Mortgage overpayments

[stdP]

I'm one of those people who's sinking almost all spare cash at the end of the month in to over-paying their mortgage. It's great! So far I've shaved 6 years off a 25yr mortgage, so (complex remortgaging calculations excluded) I'll not only be paying 6yrs less interest but also get to keep the mortgage money six years earlier. I've also got a comparatively generous "overpay 10% of the initial mortgage amount a year without incurring any charges" on mine, but your details may vary.

But it doesn't make any sense at all do go into debt/overdraft for the sake of doing so. You don't have to overpay by lump sum - as someone else upthread said, just increase your monthly payments by £WhateverSpareCashYouUsuallyHaveAtTheEndOfTheMonth and you should be in a better spot. Your £250 overdraft is a one-off thing and if you're ever unable to make up the balance you're likely to get stiffed on a 30-40% interest charge (assuming you have those terms on your current account). If you're already living within your means and have a £250 interest-free overdraft, as others have said you'll only be able to make one ~£250 overpayment. An extra £20 going on the mortgage each month, every month, for years, will likely result in a much more substantial reduction.

Someone upthread also mentioned the MSE overpayment calculator:

Mortgage Overpayment Calculator: Pay off your debt early?...

Mortgage Overpayment Calculator shows how much you can save by paying off your mortgage early - if your mortgage allows overpayments.

www.moneysavingexpert.com

You can also do the same in a spreadsheet of course (it's just compound interest), but I'd also suggest you stick some numbers in that and see what comes out. A one-off overpayment of "only" £250 isn't likely to amount to a whole hill of beans, but even a modest overpayment on your monthly repayment is likely to build up a decent enough reward over time.

 

[beesonthewhatnow]

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

This is either fairly daft - a single payment of £250 off your mortgage, taking you into debt to do so, or I don’t understand what you’re saying. Going into an overdraft doesn’t give you any more money or headroom, you’re still paid the same each month.

 

[moomoo]

I do not understand this. You’re going to use your £250 overdraft to over pay your mortgage? And then have to pay £250 from your wages to pay the overdraft? Which will leave you £250 short from the off. So you might as well overpay it straight from your wages, no?

 

[Shippou-Sensei]

Is this just a technique to get money out if your current account where you might spend it?

In that case I can kinda understand. I transfer a bit of money into a savings account after paying into the mortgage and I do sometimes take it back out again.
However that is usually for bills I have not accounted for. Having it somewhere means I don't fuck up my payments anymore.

 

[platinumsage]

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

Do you have any savings at all for emergencies? If you can't trust yourself not to spend accessible cash in your accounts then I'm not sure that deliberately living permanently in an overdraft is a solution to anything.

 

[Callie]

Another vote for staying away from the overdraft and increasing monthly payments. I need to reassess what I'm doing though as my mortgage deal is ending soonish so need to know if increased repayments > savings rates.

Little bit concerned about how rates are going to impact my mortgage but part of the point of increased repayments for me was demonstrating I could afford to pay more.

 

[xenon]

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.

Yeah I thought my brain was broken. how do you get the extra 250 the next month to take you back to where you were. And if you have it why bother going into your overdraft in the first place.

 

[danski]

Little bit concerned about how rates are going to impact my mortgage but part of the point of increased repayments for me was demonstrating I could afford to pay more.

Paying off more, sooner will also help your LTV when you remortgage

 

[MickiQ]

Pay a small amount extra off your mortgage each month, I did that and when it came to redeem it I had reduced it by £thousands. It's compound it starts off small but snowballs and I just didn't miss an extra 20 or 30 quid per month.

 

[MBV]

Agree with others saying do not use overdraft. Just round up your monthly mortgage payment to the figure you wish to pay providing you have already to a rainy day fund for emergencies/

 

[marty21]

I'm one of those people who's sinking almost all spare cash at the end of the month in to over-paying their mortgage. It's great! So far I've shaved 6 years off a 25yr mortgage, so (complex remortgaging calculations excluded) I'll not only be paying 6yrs less interest but also get to keep the mortgage money six years earlier. I've also got a comparatively generous "overpay 10% of the initial mortgage amount a year without incurring any charges" on mine, but your details may vary.

But it doesn't make any sense at all do go into debt/overdraft for the sake of doing so. You don't have to overpay by lump sum - as someone else upthread said, just increase your monthly payments by £WhateverSpareCashYouUsuallyHaveAtTheEndOfTheMonth and you should be in a better spot. Your £250 overdraft is a one-off thing and if you're ever unable to make up the balance you're likely to get stiffed on a 30-40% interest charge (assuming you have those terms on your current account). If you're already living within your means and have a £250 interest-free overdraft, as others have said you'll only be able to make one ~£250 overpayment. An extra £20 going on the mortgage each month, every month, for years, will likely result in a much more substantial reduction.

Someone upthread also mentioned the MSE overpayment calculator:

Mortgage Overpayment Calculator: Pay off your debt early?...

Mortgage Overpayment Calculator shows how much you can save by paying off your mortgage early - if your mortgage allows overpayments.

www.moneysavingexpert.com

You can also do the same in a spreadsheet of course (it's just compound interest), but I'd also suggest you stick some numbers in that and see what comes out. A one-off overpayment of "only" £250 isn't likely to amount to a whole hill of beans, but even a modest overpayment on your monthly repayment is likely to build up a decent enough reward over time.

I did pay more than the monthly mortgage payment for many years - it didn't reduce the mortgage period - it remained a 25 year mortgage - but it did reduce the monthly payments - the building society just recalculated the payments every year to reflect that I had reduced the debt .

 

[urbanspaceman]

Two points:

1) Your plan, as I understand it, is risky, and of negligible benefit
2) At the amazingly low and predictable mortgage rate you are paying, there is no benefit in paying the mortgage off faster. If you have spare cash, better uses for it are: a) build up an emergency fund in an instant access savings account, and/or b) do some long term investment in an ISA, in a super-diversified fund you can walk away from and "forget" about, eg Vanguard FTSE All-World ETF ( VWRL ) and/or c) spend it on yourself to enjoy life

 

[ddraig]

When repayment went down by a hundred odd a month kept paying the old amount so an extra hundred odd has been paid for a while
Had a letter recently about interest rates and wondering what the new monthly payment will be!!
Can take a bit of the sting out of it by cancelling the overpayment tho, very luckily

 

[maomao]

It would save you about 34p a month in interest payments for as long as you keep it up. While affecting your credit score (though I was max overdrawn for years and have an excellent credit record) and leaving you without the cushion an overdraft can provide.

 

[kabbes]

This thread is up there with Spy’s magic age calculation

 

[friendofdorothy]

I agree best keep your overdraft for emergencies and slip ups.

Use everything other spare penny to overpay your mortgage or into savings ac and use that to overpay once a year or so (if interest rates are better than the rate you are being charged on your mortgage that is) and as some one said up thread do double check they are not going to charge you for overpaying the mortgage.

Good luck.

 

[friendofdorothy]

This thread is up there with Spy’s magic age calculation

yes some of us are old enough to have paid them off.

 

[Bahnhof Strasse]

I did pay more than the monthly mortgage payment for many years - it didn't reduce the mortgage period - it remained a 25 year mortgage - but it did reduce the monthly payments - the building society just recalculated the payments every year to reflect that I had reduced the debt .

What you need to do is set your direct debit for the higher amount that you wish to pay. We did and took a 25 year mortgage down to 8 years

 

[marty21]

What you need to do is set your direct debit for the higher amount that you wish to pay. We did and took a 25 year mortgage down to 8 years

It's paid off now anyway - paid off about a year early - strangely I paid by Standing Order - just changed it when they wrote to me about the next year's charge.

 

[marty21]

This thread is up there with Spy’s magic age calculation

On one hand, I'm glad the mortgage is paid off and I don't have to worry about interest rate hikes, on the other hand , it means I'm ancient

 

[sheothebudworths]

What you need to do is set your direct debit for the higher amount that you wish to pay. We did and took a 25 year mortgage down to 8 years

I just made random overpayments - but (either way, I think?) on my mortgage account, there was an option for overpayments to either reduce the monthly amount, over the original term (which also meant no reduction in the interest/ultimate cost) or to keep the monthly payments the same and reduce the term (and therefore the interest paid).

 

[stdP]

I did pay more than the monthly mortgage payment for many years - it didn't reduce the mortgage period - it remained a 25 year mortgage - but it did reduce the monthly payments - the building society just recalculated the payments every year to reflect that I had reduced the debt .

Most mortgages will do this by default - I know mine did - as it's in their interest to keep you on the hook paying interest for as long as possible. I had to ask that they reduce the term rather than reduce payments.

If you can afford to overpay and not need to reduce your monthly payments, you'll get out under the interest all the sooner.

 

[UnderOpenSky]

It seems the sensible advice is to have it an high intrest rate account and pay it back at the end of the fixed rate, so I'm worried if we do that the money will end up being used for some thing else again. ISAs and stuff are meant to be sensible, but I've constantly lossed money on them since I put a bit aside, so wish I hadn't bothered.

 

[marty21]

Most mortgages will do this by default - I know mine did - as it's in their interest to keep you on the hook paying interest for as long as possible. I had to ask that they reduce the term rather than reduce payments.

If you can afford to overpay and not need to reduce your monthly payments, you'll get out under the interest all the sooner.

I guess I could have asked too late now.

 

[teuchter]

I don't see any sensible reason not to pay whatever you can afford into a savings account with a higher interest rate than the rate on the mortgage - instead of paying off bits of the mortgage - unless it's really the case that you would be unable to control yourself from going and spending the stuff in the savings account.

 

[kabbes]

I don't see any sensible reason not to pay whatever you can afford into a savings account with a higher interest rate than the rate on the mortgage - instead of paying off bits of the mortgage - unless it's really the case that you would be unable to control yourself from going and spending the stuff in the savings account.

You need to make sure that your savings rate is superior post-tax, of course. So that depends on your marginal tax rate and existing savings.

 

[baldrick]

I don't see any sensible reason not to pay whatever you can afford into a savings account with a higher interest rate than the rate on the mortgage - instead of paying off bits of the mortgage - unless it's really the case that you would be unable to control yourself from going and spending the stuff in the savings account.

What are the savings for, though?

I get that you might come out on top overall with money in savings over paying off the mortgage but I don't believe there's going to be a huge amount in it - unless you lock the money away for years so it's inaccessible, or juggle offers for new savings accounts - and who has time for that really? I certainly CBA with that faff.

 

[teuchter]

What are the savings for, though?

I get that you might come out on top overall with money in savings over paying off the mortgage but I don't believe there's going to be a huge amount in it - unless you lock the money away for years so it's inaccessible, or juggle offers for new savings accounts - and who has time for that really? I certainly CBA with that faff.

It obviously depends how big the difference is, between the savings interest rate and the mortgage. And how much you have available, that you could use to pay some of it off.

I can see that if you just wanted to do a modest overpayment each month, then yes maybe it could end up being a faff that's not worth it.

 

[AnnO'Neemus]

Best not to use your overdraft. Keep it for emergencies, if you need to pay a plumber or heating engineer unexpectedly just before payday. Or if you have a car, keep the overdraft available in case that brakes down and you need to get some repairs done.

 

[kabbes]

It obviously depends how big the difference is, between the savings interest rate and the mortgage. And how much you have available, that you could use to pay some of it off.

I can see that if you just wanted to do a modest overpayment each month, then yes maybe it could end up being a faff that's not worth it.

You also need to allow for the frictional costs of remortgaging every time your deal runs out, if you’re comparing lifetime values of holding savings versus paying off the mortgage. Plus, technically, you may have additional credit costs in the event that your credit score is sufficiently affected plus you want to take out further credit. Together with the tax question, it means it’s not quite as simple as just comparing rates