Mortgage overpayments

[Elpenor]

Right so I’m a very lucky person with a mortgage fixed until 2032 with interest at 2.09% - I’m also fortunate to have no other debt.

My mortgage has a 27 year term, which will run until I’m almost 68. I’m also a fairly poorly paid public sector worker, which factors into my personal finance decision making. I would like to be able to pay it off early, as it may allow me to retire early or reduce my hours. I know it could be better invested elsewhere but that’s not really my goal

Anyway I’ve just switched to a first direct bank account which gives me a £250 interest free overdraft. I never go into my overdraft normally, so I’m seeing this as £250 extra headroom each month and an opportunity to use this towards mortgage overpayments which would drastically reduce the mortgage term.

Does this plan make sense? My thought was the day before payday I could overpay the mortgage to reduce my current account balance to -£249

Thanks

 

[rubbershoes]

You can do it once, but unless you get a pay rise of £250 per month, you won't be able to do it the next month

 

[Elpenor]

You can do it once, but unless you get a pay rise of £250 per month, you won't be able to do it the next month

Yes I did realise that … my point was that essentially every month, I can reduce my balance to -£249 by overpaying. I suppose I was also wondering whether it would cause a credit rating issue if I was consistently in the (approved and interest free) overdraft

And yes, somehow I hadn’t realised that I could have been doing this all along when I had no overdraft by reducing my balance to £1 each month just before payday

 

[platinumsage]

There are savings accounts with a better rate than 2.09, and savings rates are likely to increase. It therefore makes more sense to save the money and use it to pay down the mortgage at a later date.

 

[Elpenor]

There are savings accounts with a better rate than 2.09, and savings rates are likely to increase. It therefore makes more sense to save the money and use it to pay down the mortgage at a later date.

That is true, but I am concerned that money in a savings account is too accessible.

 

[Puddy_Tat]

Right so I’m a very lucky person with a mortgage fixed until 2032 with interest at 2.09% - I’m also fortunate to have no other debt.

hmph. had a change of job last summer not gone spectacularly wrong, i might have moved house and taken out a mortgage some time round the start of this year...

You can do it once, but unless you get a pay rise of £250 per month, you won't be able to do it the next month

yes, unless you can overpay £ 250 every month, then not sure i follow the logic of this.

and then read the small print of your mortgage - the amount of overpayment they will allow varies.

I suppose I was also wondering whether it would cause a credit rating issue if I was consistently in the (approved and interest free) overdraft

maybe, not sure.

That is true, but I am concerned that money in a savings account is too accessible.

there are savings accounts out there that involve a fixed term, or at least a notice period for withdrawals (and they tend to pay higher interest - although if it's also a fixed rate now that may not be a good deal if interest rates hit double figures some time next year) some banks / building societies have an attractive initial rate, but usually limited to not all that big an amount.

and depends if you already have some other savings - aiming to be at the limit of your overdraft just before every pay day doesn't allow a lot of scope for any emergencies, and may mean a (more expensive) loan if you suddenly need to spend money on house or car repairs or something.

 

[Supine]

I think £250 over the term of the mortgage will make sod all difference tbh. Better to increase your payment dd by a tenner or something manageable if possible so it’s regular.

I suspect the credit rating will be impacted as well.

 

[Hollis]

Personally if you want to pay it off early, and you're only paying 2.09% interest, I'd stick any surplus cash you have each month in some global index tracker and forget about it for 10 years.. then see what interest rate you can fix into then, if you can still get a good rate, keep it in the index tracker for another 10 years!

 

[baldrick]

Even small amounts can make a significant difference to the overall mortgage term if they are paid regularly - compound interest in reverse if you like

MSE has a great tool for playing with overpayments. It does feel like initially like you're not making headway but if you can afford any kind of regular overpayment I reckon by the time you come to remortgage you'll have taken years off the term.

 

[WouldBe]

Always using your overdraft will affect your credit rating. Might be better to pay any spare cash each month towards the mortgage and have the overdraft available for any emergencies.

 

[Epona]

Do not go into other debt to pay off a mortgage.

Your overdraft may not be interest free forever and once you are down that rabbit hole it is difficult to get back out of it.

Your mortgage is likely to be the lowest interest rate over a long term deal that you will ever get.

If you can make extra payments on it then great, but do not go into debt elsewhere to do so.

 

[Elpenor]

It’s an interest free overdraft if £250 as per the OP

 

[Supine]

It’s an interest free overdraft if £250 as per the OP

My overdraft is ‘interest free’ as well. It has usage costs that are significant though…

 

[platinumsage]

250 quid for one month off a 2.09% mortgage is a 43p saving. Keep it knocked off and on your overdraft until 2032 and you’ll save a maximum of £52.50 off your total mortgage repayment.

 

[Elpenor]

I don’t think I’ve explained my intention very well; it’s simple I thought - rather than reduce my current account balance to £1 every month, reduce it to -£249

I realise it’s not a “new” £250 each month; my point was simply that I have an extra £250 headroom each month.

There is no usage cost charge or interest on an overdraft of up to £250 with a first direct account

Overdrafts | Bank Account With Overdraft - first direct

An overdraft is a short-term way to borrow money on your current account and can help with unplanned expenses. Use our overdraft calculator and learn more here.

www.firstdirect.com

 

[Supine]

I don’t think I’ve explained my intention very well; it’s simple I thought - rather than reduce my current account balance to £1 every month, reduce it to -£249

I realise it’s not a “new” £250 each month; my point was simply that I have an extra £250 headroom each month.

There is no usage cost charge or interest on an overdraft of up to £250 with a first direct account

Overdrafts | Bank Account With Overdraft - first direct

An overdraft is a short-term way to borrow money on your current account and can help with unplanned expenses. Use our overdraft calculator and learn more here.

www.firstdirect.com

You explained it well enough. It just isn’t a good plan!

 

[Hollis]

On a practical note, whenever I try doing something "clever" like this, I invariably fuck up, and end up paying more in interest/fees.... Hence my limited use of credit cards..

 

[quimcunx]

I don’t think I’ve explained my intention very well; it’s simple I thought - rather than reduce my current account balance to £1 every month, reduce it to -£249

I realise it’s not a “new” £250 each month; my point was simply that I have an extra £250 headroom each month.

There is no usage cost charge or interest on an overdraft of up to £250 with a first direct account

Overdrafts | Bank Account With Overdraft - first direct

An overdraft is a short-term way to borrow money on your current account and can help with unplanned expenses. Use our overdraft calculator and learn more here.

www.firstdirect.com

But you don't have 250 extra headroom each month.

If you use it once you won't be able to use it again until you pay it back.

Just pay an extra 5 or 10 quid each month off your mortgage. Stop if you can't afford it. Increase it if you can afford to.

 

[WouldBe]

I don’t think I’ve explained my intention very well; it’s simple I thought - rather than reduce my current account balance to £1 every month, reduce it to -£249

I realise it’s not a “new” £250 each month; my point was simply that I have an extra £250 headroom each month.

There is no usage cost charge or interest on an overdraft of up to £250 with a first direct account

Overdrafts | Bank Account With Overdraft - first direct

An overdraft is a short-term way to borrow money on your current account and can help with unplanned expenses. Use our overdraft calculator and learn more here.

www.firstdirect.com

It will affect your credit rating though by being close to your credit limit each month.

 

[Elpenor]

From that link on the overdraft

£250 of your overdraft interest-free​

Too much month left at the end of your money?

• no interest charges on the first £250 of your arranged overdraft and 39.9% EAR variable on anything above £250 (subject to status)

 

[WouldBe]

From that link on the overdraft

That doesn't make sense. If you have 'too much money left' at the end of the month then you won't need to use your overdraft.

 

[quimcunx]

That doesn't make sense. If you have 'too much money left' at the end of the month then you won't need to use your overdraft.

month left at the end of your money.

 

[Elpenor]

That doesn't make sense. If you have 'too much money left' at the end of the month then you won't need to use your overdraft.

Read it again

 

[WouldBe]

month left at the end of your money.

Doh.

 

[fuck seals]

my point was simply that I have an extra £250 headroom each month.

No. It's the same 250 each month. Not an extra 250 each month. Unless you are opening a new account each month.

Terrible idea.

 

[StoneRoad]

Depends on the terms of the mortgage ...
Speaking as one who suffered through the bonkers high interest rates in the past.

Best to accumulate enough savings [in an ISA] to make periodic repayments off the capital owed.
I used to make an annual capital repayment when finances allowed.

Make sure that they don't count it as early payment of accrued interest.
Nor charge you for partial / early repayment.

 

[Puddy_Tat]

I still don't really understand.

Paying a single £ 250 overpayment now isn't going to make that much of a difference to the mortgage.

Planning to go up to an overdraft limit every month doesn't sound sensible - if there is a sudden emergency, the interest rates either on extending the overdraft, running up a credit card bill, or taking out a loan, will be a lot bigger than any saving off the mortgage.

I'd advocate finding a savings account that isn't 'instant access' (some will have a better interest rate if you only make 1 or 2 withdrawals a year, for example) - bung some spare money in to that each month if you can (either as and when or if you can afford to, set up a standing order) then maybe every year consider paying a bit of mortgage overpayment.

 

[sheothebudworths]

I don't understand either - you are literally only proposing to pay a single additional £250 payment off the mortgage, ultimately?

 

[ATOMIC SUPLEX]

I had an interest only mortgage that I could make 10% overpayments on (though that was 20% for the first few years for some reason). Then every time my term ended (every two or three years) I would chuck everything I had at it.
It seemed like throwing pennies down a bottomless pit at first, but surprisingly it snowballed quite quickly (especially towards the end).
I know it is not ideal for everyone, but if you have any money to spare and are allowed to make capital repayment overpayments, I say do it.

I honestly don't know how I would be able to survive in todays climate if I hadn't wiped out my mortgage.

 

[sheothebudworths]

If you do want to overpay, to reduce the overall interest/years you will have it (I say that because afaik you have to opt for that over lowering your monthly payments over time instead, which doesn't reduce the overall amount paid) then you need to check what percentage is allowed to be overpaid each year, without incurring early repayment charges, and then work out the stuff around whether you would actually benefit more from HIGHER rates if you just saved the money instead.

It might be that you would still prefer to overpay (going on what you have said about worrying about access to any savings you put aside with the intention of doing that) - but I can't see how this plan does that.

You are just paying off £250 but then constantly staying at the limit of your overdraft.


Incase it's helpful, my mortgage allowed a max 10% overpayment each year, but anything above that (early repayment charges) was charged at a reducing rate of 5% in the 1st year, 4% in the 2nd etc, until there was no ERC.

I think that's fairly standard but you would have to check.

Like others have said though, if you can actually get a better rate for saving any extra money, and keep your hands off it, you're better off doing that.

The fact that your overdraft is interest free is just not relevant once you've made ONE overpayment of £250.
There is no more benefit to you in terms of your mortgage - you are just going to be continually, extremely close to your overdraft limit each month afterwards.

ETA - mine wasn't interest only, it was repayment - I think the 10% is fairly standard but you just have to check your mortgage agreement for that and how any ERC's are calculated.