I Reduced My Mortgage By 15k And Saved 30k
23 Oct 2007I Raised My 15k (Plus More) to complete my “15k project” a while ago, 10th September to be precise, but as already mentioned, I’ve been unsure about what to do with the funds. I wasn’t sure whether to invest more money into another property, or do as initially planned, which was to use that 15k to pay off some of the outstanding balance to my mortgage and then change my interest-only mortgage into a repayment mortgage.
Due to the uncertain condition of the property market right now, I wouldn’t feel comfortable investing in more property until the market is more stable. Additionally, I didn’t want to leave 15k laying around in my account because it’s not saving or making me much money. I finally decided to go ahead and use the money to reduce my outstanding mortgage balance. I reduced the mortgage to approximately £139k. Additionally, I changed my repayment method type to repayment, so now I’m reducing my mortgage balance each month.
The actual process of making that 15k payment and chaning my repayment method was pretty straight forward. My mortgage lender is Northern Rock for this particular property, and all it requied was a phonecall and an admin fee of £75 (for changing the repayment method). You can read more about Changing Repayment Method
I previously wrote an about the Benefits Of Paying Your Mortgage Off Early. In breif, the main benefit is that you save thousands of pounds by reducing the interest you pay on your loan.
Here’s some calculations displaying how much real money I saved by paying 15k off my mortgage.
Previous balance (before making the 15k deposit): £154k
Interest rate: 5.59%
Monthly payments: £965.13
Math:
965 x 12 (months in a year) = 11,580
11,580 x 25 (length of mortgage) = 289,500
Total amount payable after 25 years (length of mortgage): 290k approximately.
Current balance (after making the 15k deposit): £139k
Interest rate: 5.59%
Monthly payments: £871.12
Math:
871 x 12 (months in a year) = 10,452
10,452 x 25 (length of mortgage) = 261,300
Total amount payable after 25 years (length of mortgage): 260k approximately.
The figures are all approximates, and don’t take into consideration interest rate changes that may occur in the future, so I probably ended up saving myself more money (assuming that interest rates increase later on). However, by sticking to my current rate, I saved myself a minimum of 30k over a 25yr duration by making that 15k deposit. Not bad, aye?
You can also find out how much you could save by reducing your mortgage with the use of my Mortgage Calculator. If you are also thinking about reducing your mortgage earlier than planned, make sure you find out if there are penalities or extra charges for doing so. Some mortgage policies have extra charges for early lump sum payments.
Overall, I’m extremely happy with the outcome of this project. You can get a breakdown on how I raised the money here: I Raised My 15k (Plus More)
Now I need to think of another project to keep me going =]
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Talk / 2 Comments left so far
I didn't need to "dodge" early repayment penalties because there aren't any for my particular policy. There is, however, a 6k (approx) penality for completely clearing my balance with in the "tie in" period, which is 2 years. You don't get penalised for making lump payments on interest-only mortgages, because they don't expect you to pay the entire outstanding balance in one go after 25 years.
Are you sure you'll have penalities for making lump payments? Check your policy, you might be surprised. Do you have an interest-only or repayment mortgage Let me know how you get on.
One of my policies switch to a 7.3% variable rate next year, I plan on remortgaging at that point. There is no way i'm paying that much interest when the baserate is still 5.75%.
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I initially started this website because I wanted to document my every step from property idiot to property landlord,
in hope that people would find my site and help me along the way. I literally didn't have a clue about being a landlord
when I started this website.
If I get the lump sum I'm expecting I could be tempted to reduce my mortgage in a similar way, given the current state of the market, but I know I'll have penalties at least until next summer when my rate switches from fixed to variable.
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