Benefits to overpaying on a mortgage?

[Riknos]

I'm pretty new to this whole mortgage malarky, currently on a 2 year fixed term with just under a year left. I have a lodger currently, but wont be forever, and as I'm getting some extra cash from him I've started stashing it in a savings account. Now I'm wondering, if it would be of a benefit to over pay on my mortgage say £100 a month instead? I read through the paperwork and saw there would be a charge for overpaying in the first year, didn't mention the second.. I wont be looking to move any time soon, and wondered in idiot speak what the real world benefits would be for it. From my limited understanding of the pages and pages of documents on the subject, if I overpay it now, I pay less interest than letting it come out on a monthly basis? Also, I'll benefit from having more equity in the properly, which will benefit when I come to upgrade to a more expensive properly in years to come? Or have I got this wrong?

Any advice much appreciated!

[ILoveLamp]

If your savings/investments yield a better return than your mortgage interest rate, then continue to save/invest. If your mortgage rate is higher (or any other debts you have), then pay these off first.

However: As savings are so shoddy at the minute, I would be repaying the mortgage as much as possible. House prices are unlikely to drop significantly, yet interest rates will go back up.

Every penny you pay off, is a penny less subjected to an interest charge Overpaying your mortgage by a small amount each month can take years off the repayment term.

Good info here: http://www.moneysavingexpert.com/mortgages/mortgag...

[Fatman2]

Best way to work it out is on a spreadsheet. You really need to do this to fully understand the importance of overpaying a mortgage. It's shocking!

I did this myself a few years back and you can literally halve the term without paying twice the repayments

[spud989]

http://new.egg.com/visitor/0,2388,3_54988--View_10...

Might be of some use to you.

[Riknos]

Cheers for the responses / links. I'm not putting the money into savings to earn interest, more to stop myself from spending it. I'm also not that bothered about the term as it's 35 years and I took it out when I was 23.

[ILoveLamp]

Riknos said:

Cheers for the responses / links. I'm not putting the money into savings to earn interest, more to stop myself from spending it. I'm also not that bothered about the term as it's 35 years and I took it out when I was 23.

100% Put it into the mortgage then.

35 years could easily be reduced to 20 without overpaying by a substantial amount.

IIRC, doubling your mortgage repayments brings it from 25 years to about 8 (not that I'm implying you'll double repayments, but you can see that paying double reduces it by more than half!)

[Alex]

Also, don't forget: There is no tax to pay on interest saved.

[MATTP77]

Basically, If you can afford it - then pay it off as quickly as you can to avoid interest & tax upon said interest?

That's how i interpret it, anyway!

[GT03ROB]

As a different take on the answer. How much savings do you currently have? Having a reasonable wedge of liquid rainy day savings will serve you better, then start over paying the mortgage. Overpayments are effectively gone forever.

Or get an offset mortgage & combine the two.

[Riknos]

GT03ROB said:

As a different take on the answer. How much savings do you currently have? Having a reasonable wedge of liquid rainy day savings will serve you better, then start over paying the mortgage. Overpayments are effectively gone forever.

Or get an offset mortgage & combine the two.

Current savings are only about 4-5 months worth of putting away the money from my lodger, with a seperate emergency fund which equates to about 2 1/2 times his payments.

I am trying to save some money as I still need to finish off the kitchen, the hallway, and buy some more furniture.. so don't want to sink it all into the mortgage, I was thinking more along overpaying by about £100 a month.

[Alfa numeric]

Alex said:

Also, don't forget: There is no tax to pay on interest saved.

Shhh! Don't give them ideas...

[fandango_c]

Riknos said:

GT03ROB said:

As a different take on the answer. How much savings do you currently have? Having a reasonable wedge of liquid rainy day savings will serve you better, then start over paying the mortgage. Overpayments are effectively gone forever.

Or get an offset mortgage & combine the two.

Current savings are only about 4-5 months worth of putting away the money from my lodger, with a seperate emergency fund which equates to about 2 1/2 times his payments.

I am trying to save some money as I still need to finish off the kitchen, the hallway, and buy some more furniture.. so don't want to sink it all into the mortgage, I was thinking more along overpaying by about £100 a month.

If you overpay your mortgage, you won't be able to get the money back easily.
As you only have a small amount of savings already, it may make more sense to save rather than overpay, so you have some cash easily available for a rainy day.
If you can offset your mortgage, then this would be a good option.

[fergywales]

fandango_c said:

Riknos said:

GT03ROB said:

As a different take on the answer. How much savings do you currently have? Having a reasonable wedge of liquid rainy day savings will serve you better, then start over paying the mortgage. Overpayments are effectively gone forever.

Or get an offset mortgage & combine the two.

Current savings are only about 4-5 months worth of putting away the money from my lodger, with a seperate emergency fund which equates to about 2 1/2 times his payments.

I am trying to save some money as I still need to finish off the kitchen, the hallway, and buy some more furniture.. so don't want to sink it all into the mortgage, I was thinking more along overpaying by about £100 a month.

If you overpay your mortgage, you won't be able to get the money back easily.
As you only have a small amount of savings already, it may make more sense to save rather than overpay, so you have some cash easily available for a rainy day.
If you can offset your mortgage, then this would be a good option.

My mortgage allows me to over pay and take payment holidays from over payment amounts, providing it is within the same year.

[TheD]

The offset deal is a good one. It pays off a little each year while keeping your savings for an emergency

[NoelWatson]

ILoveLamp said:

House prices are unlikely to drop significantly until interest rates go back up.

EFA

[BoRED S2upid]

Instead of overpaying monthly why not over pay yearly if you can afford it say over pay £2000 at the end of the year, certainly don't put every penny you can afford into your mortgage life is too short for that.

[Jockman]

Alfa numeric said:

Shhh! Don't give them ideas...

Marc - Congrats on being quoted in the April edition of Moneywise (pg 50)

You can retire a happy man now

[supersport]

fandango_c said:

Riknos said:

GT03ROB said:

As a different take on the answer. How much savings do you currently have? Having a reasonable wedge of liquid rainy day savings will serve you better, then start over paying the mortgage. Overpayments are effectively gone forever.

Or get an offset mortgage & combine the two.

Current savings are only about 4-5 months worth of putting away the money from my lodger, with a seperate emergency fund which equates to about 2 1/2 times his payments.

I am trying to save some money as I still need to finish off the kitchen, the hallway, and buy some more furniture.. so don't want to sink it all into the mortgage, I was thinking more along overpaying by about £100 a month.

If you overpay your mortgage, you won't be able to get the money back easily.
As you only have a small amount of savings already, it may make more sense to save rather than overpay, so you have some cash easily available for a rainy day.
If you can offset your mortgage, then this would be a good option.

This depends on who your mortgage is with. The Nationwide for example allow to either take a payment holiday and or get the money back as the overpayments are "kept" in separate box.

[Porkbrain]

supersport said:

This depends on who your mortgage is with. The Nationwide for example allow to either take a payment holiday and or get the money back as the overpayments are "kept" in separate box.

I overpaid my Nationwide mortgage every month to end it early. They had the extremely annoying policy that any time that the fixed portion that you pay changed by a tiny percentage, (this was between 2004 & 2009), then they would default to lowering the fixed portion to keep the term the same. Each time this happened I had to phone them and demand that the term was reduced not the fixed amount.

[cailean]

If you make the equivalent of 13 instalments in a year instead of 12 I think you end up repaying the mortgage about 5 years "early". The power of compounding is often said to be one of the wonders of the world if you know how to use it (for repaying debt or the other way around for investing).

If your priority is financial freedom then paying off the mortgage early should be your aim