# Exiting mortage early (pay penalty or let it run)

A

#### Allan

GF is thinking about selling house or renting it. Mortgage currently
paying approx 5% (£530/month). If she leaves within first 5 years
(currently just finishing year 1), she will pay £2K penalty.
I'm trying to persuade her to look carefully at the difference between
paying for another 4 years, versus getting out now and paying the £2K
early-redemption penalty. I think the mortgage is about £90k.

Does anyone have any indication on how to do the sums to compare?
Is there a useful website that would give any pointers on this?

T

#### Tim Woodall

GF is thinking about selling house or renting it. Mortgage currently
paying approx 5% (£530/month). If she leaves within first 5 years
(currently just finishing year 1), she will pay £2K penalty.
I'm trying to persuade her to look carefully at the difference between
paying for another 4 years, versus getting out now and paying the £2K
early-redemption penalty. I think the mortgage is about £90k.

Does anyone have any indication on how to do the sums to compare?
Is there a useful website that would give any pointers on this?
Very, very, rough and ready calculation:

As it's the first five years of the mortgage basically nothing will be
paid off of the principal so over the next four years she will pay:

90000*5%*4=18000 in interest payments.

If we assume she's paying 500 per month she will have paid 24000 in
total reducing her outstanding balance to 84000.

The 18000 interest payment is an overestimate - but not by that much.
It's relatively easy to put the numbers into a spreadsheet and
calculate the interest due each month if you want it more accurate.

Tim.

S

#### Stickems.

What's the answer, does GAF pay the penalty or let it run?

| On Mon, 27 Jul 2009 11:36:46 +0100,
| >
| > GF is thinking about selling house or renting it. Mortgage currently
| > paying approx 5% (£530/month). If she leaves within first 5 years
| > (currently just finishing year 1), she will pay £2K penalty.
| > I'm trying to persuade her to look carefully at the difference between
| > paying for another 4 years, versus getting out now and paying the £2K
| > early-redemption penalty. I think the mortgage is about £90k.
| >
| > Does anyone have any indication on how to do the sums to compare?
| > Is there a useful website that would give any pointers on this?
|
| Very, very, rough and ready calculation:
|
| As it's the first five years of the mortgage basically nothing will be
| paid off of the principal so over the next four years she will pay:
|
| 90000*5%*4=18000 in interest payments.
|
| If we assume she's paying 500 per month she will have paid 24000 in
| total reducing her outstanding balance to 84000.
|
| The 18000 interest payment is an overestimate - but not by that much.
| It's relatively easy to put the numbers into a spreadsheet and
| calculate the interest due each month if you want it more accurate.
|
| Tim.
|
| --
| God said, "div D = rho, div B = 0, curl E = - @B/@t, curl H = J + @D/@t,"
| and there was light.
|
| http://www.woodall.me.uk/

T

#### Tim Woodall

| On Mon, 27 Jul 2009 11:36:46 +0100,
| >
| > GF is thinking about selling house or renting it. Mortgage currently
| > paying approx 5% (£530/month). If she leaves within first 5 years
| > (currently just finishing year 1), she will pay £2K penalty.
| > I'm trying to persuade her to look carefully at the difference between
| > paying for another 4 years, versus getting out now and paying the £2K
| > early-redemption penalty. I think the mortgage is about £90k.
| >
| > Does anyone have any indication on how to do the sums to compare?
| > Is there a useful website that would give any pointers on this?
|
| Very, very, rough and ready calculation:
|
| As it's the first five years of the mortgage basically nothing will be
| paid off of the principal so over the next four years she will pay:
|
| 90000*5%*4=18000 in interest payments.
|
| If we assume she's paying 500 per month she will have paid 24000 in
| total reducing her outstanding balance to 84000.
|
| The 18000 interest payment is an overestimate - but not by that much.
| It's relatively easy to put the numbers into a spreadsheet and
| calculate the interest due each month if you want it more accurate.
|
| Tim.
|

What's the answer, does GAF pay the penalty or let it run?
That wasn't the question that was asked.

But I don't see how that can be answered.

If the only reason to keep the house is to avoid the 2K penalty and it
can currently be sold for enough to cover the outstanding balance and
there's no desire to keep the house very long term as an investment then
I'd sell now.

If the intention is to keep the house as an investment property long
term and fluctuations in property prices are not a worry then I'd be
paying the maximum allowed to reduce the mortgage and I'd let the
property out.

Tim.

M

#### Mark

That wasn't the question that was asked.

But I don't see how that can be answered.

If the only reason to keep the house is to avoid the 2K penalty and it
can currently be sold for enough to cover the outstanding balance and
there's no desire to keep the house very long term as an investment then
I'd sell now.
I thought houses were primarily to live in ;-)
If the intention is to keep the house as an investment property long
term and fluctuations in property prices are not a worry then I'd be
paying the maximum allowed to reduce the mortgage and I'd let the
property out.
I would try to rent it out to cover the mortgage if you can manage
without any capital tied up in the house. A £2K penalty would be
difficult to recover any other way IMHO.

--
(\__/) M.
(='.'=) Due to the amount of spam posted via googlegroups and
(")_(") their inaction to the problem. I am blocking most articles
posted from there. If you wish your postings to be seen by
everyone you will need use a different method of posting.

T

#### Tim Woodall

I would try to rent it out to cover the mortgage if you can manage
without any capital tied up in the house. A £2K penalty would be
difficult to recover any other way IMHO.
You're relying on a) the rental covering the interest on the mortgage
and b) house prices not dropping over the next four years.

Personally, I think that's a big risk to save 2K on a 90K debt.

I've no idea what mortgages are available now but a google for mortgage
rate uk gives "Compare Latest Re-Mortgage Deals. Rates from 2.4%"

Even if you do decide to keep the house and let it out you're possibly
still better off taking the 2K hit and getting out of the mortgage now.

HSBC has 2.49% fixed for 2 years. If I'm doing the sums correctly that
should save around 2.5K less fees for the new mortgage even after the 2K
hit with the ability to get out in two years instead of four.

If you're planning to keep the house long term so that eventually,
rental income becomes real income instead of just covering mortgage
interest and you're prepared to ride out ups and downs of rental income
using other finances then keep the house.

But voluntarily paying the bank 18K and taking on all the risk of
property price movements and rental income just so you can avoid paying
them 2K seems utterly daft to me. Far better is to start paying those
mortgage payments into a savings account. In four years time you'll have
24000 in the account. (More than 20000 even if you have to borrow the 2K
on a credit card and pay it off at 500 per month initially)

And if you can't afford to continue to make the mortgage payments but
will be utterly dependent on rental income to cover the mortgage ...
well I won't say what I think.

YMMV

Tim.

M

#### Mark

You're relying on a) the rental covering the interest on the mortgage
and b) house prices not dropping over the next four years.
I'm assuming a) and b), yes.
Personally, I think that's a big risk to save 2K on a 90K debt.

I've no idea what mortgages are available now but a google for mortgage
rate uk gives "Compare Latest Re-Mortgage Deals. Rates from 2.4%"

Even if you do decide to keep the house and let it out you're possibly
still better off taking the 2K hit and getting out of the mortgage now.

HSBC has 2.49% fixed for 2 years. If I'm doing the sums correctly that
should save around 2.5K less fees for the new mortgage even after the 2K
hit with the ability to get out in two years instead of four.
The best fixed rate at HSBC I can find is nearly 4%. I don't see any
down near 2.5%. If there is I suspect it would have a hefty fee which
would have to be factored into the mix.
If you're planning to keep the house long term so that eventually,
rental income becomes real income instead of just covering mortgage
interest and you're prepared to ride out ups and downs of rental income
using other finances then keep the house.

But voluntarily paying the bank 18K and taking on all the risk of
property price movements and rental income just so you can avoid paying
them 2K seems utterly daft to me. Far better is to start paying those
mortgage payments into a savings account. In four years time you'll have
24000 in the account. (More than 20000 even if you have to borrow the 2K
on a credit card and pay it off at 500 per month initially)
If the rental income covers the mortgage then you are not paying the
bank the 18K; the renter is.
And if you can't afford to continue to make the mortgage payments but
will be utterly dependent on rental income to cover the mortgage ...
well I won't say what I think.
Is that the normal business model for a landlord? i.e. they could not
afford to keep houses empty.

--
(\__/) M.
(='.'=) Due to the amount of spam posted via googlegroups and
(")_(") their inaction to the problem. I am blocking most articles
posted from there. If you wish your postings to be seen by
everyone you will need use a different method of posting.

T

#### Tim Woodall

The best fixed rate at HSBC I can find is nearly 4%. I don't see any
down near 2.5%. If there is I suspect it would have a hefty fee which
would have to be factored into the mix.
http://www.hsbc.co.uk/1/2/personal/mortgages/rate-matcher?WT.srch=1&id=RateMatcher

If the rental income covers the mortgage then you are not paying the
bank the 18K; the renter is.
And you are taking all of the risk, the bank is taking no extra risk at
all.
Is that the normal business model for a landlord? i.e. they could not
afford to keep houses empty.
AFAICT the OP isn't planning to make a business of letting property,
they've just got one property that they are planning to let out for four
years in order to avoid paying 2K now.

They'll have all sorts of costs initially - finding a tenant, maybe
changing their insurer etc.

Then they'd better hope they get a good tenant who pays on time.

I've let out property. And I've ended up with a bad tenant once. Three
months unpaid rent and the deposit didn't quite cover the work needed to
get the house back into a state where it could be let again. And,
unfortunately, that was my very first tenant.

Long term it's definitely worked out for me. But over those early years
I barely broke even (IIRC I did declare a very small profit on my first
tax return but my tenant was a reluctant payer rather than refused to
pay at that point) and that was with a loan to value of less than 50%[1]

I've also made a loss in a tax year due to a long void between tenants.
Now there is no mortgage so it seems unlikely that there will be any
more losses declared.

I don't think house prices are going to do anything exciting in the next
five years and may well decline. I might be wrong. But gambling with
tens of thousands in order to save 2K just seems ridiculous to me.

Tim.

[1] Actually I messed up when I first let the house. With a bit better
understanding and planning at the time I could have made a significant
loss in these early years and saved a lot of tax in later years.

M

#### Mark

Fees range between £800 & £5000!
And you are taking all of the risk, the bank is taking no extra risk at
all.
Iff they can't rent it. What I am suggesting is to attempt to get a
tenant. If this fails then sell otherwise keep it.
AFAICT the OP isn't planning to make a business of letting property,
they've just got one property that they are planning to let out for four
years in order to avoid paying 2K now.

They'll have all sorts of costs initially - finding a tenant, maybe
changing their insurer etc.
But it can't be that bad otherwise people would not do it IMHO.
Then they'd better hope they get a good tenant who pays on time.

I've let out property. And I've ended up with a bad tenant once. Three
months unpaid rent and the deposit didn't quite cover the work needed to
get the house back into a state where it could be let again. And,
unfortunately, that was my very first tenant.

Long term it's definitely worked out for me. But over those early years
I barely broke even (IIRC I did declare a very small profit on my first
tax return but my tenant was a reluctant payer rather than refused to
pay at that point) and that was with a loan to value of less than 50%[1]

I've also made a loss in a tax year due to a long void between tenants.
Now there is no mortgage so it seems unlikely that there will be any
more losses declared.

I don't think house prices are going to do anything exciting in the next
five years and may well decline. I might be wrong. But gambling with
tens of thousands in order to save 2K just seems ridiculous to me.
I don't understand why you say "gambling with 10 of thousands". If a
tenant is paying there is no gamble.

--
(\__/) M.
(='.'=) Due to the amount of spam posted via googlegroups and
(")_(") their inaction to the problem. I am blocking most articles
posted from there. If you wish your postings to be seen by
everyone you will need use a different method of posting.

T

#### Tim Woodall

I don't understand why you say "gambling with 10 of thousands". If a
tenant is paying there is no gamble.
A 2% fall in property values over the next four years will lose you as
much as the 2K. (I'm assuming 100% LTV, it's worse if the property is
worth more although the rental is likely to be higher to compensate)

A 20% fall, which is possible, will lose you 16K more than taking the 2K
hit now.

Of course, house prices might go up as well. But assuming that the OPs
only goal is to avoid the 2K then I think they're insane to consider
continuing to own the house.

Of course, they might not be able to sell it for enough to cover the
outstanding mortgage anyway or they might not be able to sell it at all
in the current climate. Then having a tenant is better (unless they're
very unlucky with the tenant)

Anyway, I've had my say. IMO, in the current climate, the best option is
to clear debts as quickly as possible. But we could be on our way into
another boom which is perfect for people with high leveraging.

Tim.