Overpay the Mortgage or Save

[pete_esp]

Hi folks,

I'm in the unusual position that my mortgage is fixed at 1.7% for the next 3.5 years. I've been overpaying by 25% for a number of years but now with savings rates being higher than my mortgage rate I'm beginning to wonder if I would be better off chucking the overpayment into a fixed term saver, the First Direct 7% one to be precise and using that as a lump sum at renewal.

Analytically I think using the savings makes sense but psychologically I like seeing my overpayment exceeding the amount of interest charged each month.

Anyone got any advice or links to any reliable calculators that would help me model each scenario?

[Liamjrhodes]

personally i would be pumping as much money into the mortgage as possible while you have such a low rate!

when you get to the end of the 3.5 years your rate is going to go up dramatically

[blue_haddock]

Liamjrhodes said:

personally i would be pumping as much money into the mortgage as possible while you have such a low rate!

when you get to the end of the 3.5 years your rate is going to go up dramatically

But if he saves the overpayment in a decent account getting 5% or more he could make a big overpayment (if allowed) when his fixed rate ends.

[borrowdale]

pete_esp said:

Hi folks,

I'm in the unusual position that my mortgage is fixed at 1.7% for the next 3.5 years. I've been overpaying by 25% for a number of years but now with savings rates being higher than my mortgage rate I'm beginning to wonder if I would be better off chucking the overpayment into a fixed term saver, the First Direct 7% one to be precise and using that as a lump sum at renewal.

Analytically I think using the savings makes sense but psychologically I like seeing my overpayment exceeding the amount of interest charged each month.

Anyone got any advice or links to any reliable calculators that would help me model each scenario?

Let's say you have £10k to overpay with:

Interest earned on £10k at 7% = £700
Interest saved by overpaying £10k on mortgage at 1.7% = £170

Maybe you're a higher/additional rate taxpayer, or already above the tax-free interest threshold, so the interest is taxed and you're left with just over half of it.

I'd be putting the overpayments into the savings account and then dumping the contents into the mortgage when the fix ends.

[Shaoxter]

Liamjrhodes said:

personally i would be pumping as much money into the mortgage as possible while you have such a low rate!

when you get to the end of the 3.5 years your rate is going to go up dramatically

That makes absolutely no sense.
Stick it in some 3 year savings account now, then pay off a lump sum (including the nice interest you've earned) and reduce your mortgage balance when your nice fixed rate ends.

[Jag_NE]

The maths says put it into savings, but personally I’d plough it into the mortgage just because it feels good to see it collapsing over time. Also savings are easily raided if something catches my interest.

[joropug]

Similar situation, we have turned off the overpayments and switched to saving the same amount religiously every month.

We will lump sum the savings into the mortgage when it renews, assuming the rates are still bad.

[vxsmithers]

joropug said:

Similar situation, we have turned off the overpayments and switched to saving the same amount religiously every month.

We will lump sum the savings into the mortgage when it renews, assuming the rates are still bad.

Same, just need to make sure the money is separate and not spent in a moment of madness on a new shiny thing! I have 9 years left on my fix, if interest rates stay the same I'll be about 30-40K better off not paying the mortgage down quicker due to compounding and its low risk as kept in savings

[RizzoTheRat]

borrowdale said:

I'd be putting the overpayments into the savings account and then dumping the contents into the mortgage when the fix ends.

But check what the maximum lump sum you can pay off in a year is without incurring penalties, and what those penalties are. It may be you can save for a couple of years without exceeding the limit, or it might be that even with the penalty it's worth saving and paying off a chunk when fixed rate ends.

[borrowdale]

RizzoTheRat said:

But check what the maximum lump sum you can pay off in a year is without incurring penalties, and what those penalties are. It may be you can save for a couple of years without exceeding the limit, or it might be that even with the penalty it's worth saving and paying off a chunk when fixed rate ends.

Typically penalties for overpayment only apply for the fixed rate period, so when that ends and you re-mortgage (maybe with another lender), you can redeem the old mortgage with your savings + new mortgage.

[Bighoose]

Similar position. Fixed at 2.2% until Aug 27. Could actually afford to repay the remaining mortgage last year but instead kept the money in ISAs and now getting 4.72 interest fixed (fixed term ISAs).

OP, don't just think about the savings interest rate but also the effect of compound interest. Looking at my situation the interest built up over the 4 years will be such that I could put just that interest into the mortgage in Aug 2027, which would let me keep the savings and keep repayments at the level they are now. So you'll likely find that putting the money into the best savings option available to you rather than overpaying, while your rate is so low, will give you more flexibility and options when your fix is up. As long as you are disciplined and don't spend it.

[Crudeoink]

I'm in the same position, just under 4 years left on the fix at about 1.84% or something like that. Been saving what I could be over-paying with and intend to pay off a lump sum when I come to remortgage. At the moment, the savings are looking like it will be enough to clear about 10-15% of the mortgage. Its nice to know we have a decent nest-egg that's available if something dreadful happens and our regular 'buffer' doesnt cut it.

[pete_esp]

hmmm , much to think about here. Thanks for all of your input.

I've done a crude model that indicates the savings route would have me approx £1500 better off in the 3 year term. Which makes me wonder if it's really worth it.

I like the idea of the compounded interest on savings paying my mortgage payments. I'm a long way off that but maybe I need to take a longer term view rather than focussing on the re-mortgage horizon.

If all things remain equal, when the rate I'm on ends my monthly payment will be roughly equal to what my current payment is with the overpayment so thankfully we won't be in for a lifestyle shock when it happens. I am kicking myself about not taking a 10 year fix out #whatafud. Nevermind.

[RizzoTheRat]

If someone said "do you want this £1500", presumably you'd say yes, so how much effort is too much for £1500?

I agree that it's a pretty small amount compared to the total mortgage but it's not much hassle to do.

[joropug]

RizzoTheRat said:

If someone said "do you want this £1500", presumably you'd say yes, so how much effort is too much for £1500?

I agree that it's a pretty small amount compared to the total mortgage but it's not much hassle to do.

This!

£1500 is £1500, or push it a bit more and add some more to savings and keep even more reward.

[Sir Bagalot]

Savings all day long but you have to be disciplined enough not to touch it

[Douglas Quaid]

If I had it in savings the wife would definitely suggest spending it on a holiday so I would rather pay it off the mortgage otherwise it would probably be spent. Your wife may be different to mine but mine likes wine and spending.

[anonymous-user]

borrowdale said:

Typically penalties for overpayment only apply for the fixed rate period, so when that ends and you re-mortgage (maybe with another lender), you can redeem the old mortgage with your savings + new mortgage.

With most mortgages you can overpay by 10% during the fixed term.

For this to work you would need to wait until the fixed rate ended and you went onto the variable rate. Then pay off your three years worth of savings and then have another fixed rate starting a few days later.

Not impossible but sounds like a bit of hassle and stress with timing. Plus the variable rate on some mortgage is over 9% now so may take up a chunk of the £1500.

Personally I am just overpaying 10% even though my mortgage is 2.84%

[Abdul Abulbul Amir]

Joey Deacon said:

borrowdale said:

Typically penalties for overpayment only apply for the fixed rate period, so when that ends and you re-mortgage (maybe with another lender), you can redeem the old mortgage with your savings + new mortgage.

With most mortgages you can overpay by 10% during the fixed term.

For this to work you would need to wait until the fixed rate ended and you went onto the variable rate. Then pay off your three years worth of savings and then have another fixed rate starting a few days later.

Not impossible but sounds like a bit of hassle and stress with timing. Plus the variable rate on some mortgage is over 9% now so may take up a chunk of the £1500.

Personally I am just overpaying 10% even though my mortgage is 2.84%

Some mortgages allow unlimited overpayments for a period close to the very end of the product term period...one to check with the lender.

[MrBen986]

Save the money, and pay off the mortgage just before the end of the fixed period = make free money. I did exactly this.

The only requirements are being organised, keeping a close eye on best savings deals, and being disciplined enough to keep those funds absolutely ringfenced to pay into the mortgage just before the fixed period ends (unless rates have drastically changed by then and there is a benefit of doing something else).