina:

The maths is one part of the equation.The other s include whether he is better having access to the cash for other purposes as a standby. Or has he looked at just for example paying of half of the £34,200 back.

Never an easy decision.

In reply to colina:

So he's committed to paying £34200 over the next 4 years and 4 months.

Invested at 3% (assume that's apr) for 4 years and 4 months:
End of year 1: £34200 x 3% = £34713
End of year 2: £34713 x 3% = £35233
End of year 3: £35233 x 3% = £35762
End of year 4: £35762 x 3% = £35941
End of year 4 + 4 months: £35941 x 3% = £36480
And then he uses £34200 to pay off the mortgage and he's left with £1767

If he simply uses the £34200 to pay off the mortgage now, the mortgage has gone and he has an extra ~£650/month. £650 x 52 = £33800 and that's assuming he puts it under the pillow and doesn't invest it. So, on teh face of it, unless there's an enormous penalty for early repayment he should pay off the mortgage.

However, I'm not sure that what you said in your original post can be true. If he were really paying ~£650/month interest only on £34200 then the apr would be huge! Of the order of 20%?

In reply to colina:


....less tax.

In reply to hokkyokusei: presumably the amount was much larger initially hence the £650/month

In reply to MG:


If it's interest only he wouldn't still be paying interest on the larger amount though, would he? Certainly, there's some piece of info missing here.

In reply to Fraser:


Yes, I neglected to allow for that.

In reply to colina:

I paid off my mortgage around 2 years ago. Not sure if it was the wisest decision tbh. Meanwhile,my brother who is a chartered accountant was in a similar situation but has not paid off his. Tells me is better off investing his money in shares.

In reply to colina:
I am not a financial advisor, but surely it is this simple:

If mortgage intrest rate > savings account interest rate, then paying of the mortgage is (financially) the best option.

If Mortgage interest rate
If both rates are equal then the best option is probably still paying of the mortgage due to tax on savings.

I am happy to be corrected tho.

In reply to hokkyokusei:

Fair point. Odd

In reply to colina:

Pay the mortgage off. Your friend is obviously so financially clueless as to ask a friend who also doesn't understand numbers, who in turn chooses a climbing forum for advice. The best option is clear the debt and have £650 a month extra cash to play with.

In reply to Philip:

I may find myself in a similar position next year, and whilst having not done the maths this was my exact approach as it would give me more disposable income each month

In reply to colina:

Are you saying that the interest on his loan is approx. £650 per month? Bearing in mind, if this is an interest only mortgage, he still has to pay off the entire capital at the end of the loan, so thinking that he can pay off the remaining interest in one lump is not the right way of looking at it.

Completely depends on the terms and conditions of his mortgage, but on average the interest charged on loans is more than the interest paid on savings - go figure.

In reply to colina:




Unfortuantely, it doesn't!

As others have said, if its interest only, he should only be paying the interest on the borrowing with the capital left to repay at the end of the term. If the capital borrowed is only £34,200, the monthly interest payments will not be approx £650 pm (as that would be annual interest of £7,800 on a loan of £34,200, only possible if he took his mortage out with Wonga)

Basicially, what's the mortgage interest rate V bank interest rate adjusted for your friend's income tax rate. Then factor in any early repayment penalties

In reply to colina:

In another thread your 'mate' has 20k to invest, on this he has 34.2k to pay off his mortgage. Has he considered spending a couple of quid on a financial advisor?

In reply to Philip:


In practice there's no extra cash if you pay off the mortgage.

Assuming the OPs mate can offset his savings against the mortgage he'll be able to invest the £650 a month and have an emergency fund if needed. For Example, using round numbers.

Mortgage 100k
Savings 100k
Mortgage repayments 1k a month.

Option 1 - pay off mortgage. Net result:
Mortgage 0
Savings 0
'Extra' monthly cash 1k

Option 2 - offset capital against mortgage interest.
Mortgage 100k
Savings 100k
Pay 1k off mortgage.

This leaves you with:
Mortgage 99k
Savings 100k
Withdraw 'extra' 1 k monthly cash from savings that's no longer required to offset against mortgage.

You're in exactly the same position as if you paid off the mortgage, but instead of being skint you still have 99k in the bank in case of emergencies.

In reply to hokkyokusei:

paying approx. £78 per month now till april 2019 then has to pay the remainder of the loan in april 2019 or remortgage.

In reply to Philip:

thx for those kind words Philip. I know it is a climbing forum however there are obviously people here who undoubtably climb but also have a day job possibly banking ,finance etc maybe hes not really clueless but just gathering different opinions to make an educated decision or not.