Why overpay a mortgage?
Discussion
I have savings earning approx 3% & a fixed mortgage at 2.5%, with up to 10% of original mortgage value in overpayments allowed per year without penalty.
Am I missing something or does it only makes sense to overpay a mortgage if your savings interest is lower than your mortgage interest?
I've not remortgaged before, but am I right in thinking that if I want to reduce the total mortgage sum, I can just chuck my savings in as a lump sum, whatever the amount, at the point of remortgaging?
Am I missing something or does it only makes sense to overpay a mortgage if your savings interest is lower than your mortgage interest?
I've not remortgaged before, but am I right in thinking that if I want to reduce the total mortgage sum, I can just chuck my savings in as a lump sum, whatever the amount, at the point of remortgaging?
Edited by DaveCWK on Wednesday 4th October 16:30
Are your savings earning 3% gross, or 3% after tax. I would imagine the former and therefore your net return would be higher by paying down your mortgage rather than keeping the cash on deposit (I am also assuming the 3% is from a fixed term deposit account).
Basically (assuming 3% gross interest on savings and 2.5% mortgage interest) it depends on the level of savings too. If the interest is all within your tax free interest allowance then you may be better off as you are. This is highly unlikely though when you factor in the reduction in overall mortgage payments (compound interest on the outstanding capital) and you would be in an unusable position if not paying down the mortgage was the best move for you.
Sarnie is likely your man on this one as he is excellent with all things mortgage related.
Basically (assuming 3% gross interest on savings and 2.5% mortgage interest) it depends on the level of savings too. If the interest is all within your tax free interest allowance then you may be better off as you are. This is highly unlikely though when you factor in the reduction in overall mortgage payments (compound interest on the outstanding capital) and you would be in an unusable position if not paying down the mortgage was the best move for you.
Sarnie is likely your man on this one as he is excellent with all things mortgage related.
Why do it?
1. It's a risk free way of reducing net interest charges over the long term.
2. It's proving to your current mortgage provider or future mortgage provider you have evidenced a history of overpaying and reducing debt vs simply stating you will.
3. It's alarming at how something like £10pcm can make a difference. So some people say decide to only have 4 costas a week not 5 and put that saving into the overpayment. Then reduce further. Then look at household bills and utility bills - all the savings you achieve put it into an ever increasing mortgage overpayment.
As such you can really see the hard work you've done/reduced lifestyle or been more efficient pay dividends.
4. The fun factor of seeing that mortgage free date accelerating towards you.
5. Regular monthly payments at a set level in effect prepares you for what would happen IF rates went up to x%. You could work out exactly what the effective interest rate would be that you are currently paying so have that buffer. It's a great idea and upping it say on annual salary uplifts are another great way of doing it (or go 50:50 save 50% and say nicer car or meals out 50%).
On our last house overpaying the mortgage became an addiction - we got to the point of effectively paying 15% interest rates so had nothing to worry about. As it turned out doing that reduced our term from 25years to 12 years in what felt like no time. It also meant the next step up the property ladder was so much easier.
There are many who go interest only or stretch the mortgage term to 35-40 years believing that they can invest and get far better returns than paying down the mortgage resulting in effectively clearing it sooner.
There are some people who simply have no intention on paying off the mortgage the strategy is either remortgage at the end of the term / sell and downgrade to a smaller house for retirement and enjoy the £ capital growth a higher priced house gives over 25-40 years.
MOST people are poor in financial control or don't invest the best way or frankly know what the options are or are not. Hence the repayment mortgage it's a forced savings vehicle in another name. Just think if most people can become mortgage free by early 50's in the forever home they then have 15 odd years of saving what they used to pay as mortgage to be additional retirement savings over and above what they have invested to date. Surely that's a nice position to be in.
There is no wrong or right answer but if your overpaying a mortgage yet have 18% Credit card debt that's firmly in the no camp.
Best of luck PHer
1. It's a risk free way of reducing net interest charges over the long term.
2. It's proving to your current mortgage provider or future mortgage provider you have evidenced a history of overpaying and reducing debt vs simply stating you will.
3. It's alarming at how something like £10pcm can make a difference. So some people say decide to only have 4 costas a week not 5 and put that saving into the overpayment. Then reduce further. Then look at household bills and utility bills - all the savings you achieve put it into an ever increasing mortgage overpayment.
As such you can really see the hard work you've done/reduced lifestyle or been more efficient pay dividends.
4. The fun factor of seeing that mortgage free date accelerating towards you.
5. Regular monthly payments at a set level in effect prepares you for what would happen IF rates went up to x%. You could work out exactly what the effective interest rate would be that you are currently paying so have that buffer. It's a great idea and upping it say on annual salary uplifts are another great way of doing it (or go 50:50 save 50% and say nicer car or meals out 50%).
On our last house overpaying the mortgage became an addiction - we got to the point of effectively paying 15% interest rates so had nothing to worry about. As it turned out doing that reduced our term from 25years to 12 years in what felt like no time. It also meant the next step up the property ladder was so much easier.
There are many who go interest only or stretch the mortgage term to 35-40 years believing that they can invest and get far better returns than paying down the mortgage resulting in effectively clearing it sooner.
There are some people who simply have no intention on paying off the mortgage the strategy is either remortgage at the end of the term / sell and downgrade to a smaller house for retirement and enjoy the £ capital growth a higher priced house gives over 25-40 years.
MOST people are poor in financial control or don't invest the best way or frankly know what the options are or are not. Hence the repayment mortgage it's a forced savings vehicle in another name. Just think if most people can become mortgage free by early 50's in the forever home they then have 15 odd years of saving what they used to pay as mortgage to be additional retirement savings over and above what they have invested to date. Surely that's a nice position to be in.
There is no wrong or right answer but if your overpaying a mortgage yet have 18% Credit card debt that's firmly in the no camp.
Best of luck PHer
red_slr said:
If you are only seeing around 3% on your investments it might be better to look at why that is. I would expect at least twice that as a base number.
OP did refer to 'savings' and specifically to 'savings interest', so the returns seem entirely risk appropriate.....Given that, and no reference to what risk he might take with any investments (which might be more, less or the same as you), I'm not sure its possible to extrapolate what might be a risk appropriate return on them either.
The other key thing to consider is life insurance so that if the worst ever happens you or your wife /partner will have no mortgage to worry about plus possibly a bit extra rather than have to deal with the loss/grief then the massive change in lifestyle (if children are involved even more so).
This isn't a lot pcm for that total piece of mind - IIRC £12pcm would be more than ample for most people.
This isn't a lot pcm for that total piece of mind - IIRC £12pcm would be more than ample for most people.
In 1991 I took out a straightforward repayment mortgage of around £200,000 over the then usual 25 year term. When the interest rates increased I increased my monthly payment, when interest rates reduced I kept to the same monthly payment. The result? Mortgage fully paid off in 10 years. Could have been the best financial decision I ever made.
R.
R.
Welshbeef said:
red_slr said:
If you are only seeing around 3% on your investments it might be better to look at why that is. I would expect at least twice that as a base number.
"Expect" in my world means risk free. Please direct me to limitless 6% investments thanks.
I am just trying to offer advice, no need to get snappy.
The chap needs to sit down and review his position, risk profile, targets etc
red_slr said:
Yes I did say "I would expect" and I would.
I am just trying to offer advice, no need to get snappy.
The chap needs to sit down and review his position, risk profile, targets etc
Not snappy. I am just trying to offer advice, no need to get snappy.
The chap needs to sit down and review his position, risk profile, targets etc
Glancing at one of my unit trusts YTD Jan to Sept it has done low 7%'s and another is high 5%'s as an example but my capital is at risk.
Well I never, between 5 and 7 you find..... 
Personally, its down to your own risk profile but I think long term I would expect at the very least 6% ish.
Given the OP is talking about over paying the mortgage I assume this is "spare" cash each month so its never going to be worth zero. If it is the whole world is stuffed. Sure might go up and down but if this is a long term thing (like a mortgage) then over time I don't see its a big deal just now with rates as low as they are to invest rather than overpay. Now if rates get anywhere over 3.something % I think it would be a different story, assuming savings / investment returns did not match pace.
Personally, its down to your own risk profile but I think long term I would expect at the very least 6% ish.
Given the OP is talking about over paying the mortgage I assume this is "spare" cash each month so its never going to be worth zero. If it is the whole world is stuffed. Sure might go up and down but if this is a long term thing (like a mortgage) then over time I don't see its a big deal just now with rates as low as they are to invest rather than overpay. Now if rates get anywhere over 3.something % I think it would be a different story, assuming savings / investment returns did not match pace.
Maxf said:
There is also a nice psychological boost when your mortgage account reads zero - I imagine... I'm miles off that!
There is, that's a definite weight off the shoulders day.There is no right or wrong answer to this, devil is in the detail regarding personal attitudes and the numbers.
For example I wouldn't consider lumping personal savings into the mortgage if that then left me without X months of income equivalent still in readily accessible savings / investments / rainy day money, and then some extra in more long term savings. The value of the number X above depends on your own attitude to risk. Somewhere around 9-12 was my minimum.
Agree with comments earlier too many people are bad at managing money. I'm not brilliant, too cautious probably, if can't afford it then don't buy it. Too many are hand to mouth when they really shouldn't be given a really good income, but in reality are only a couple of pay cheques away from disaster simply due to lifestyle. Sorry that's not meant to sound sanctimonious but it constantly amazed me what stuff folks spend money on but when pushed have to scratch around for an unexpected bill.
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