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I have a mortgage on my primary home, which consists of two sub-account: one is for the original loan with about £30K remaining on it; the other part is the extra borrowing to build an extension - that part has about £40K left on it. These two parts are on different schedules (rates/periods) which are like this:

  • Sub-account 1: about £30K balance, about £1K per month payment, current rate 1.05% (variable), no early payment penalty
  • Sub-account 2: about £40K balance, about £500 per month payment, current rate 1.74% fixed until October 2022 with heavy early payment penalties, after which the rate goes up to 3.59% (variable).

I have extra money now that I can pay toward the mortgage to pay it out sooner. I have three options:

  1. Pay more toward the lower interest no-penalty sub-account
  2. Pay more toward the high interest part and pay early penalty; the early payment penalty is equal to the interest I would otherwise pay between the time of payment and October 2022.
  3. Wait until high-interest sub-account gets to no-penalty in about 1.5 years and pay more than

Intuitively (rightly or wrongly) I feel that I should keep saving for the next 18 months and then in October 2022 pay out as much as I can - however I'm struggling to get all the math to verify this.

Can somebody help me with the math here to determine the right option?

Note that I have no other debt and have sufficient other means to cover "worst case scenarios" (e.g. no job for 6 months, etc.)

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There is no good reason going for option 2 if the penalty is exactly the same as the expected interest. You are paying now the same money that you would need to pay otherwise but its gone. That is a 0% return on investment. One can still do better even with a savings account, although not by much.
After October '22 the ROI on account 2 will be 3.59% which is pretty considerable for a risk-free "investment" and this will beat any investment you can do now in account 1 as the time frame for account 1 is only 30 months = 2.5 years left and this will give you a total return on anything invested now of less than 3%

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