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Page 15: Financial: Paying-off Your Mortgage Early.
Should you pay-off the mortgage with your savings?
If you're amassing enough savings to pay-off your mortgage,and are considering your options, these extracts from our news archive might help you decide...
Mind the Mortgage/Savings Gap
(10:00 Saturday 25th June 2005 news story)
Some excellent mortgage deals are available at the moment, including a product for first-time buyers only from Portman BS, which is a 2-year discounted variable, currently discounted to 4.48%, and just a 2-year tie-in for maximum Loan To Value of 95%, and a £499 admin fee. Another good discounted variable is one from Alliance and Leicester, currently set at 4.74%, with a 2-year tie-in.
There are also a handful of tempting cash-back deals out there. Best value is a six-year tie-in from Tipton and Coseley BS, offering an 8% cash-back and no other fees, on an LTV of 75%. This is equivalent to a discount of 1.33% off the SVR of a 25-year mortgage, currently at 6.74%, equalling 5.41% and remember there's no fees. Chelsea BS do a similar deal but with a £200 fee, offering 6% cash-back with a 5-year tie-in, equivalent to a discount of 1.21%. Remember that with cash-backs, the money is received from the mortgage company up-front, so there is potential for a few years' top rate interest to further improve the value of the deal.
If you really don't want to shop around for a mortgage deal every few years, there's a nice mortgage from Chesham BS for the entire term of the mortgage for a discounted variable rate of 5.14% and no fees at all. We won't mention fixed-rate deals because if rates drop, you may be left high and dry, suffice to say that the rates offered for fixed-rate mortgages are near identical to those for variable-rate deals indicating that mortgagers are split 50/50 on whether rates are likely to rise or fall over the particular mortgage tie-in period.
Compare these borrowing rates with the best savings rates and you can see the gap between the lowest mortgage rate and the highest savings rate. The choicest Mini-Cash ISAs are at 5.50%, courtesy of National Counties BS, Portman BS and Leeds and Holbeck BS. See the Best Interest Rates here. The gap is at about 1%, is it not? Move your mortgage to the best deal available, when it's time to remortgage and keep moving around your accrued savings in the meantime, and the "profit" on a £100,000 loan is £1,200 each year. Don't forget the added effect of compounded interest on the interest: Imagine stashing the £1,200 away in a high interest account each year.
The effort involved in monitoring the market, calculating the remortgage deal and reading the small print in the accounts and the hassle of moving accounts to ones with better rates might put-off the average person, but that's why there's a gap in existence: Inertia. Banks and building societies gamble on headline grabbing, limited-term accounts that ought not make them a loss because people generally can't be bothered. They'll even tolerate the one-in-a-hundred customers who are savvy rate tarts and chase the best rates.
Do you fancy getting £15,000 over 10 years for not paying-off your 100K mortgage? Then mind the gap.
Why Pay Off Your Mortgage Early?
(19:00 Monday 7th March 2005 news story)
We've just read another article on paying-off your mortgage early.
There are a host of Discounted Variable mortgage deals offering around 4.5% over a couple of years, including 4.49%, 4.54%, and 4.63%, with Lambeth BS, Dunfermline BS and Saffren Walden BS respectively. You can also get Fixed-Rate mortgages for as low as 4.59%, 4.69%, and 4.79% with Skipton BS, Alliance and Leicester and Portman BS, respectively.
For the savings, you can have a 5-year fixed-rate Mini Cash ISA with Halifax for 5.70%. Alternatively, you could choose a good variable ISA like Lambeth BS's 5.65%, or Abbey's 5.35%. Members of Leeds and Holbeck Building Society can open an account paying 6.0% gross, albeit for a limited period.
Now lets pretend Mr and Mrs Smith have a mortgage for £100,000 and over the years, they've amassed a similar fortune in mini-cash ISAs. Annual interest payments on a mortgage with Lambeth BS is £4,490. Annual interest income with Halifax is £5,700. Mr and Mrs Smith consider paying-off their mortgage early as daft. They'd lose £1,210 a year if they did. They joke that they actually want to borrow more, rather than less, to put it into the ISA.
This One-Percent difference between the lowest mortgage rates and the highest savings rates has been in existence in the UK now for at least ten years. As each new market leading ISA account surfaces, the Smiths consider transferring their existing ISA, and when the time approaches for remortgaging, they scour the market for the best rate for them - usually Discounted Variables.
Everyone has different circumstances and getting rid of massive monthly mortgage payments might be a wise move. Monitoring the markets is also time-consuming, getting rid of your mortgage means that your home is safe, whatever happens. But when every financial adviser seems to say "pay-it-off, pay-it-off" like cage-stir-crazy parrots, Money Surgery says think carefully if you are tempted to pay off your mortgage. You might find that paying it off isn't necessarily the the most lucrative option for you, as we've shown.
Copyright 2000 - 2007 ©Kevin Anthony Jones