Capital idea

By THIS IS MONEY
Updated:

 

We have a £39,650 mortgage with Skipton BS that is due to be redeemed in October 2005. We pay £211 a month on an interest-only mortgage and we are paying for endowment policies. Interest on the mortgage is charged at 5.84% on a daily basis and there are no penalties for paying a lump sum off the capital at any time.

We are due to receive about £22,000 from two endowments in September, with hopefully another £10,000 in November 2004. As we have a full year from the time the first policies mature, we could invest in a one-year bond to increase the cash available, but nothing we have seen pays more than the 5.84% we are paying now on the mortgage. Having been let down by the insurance policies, we are unwilling to consider anything that is not 100% guaranteed!

We think our best option is to reduce our mortgage capital immediately with the proceeds from all the endowments. We could then increase our monthly mortgage payment by the amounts that we no longer have to pay for the policies in addition to the £211 we now pay, thereby reducing the outstanding capital even further.

We realise that in October 2005 when the mortgage has to be repaid that we will still have outstanding capital and at that stage we will have to take out a further loan. What is your advice as to our best course of action?

Justin Modray at Bestinvest says: The course of action you suggest is sensible. As you've discovered, it's highly unlikely you will find a guaranteed rate of interest on a savings account or bond, after tax, greater than your mortgage rate.

The only suggestion I would make is that you could consider remortgaging now in order to potentially cut your monthly payments and provide a relatively cheap means of borrowing the outstanding capital which will not be repaid by the endowments.

You must however check that such a mortgage allows you to pay off the balance early, without penalty. You might even talk to Skipton BS about a short extension to your current mortgage, as mortgage rates are usually lower than those on personal loans.

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