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
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

Austen Lloyd: Commercial Property Solicitor - Exeter

Excellent Salary: Austen Lloyd: EXETER - A great new opportunity with real pot...

Austen Lloyd: Senior Private Client Solicitor - Exeter

Excellent Salary: Austen Lloyd: EXETER - An outstanding senior opportunity for...

Sauce Recruitment: Retail Planning Manager - Home Entertainment UK

salary equal to £40K pro-rata: Sauce Recruitment: Are you available to start a...

Ashdown Group: Front-End Developer - London - up to £40,000

£35000 - £40000 per annum: Ashdown Group: Creative Front-End Developer - Claph...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower