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
Sport
Super BowlAfter Katy Perry madness it's back to The Independent's live coverage of Super Bowl 49!
News
See what Twitter had to say about the first half of the Super Bowl
News
people
News
people
PROMOTED VIDEO
Property search
Latest stories from i100
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

Tradewind Recruitment: PMLD Teacher

Negotiable: Tradewind Recruitment: PMLD Teacher A specialist primary school i...

Recruitment Genius: Online Media Sales Trainee

£15000 - £30000 per annum: Recruitment Genius: Now our rapidly expanding and A...

Recruitment Genius: Public House Manager / Management Couples

£15000 - £20000 per annum: Recruitment Genius: Are you passionate about great ...

Recruitment Genius: Production Planner

£20000 - £30000 per annum: Recruitment Genius: This fast growing reinforcing s...

Day In a Page

The super-rich now live in their own Elysium - they breathe better air, and eat better food, when they're not making beans on toast for their kids

The super-rich now live in their own Elysium

They breathe better air, eat better food, take better medicine
A generation of dropouts failed by colleges

Dropout generation failed by colleges

£800m a year wasted on students who quit courses before they graduate
Entering civilian life 'can be like going into the jungle' for returning soldiers

Homeless Veterans appeal

Entering civilian life can be like going into the jungle
Sam Taylor-Johnson: Woman on top

Sam Taylor-Johnson: Woman on top

Fifty Shades of Grey director on bringing the hit to the screen
Shazam! Story of the $1bn 'what's that song?' app

Shazam: Story of the $1bn 'what's that song?' app

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch