Should I overpay my mortgage?
Discussion
I’ll be moving into my first house in about a months time and fortunately I’ve managed to get it at a price that means I shouldn’t be maxing myself out every month to afford it. It’s on a 80% mortgage variable rate, so there is a possibility that my mortgage payments can/will go up. I can over pay by 10% of the outstanding balance a year, but I don’t know whether I should save whatever I have left over at the end of the month, or use that to overpay my mortgage? With the chance the interest rates could go up should I save what I have left in case I need to dip into to cover my mortgage & bills if rates sky rocket? I save in an employee share save scheme with work, so I have other savings, which is always useful for changing cars, potential extensions, etc. I'm just conscious that the first few years of mortgage payments are interest so I wondered if it was worthwhile.
Darth Paul said:
I’ll be moving into my first house in about a months time and fortunately I’ve managed to get it at a price that means I shouldn’t be maxing myself out every month to afford it. It’s on a 80% mortgage variable rate, so there is a possibility that my mortgage payments can/will go up. I can over pay by 10% of the outstanding balance a year, but I don’t know whether I should save whatever I have left over at the end of the month, or use that to overpay my mortgage? With the chance the interest rates could go up should I save what I have left in case I need to dip into to cover my mortgage & bills if rates sky rocket? I save in an employee share save scheme with work, so I have other savings, which is always useful for changing cars, potential extensions, etc. I'm just conscious that the first few years of mortgage payments are interest so I wondered if it was worthwhile.
Overpayments directly reduce the capital you owe, which will reduce the amount of interest you have to pay in future. I remember reading that for every £1 you pay off early, you save £5 over the life of the average mortgage, which is better than the vast majority of saving schemes.The reduced amount of capital owed should protect you better against increased rates than have savings would anyway. If you really want the flexibility then look at switching to an offset mortgage.
Darth Paul said:
I’ll be moving into my first house in about a months time and fortunately I’ve managed to get it at a price that means I shouldn’t be maxing myself out every month to afford it. It’s on a 80% mortgage variable rate, so there is a possibility that my mortgage payments can/will go up. I can over pay by 10% of the outstanding balance a year, but I don’t know whether I should save whatever I have left over at the end of the month, or use that to overpay my mortgage? With the chance the interest rates could go up should I save what I have left in case I need to dip into to cover my mortgage & bills if rates sky rocket? I save in an employee share save scheme with work, so I have other savings, which is always useful for changing cars, potential extensions, etc. I'm just conscious that the first few years of mortgage payments are interest so I wondered if it was worthwhile.
As long as you have a suitable cash float to handle life's every day drama then it can only be prudent to over pay.it makes even more difference in the first few years to your interest savings, so get overpaying
we took a new 25 yr one 3 years ago ...currently scheduled to be a 12 yr mortgage if interest rates stay the same, thanks to overpaying...
its saving you interest now, and when they go back up, it will save you even more as youve reduced the capital so much
bit of a no brainer really, as long as you have a few months outgoings tucked away in savings for the unforseen
we took a new 25 yr one 3 years ago ...currently scheduled to be a 12 yr mortgage if interest rates stay the same, thanks to overpaying...
its saving you interest now, and when they go back up, it will save you even more as youve reduced the capital so much
bit of a no brainer really, as long as you have a few months outgoings tucked away in savings for the unforseen
Edited by bogie on Wednesday 23 June 16:04
Its the right answer. I did a combination of monthly overpayment (kept repayments at the same level despite falling interest rates) and regular additional lump sum payments when I thought I had built up enough excess 'rainy day' cash. All paid off in 12 years, just before 40. It would have been quicker if the wife had not become ill and had to become part time.
Only word of warning - watch the terms of your deal. They all vary. Maximum % each year is a common one.
Only word of warning - watch the terms of your deal. They all vary. Maximum % each year is a common one.
Overpaying is great news, and does give peace of mind. Check as well though whether there is a facility to draw back down overpayments. My mortgage does offer this (for a minimal fee), which having paid off a large chunk early still gives me the flexibility to source funds at a cheap rate if I find I need them at a future point.
Normally overpaying is good as it is the best safe return due to the tax benefits, but these are interesting times and it depends on the mortgage interest rate you are paying.
There is no point overpaying if the rate is 1.5% for example, you can get a better net return on an instant access savings account at present (ING - 2.75% gross, 2.2% net for basic rate taxpayers). That way your money is earning interest and you have it available if you need it.
In my example, £1000 will earn you £22 over the year in a savings account, or if used as an overpayment you will not be charged £15 interest on the mortgage.
Of course, denary arithmetic is not my strong point, so I await the experts correcting me.
There is no point overpaying if the rate is 1.5% for example, you can get a better net return on an instant access savings account at present (ING - 2.75% gross, 2.2% net for basic rate taxpayers). That way your money is earning interest and you have it available if you need it.
In my example, £1000 will earn you £22 over the year in a savings account, or if used as an overpayment you will not be charged £15 interest on the mortgage.
Of course, denary arithmetic is not my strong point, so I await the experts correcting me.
illmonkey said:
I'm split about this. I want to reduce it, as its only on interest only for now, to keep payments low so I can save. But don't want to tie all of my money up in it and want to get a big chuck of savings.
I suppose at the end of the year I'll review savings and pay some off.
Look for an offset mortgage (I don't know if you can get these on IO mortgages though?)? I try and save whatever I can into my offset account - so interest is only charged on the mortgage amount minus whatever's in my offset account. This way I pay less interest but I can take the money out whenever I want to. Suits my circumstances perfectly I suppose at the end of the year I'll review savings and pay some off.
DXB said:
illmonkey said:
I'm split about this. I want to reduce it, as its only on interest only for now, to keep payments low so I can save. But don't want to tie all of my money up in it and want to get a big chuck of savings.
I suppose at the end of the year I'll review savings and pay some off.
Look for an offset mortgage (I don't know if you can get these on IO mortgages though?)? I try and save whatever I can into my offset account - so interest is only charged on the mortgage amount minus whatever's in my offset account. This way I pay less interest but I can take the money out whenever I want to. Suits my circumstances perfectly I suppose at the end of the year I'll review savings and pay some off.
scotal said:
illmonkey said:
I'm on a tracker of 0.99% above BoE (with a top up of 7% rate of 10% property value, I've just moved).
Can you target the overpayment to the 7% part of your mortgage. That would be my plan.Technically they are under 2 accounts, So I'd assume I can enter that account number when I do a transfer..I hope.
A phone call is in order, me thinks.
In short yes. However, as you have a very cheap variable for the bulk of your borrowing, how would you cope if base went to say 4%? If you could still manage then crack on, if not why not build up a pot that you could use to assist your monthly cashflow should rates go up. Once the pot is established, crack on with the overpayments.
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