Loan Question

[Semple]

I don't think that is correct especially for mortgages. The whole point of an ERC is to make up for loss in interest over the duration of the agreement.

Alternatively you can invest that money elsewhere to offset interest.

For example my mortgage it's 5% for an ERC reducing by 1% every year until it's 0% at which point I can change deals or pay without any ERC.

Also on mortgages with nationwide you can overpay by 10% of the original mortgage amount without any charges. So you can make overpayments to reduce interest by quite a bit penalty free.

It would make zero sense to pay 1-5% to end it early as I could be making 1-5% on that money instead. It's entirely dependent on the arrangement in place. But you would be better off cancelling out the interest by investing than paying an ERC and losing money.

If you'd won say the lottery, then swallowing the ERC isn't a big deal. The interest you'd earn on the would be payment would be a pittance these days anyway.

Also if someones house had increased in value and they needed to move, but mortgage wasn't portable. The increased value of your property would then cover the ERC.

I imagine most people don't bother due to its cost. My ERC on the first year of my mortgage was over 15k.

 

[Psycho Sonny]

If you'd won say the lottery, then swallowing the ERC isn't a big deal. The interest you'd earn on the would be payment would be a pittance these days anyway.

Also if someones house had increased in value and they needed to move, but mortgage wasn't portable. The increased value of your property would then cover the ERC.

I imagine most people don't bother due to its cost. My ERC on the first year of my mortgage was over 15k.

Yeah if you won the lottery you might not care about losing £10k on an ERC. However I'm guessing the people that need financial advice on these things haven't just won millions. It's a very abstract scenario to support your argument.

If my house has increased in value then generally it's not as easy as saying that is pure profit.

I could pay say £300k for a home and when I sell it's worth £350k. However over 15 years I may have paid £90k in interest.

So I've actually lost £40k when I sell the home.

So let's go back to the interest argument which is what is really the key here. You can port a mortgage should you need to move so no need to pay it off. Let's say I have £100k left to pay and 1 year before my deal ends and then pay zero ERC.

I need to look at the current mortgage interest rate. Let's say it's 2%. The ERC is 1% so I'd save 1% by paying the full thing off.

If I had 100K cash I can easily get a 5% return minimum through other means. I wouldn't leave it sitting in the bank. So I'd be £3k better off minimum by not paying it off early.

If you have cash it's usually best to leave low interest loans be and invest it to make more money.

That's why I said in my previous post your advice in regards to mortgages specifically is wrong.

Now if it was a 24.9% credit card then absolutely pay it off asap.

 

[theone8181]

I don't think that is correct especially for mortgages. The whole point of an ERC is to make up for loss in interest over the duration of the agreement.

Alternatively you can invest that money elsewhere to offset interest.

For example my mortgage it's 5% for an ERC reducing by 1% every year until it's 0% at which point I can change deals or pay without any ERC.

Also on mortgages with nationwide you can overpay by 10% of the original mortgage amount without any charges. So you can make overpayments to reduce interest by quite a bit penalty free.

It would make zero sense to pay 1-5% to end it early as I could be making 1-5% on that money instead. It's entirely dependent on the arrangement in place. But you would be better off cancelling out the interest by investing than paying an ERC and losing money.

It was a poor decision that I'd made, half way through a 10 year fixed term at 800 a month, the amount I had to pay was less than the difference from moving to another provider. I've used it as a very expensive learning curve. % wise, my original one was 5.19% and I'm now on 2.49%.

 

[Psycho Sonny]

It was a poor decision that I'd made, half way through a 10 year fixed term at 800 a month, the amount I had to pay was less than the difference from moving to another provider. I've used it as a very expensive learning curve. % wise, my original one was 5.19% and I'm now on 2.49%.

Yeah if you don't have a lot of equity you should never fix long term unless

A - you have a risky job / income
B - you think that the market will crash within the next 2-3 years

Probably a few others I'm missing but fix for 2 years lower the LTV and fix at a better rate. Rinse and repeat.

I don't believe interest rates will be going anywhere for at least 15 years. Brexit and covid has put sure to that.

 

[theone8181]

Yeah if you don't have a lot of equity you should never fix long term unless

A - you have a risky job / income
B - you think that the market will crash within the next 2-3 years

Probably a few others I'm missing but fix for 2 years lower the LTV and fix at a better rate. Rinse and repeat.

I don't believe interest rates will be going anywhere for at least 15 years. Brexit and covid has put sure to that.

This was a few years ago and our first house so not much equity apart from the deposit.