Lump sum payment but moving before end of mortgage term

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Fat Tony

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So I'm lucky enough to have a lump sum at the moment which I'm considering paying off against my mortgage. Have weighed all the pros and cons regarding keeping it on deposit and security of the euro etc. Have also decided to pay it off against capital of mortgage and reduce term rather than reduce my payments. The mortgage is a tracker @ ECB + .75%

Having said all that, with 20 years currently outstanding before I pay the lump sum (which should reduce it to 15) I hope to move in the next 2 to 5 years all going well.

Does that fact that I will possible be selling up in the next few years have any bearing on my decision to pay in the lump sum and reduce the term? I haven't factored this in really in my calculations or anything and am not sure if it makes any difference???

Thanks!
 
Hi Tony

An interesting question. I presume you have read this Key Post Should I use a lump sum to reduce my mortgage?

But first of all, if you are going to make a capital repayment against a cheap tracker, insist that the bank agrees in writing that it is a payment in advance. So, if you need to take a break at any time in the future, you can do so as of right and not at their discretion.

If you are selling up and not rebuying, then I can't see any bearing on it.

But if you are rebuying, I think it could be relevant.

You may want to buy a new home and not be able to sell the old home. If you have a lump-sum you may be able to buy a new home and let out the old home.

You would obviously be better off paying the lump-sum against a mortgage with a market rate tracker of 4.5% than against a mortgage with a cheap tracker of 1.75%.
 
Thanks for the detailed reply Brendan. I wasn't aware that I could specify the lump sum as a payment in advance. I can do this and still have the payment reduce the term?

My reasoning for getting the most value from paying in the lump sum is based on interest savings over the term of the mortgage (reduction from 20 to 15 years). By possibly selling up after 3 years(for example) does that negate this savings calculation? If so would it be more advisable to reduce the payments rather than the term then if I was to sell up early?

I had thought that I would sell up and rebuy but then as you say, a lump sum against the new higher mortgage would be much better than against my current cheap tracker. Although I would imagine that the tracker rate will not stay at this current low level over the next few years...
 
The only other bit of advice I would give is if you pay the lump sum and continue your existing payments your term will finish early anyway, I would not be inclined to officially reduce the term on the mortgage as should anything happen in the future where you need to reduce your repayments you may not be able to increase the term again. If it is a variable rate mortgage it should not make any difference cost wise, it would just mean that if you needed to step back to what the longer term repayments would have been at any stage in the future you will be able to do it without any hassle.
 
Fat Tony said:
My reasoning for getting the most value from paying in the lump sum is based on interest savings over the term of the mortgage (reduction from 20 to 15 years). By possibly selling up after 3 years(for example) does that negate this savings calculation? If so would it be more advisable to reduce the payments rather than the term then if I was to sell up early?
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Selling in 2-3 years time means you should only calculate the savings over the 2-3 year term not the term of the mortgage.

Fat Tony said:
I had thought that I would sell up and rebuy but then as you say, a lump sum against the new higher mortgage would be much better than against my current cheap tracker. Although I would imagine that the tracker rate will not stay at this current low level over the next few years...
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You are right the tracker will not stay at this rate forever but it will stay at 0.75% over ECB rate forever (or for as long as your mortgage term). A new mortgage will have a margin of much more than 0.75% over ECB, probably more like 3-4% more than ECB.
 
Thanks for all the replies, still wavering between decisions. Rediscovered the mortgage calculator so have a better picture and understand the savings differences now with selling up early etc.

With so many variables it's very hard to make the best decision...

Regarding making a capital payment reducing the term, I just want to confirm that I can do this and also specify the quote below? :

"Make sure to get a letter in writing from the lender saying that this is a payment of repayments in advance. So, if you need to take a payment break at some stage in the future, you will be able to do so as of right, and not at their discretion."
 
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Fat Tony said:
"Make sure to get a letter in writing from the lender saying that this is a payment of repayments in advance. So, if you need to take a payment break at some stage in the future, you will be able to do so as of right, and not at their discretion."
Click to expand...

Hi Tony

They are under no obligation to agree to this, but you are under no obligation to pay a lump sum off your mortgage. They should agree to this as it's massively in their interest. But don't accept the word of some guy in a call centre. Get it in writing.
 
Thanks Brendan, but can I try to make it a payment of repayments in advance and also specify that I want it to be a capital repayment reducing the term. This isn't contradictory(sp?) if I'm able is it?
 
Fat Tony said:
Thanks Brendan, but can I try to make it a payment of repayments in advance and also specify that I want it to be a capital repayment reducing the term. This isn't contradictory(sp?) if I'm able is it?
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You can't specify this payment as an advance repayment (of your normal monthly repayments) and also state that you want it to reduce the term of the loan. It has to be one or the other!
 
That's what I thought, so if I specify the former I won't make the interest savings right? Doesn't seem to make sense to me (financially) to specify the (latter - strike that, reverse it)former unless I just wanted to keep my options open for the future...?
 
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Decision is up to you. Write to the Bank and specify that you are making an advance lump sum payment to your loan. Tell them to cancel direct debit payments for the period. (I.e if your repayments are currently 2K pm and you are lodging 20K, the advance payment will be for 10 months). If interest rates increase this period could reduce.
 
Oops, I meant to say former above, not latter :eek:

I want the lump sum to save me as much as I can from my mortgage so therefore I should specify it as a capital repayment reducing the term and not mention it as a "payment of repayments in advance", correct?
 
Normally the bank won't interpret it as a "payment in advance". Standard process is that it will immediately reduce the balance owing and the Bank's system will automatically reduce the loan repayments in line with the reduced amount and the original term of the loan. You can specify to the Bank that you don't want your payments to reduce, which will shorten the term of the facility.
 
44brendan said:
Normally the bank won't interpret it as a "payment in advance". Standard process is that it will immediately reduce the balance owing and the Bank's system will automatically reduce the loan repayments in line with the reduced amount and the original term of the loan. You can specify to the Bank that you don't want your payments to reduce, which will shorten the term of the facility.
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I have heard completely contradictory advice here over the years on what "standard Practice" is in banks if you pay off a lump sum and dont specify what you want this lump sum do to.

My advice is to assume there is no standard practice.

Ask the bank the clear question

"I would like to pay 10K off my mortgage. I would like this money to be taken off the capital. I would like to continue to pay xxx per month. Please confirm that is is possible to do this, and inform me what the new term of the mortgage is ?"
 
"I would like to pay 10K off my mortgage. I would like this money to be taken off the capital. I would like to continue to pay xxx per month. Please confirm that is is possible to do this, and inform me what the new term of the mortgage is ?"

Not at all.

I would like to pay €10k off my mortgage.
I want this to be treated as payments in advance.
I am going to continue paying my monthly instalment of xxxx per month.
However, should I wish to take a payment break at any time in the future, please confirm that I will be entitled to do so.
Please confirm also that interest will be charged on the net balance after the payment of €10,000.
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Thanks Brendan.
Reading through the thread it is not clear which option he wants. My reading of it was that he wants to pay off the capital and continue to make repayments.

Either way, I think that the point has been made that he should make a clear and precise request to the bank of what he wants to do with the lump sum.
 
Originally I had decided to pay lump sum against the capital, keep repayments the same and reduce the term - Plan A.

Then when figuring in the possibility of moving in ~3 years, it looked like reducing the payments was the better option - Plan B. Interest savings are similiar after 3 years but more money in pocket (as the tracker wouldn't run long enough to get the extra interest savings as in Plan A).

Because of so many variables, I've decided not too reduce my monthly repayments and use the lump sum against the capital to make the most savings on interest - Plan A. (thereby reducing the term as I understand)

The/my confusion arises around the posts regarding using the payment as "payment in advance" - whether I can try to ask for this and still make the interest savings as in Plan A...?
 
Interest saving will always apply. banks calculate mortgage interest on a daily accrual basis. I.e. if you lodge 10K to your mortgage of 100K today, the interest accrual will be calculated from tomorrow on a 90K balance.
In terms of keeping your monthly repayments unchanged, you need to contact the Bank to arrange this.
 
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