Sam Dunn: 'Should I use my payout to cut my home loan?’

House Doctor


Question: I've had a redundancy payment of nearly £23,000 and want to use most of it to overpay on my mortgage of £134,000. Do I have to pay tax on this cash, and do you think it's wise to use it to reduce my home loan – or will I get penalised?

AQ, Redditch

Answer: First, a straightforward diagnosis: you've no worries about tax on your redundancy since the taxman allows any such payout up to £30,000 to stay free of its clutches.

But there's a second, rather more complicated issue: whether to whittle down your mortgage debt – and by how much – depends on many factors, the most pertinent of these being your personal finances' status quo.

Any decision on whether to overpay your mortgage or not raises bigger questions about your overall financial health and two worries in particular: do you have other more expensive debts and are you still unemployed?

"Although reducing debt is generally a good idea, if you have other financial commitments carrying higher interest rates than your mortgage, you should consider repaying these first," says Richard Morea of broker London & Country.

When you've credit card debts costing annual interest of 18 per cent, say, and an outstanding personal loan at 11 per cent, it can make a lot more financial sense to use spare cash to pay off these pricier debts rather than your home loan at just 4.5 per cent.

And while £23,000 will seem like a lot of money, it'll be quickly eaten up by your mortgage and other bills if you've yet to sort out another job – and could leave you horribly exposed, Morea warns.

"Even if you have no other debt, you need to consider whether the benefit of overpayment is significant enough to warrant the loss of access to this money, as it could be a financial backstop if you're unfortunate enough to remain unemployed for some time."

Few mortgages allow you to claw back overpayments if you later fall into financial difficulties, so it's absolutely vital to shore up your other finances before overpaying.

But if you're confident to go ahead, you could slash your monthly repayments.

As a rule, most lenders let you overpay 10 per cent of the outstanding "capital" value of your mortgage each year – and so reduce your overall outstanding debt, interest and remaining monthly payments – without penalty, whether you overpay monthly or by lump sum.

It's become an increasingly popular move as a rock-bottom Bank base interest rate (kept at 0.5 per cent last week) has seen tracker and variable-rate mortgage rates falling in sync.

In turn, borrowers willing to keep paying the same repayment before base rate slid from 5 per cent in October 2008 to 0.5 per cent in March are effectively overpaying each month; HSBC has even written to 30,000 mortgage customers encouraging them to do so.

But watch out for a nasty trap, warns Andy Montlake of broker Coreco: "Once you've double-checked that your lender lets you overpay by up to 10 per cent – and many do – see whether interest on your mortgage is calculated daily, monthly or annually."

This might seem like a small point, he adds, but it can have a big impact.

"If it is worked out annually, then you can end up paying down a sum now but not see the benefit in monthly payments until the end of the year." Worse, you'd lose out on savings interest that you could have earned elsewhere.

However, if interest is calculated daily, then you will see an almost immediate difference in repayments; if "monthly", make sure you time it in the fourth week for maximum effect.

To be sure, ask your lender to tell you the optimum time to make an overpayment.

Discover more property articles at Homes and Property
PROMOTED VIDEO
News
Richard Norris in GQ
mediaGQ features photo shoot with man who underwent full face transplant
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
News
Your picture is everything in the shallow world of online dating
i100
News
The Swiss Re tower or 'Gherkin' was at one time the UK’s most expensive office when German bank IVG and private equity firm Evans Randall bought it
news
Life and Style
Attractive women on the Internet: not a myth
techOkCupid boasts about Facebook-style experiments on users
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Project Coordinator

Competitive: The Green Recruitment Company: The Organisation: The Green Recrui...

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Embedded Linux Engineer

£40000 - £50000 per annum + competitive: Progressive Recruitment: Embedded Sof...

Senior Hardware Design Engineer - Broadcast

£50000 - £65000 per annum + Benefits: Progressive Recruitment: Working for a m...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on