Mortgage overpayments

[quimcunx]

Also some people might find paying off their mortgage more satisfying than building savings.

 

[teuchter]

But if you are in the position of the OP with a ten year fix at around 2%, and we are currently seeing savings accounts offered with up to 5%, it's something definitely worth considering, much more so than in recent years, right?

If it works out numbers wise, it also has the advantage that you have some savings available to you during that time period, that you wouldn't otherwise. If some situation arose where you needed some cash, you effectively have the option to borrow it at 2% rather than whatever high rate that you'd need to borrow at if you'd already sunk the money into paying off the mortgage.

(By the way why won't the MSE thing let me do a comparison with an interest-only mortgage?)

 

[hash tag]

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.

Yes, agreed.

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.

It is possible that any overpayments on your mortgage will just sit in an account doing nothing, or worse, you might find you are penalised for overpaying.

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

This assumes the overpayments are used to reduce the balance.
Check the terms of the mortgage before deciding course of action.

 

[A380]

I’ve never done anything clever with money.

When I’ve had it I’ve, in this order.

Paid of unsecured debts.
Then paid down and then off mortgage
Then stuffed money into my pensions.

It’s worked for me, but I have been lucky.

ETA, check the terms for overpayment charges. If you have such a good long term fixed rate the flip side is there might be high overpayment / early partial repayment charges.

 

[19sixtysix]

I just wouldn't do this. I'd aim to keep to no overdraft and any surplus put it in a savings account. Home ownership always pops up new ways to spend your money.

I have savings now but I have an offset mortgage where the saving are taken into account when calculating my interest while I pay the same amount every month. I still have access to my savings but my mortgage disappearing at a nice rate.

 

[kabbes]

But if you are in the position of the OP with a ten year fix at around 2%, and we are currently seeing savings accounts offered with up to 5%, it's something definitely worth considering, much more so than in recent years, right?

If it works out numbers wise, it also has the advantage that you have some savings available to you during that time period, that you wouldn't otherwise. If some situation arose where you needed some cash, you effectively have the option to borrow it at 2% rather than whatever high rate that you'd need to borrow at if you'd already sunk the money into paying off the mortgage.

(By the way why won't the MSE thing let me do a comparison with an interest-only mortgage?)

Yes, if I had a 10 year fixed mortgage at 2%, I’d definitely be investing rather than paying off the mortgage right now. I wouldn’t personally be doing it via a savings account though. If I were investing for 10 years, I’d be buying into a world passive index equity fund

 

[Winot]

But if you are in the position of the OP with a ten year fix at around 2%, and we are currently seeing savings accounts offered with up to 5%, it's something definitely worth considering, much more so than in recent years, right?

If it works out numbers wise, it also has the advantage that you have some savings available to you during that time period, that you wouldn't otherwise. If some situation arose where you needed some cash, you effectively have the option to borrow it at 2% rather than whatever high rate that you'd need to borrow at if you'd already sunk the money into paying off the mortgage.

(By the way why won't the MSE thing let me do a comparison with an interest-only mortgage?)

Yes that logic is sound.

I’ve been effectively doing that in recent years as have two variable mortgages at 0.69% and 1.2% over BoE base. Have been doing minimum payments and maxing ISA/pension which grew 10% (until recently ).

Now that base rate is creeping up and equity growth is going down there’ll be a point at which I’ll switch to paying off mortgages.

 

[kabbes]

I suppose that in the interest of disclosure and how alternative contexts can change decisions, I should also explain what I actually am doing right now, rather than just what I might theoretically do.

I have a mortgage that is BOE+0.75%. I am planning to retire in 21 months and my savings are broadly already sufficient, albeit currently 15% down on their peak market value. I do not want to retire still owning a mortgage, I do not want to be forced into a fire sale of other assets to pay off the mortgage and I don’t like the fact that the mortgage rate is currently increasing month by month. So I currently am using all spare money each month to pay off the mortgage, despite the fact that it would probably pay off better to carry on putting it into savings instead. It’s important to consider personal security and situation as well as pure finance and economics.

 

[marty21]

I suppose that in the interest of disclosure and how alternative contexts can change decisions, I should also explain what I actually am doing right now, rather than just what I might theoretically do.

I have a mortgage that is BOE+0.75%. I am planning to retire in 21 months and my savings are broadly already sufficient, albeit currently 15% down on their peak market value. I do not want to retire still owning a mortgage, I do not want to be forced into a fire sale of other assets to pay off the mortgage and I don’t like the fact that the mortgage rate is currently increasing month by month. So I currently am using all spare money each month to pay off the mortgage, despite the fact that it would probably pay off better to carry on putting it into savings instead. It’s important to consider personal security and situation as well as pure finance and economics.

Had this crisis hit 2 years ago, I would have upped the payments on my mortgage as much as I could have afforded.

 

[UnderOpenSky]

Yes, agreed.

It is possible that any overpayments on your mortgage will just sit in an account doing nothing, or worse, you might find you are penalised for overpaying.

This assumes the overpayments are used to reduce the balance.
Check the terms of the mortgage before deciding course of action.

Silly question, but assuming you are allowed to overpay, why would payments not reduce the balance?

 

[A380]

Paying off your mortgage has a massive psychological benefit that I factored into my decision making. If you feel the sane need to add this on the credit side of your decision making.

 

[pbsmooth]

I think what you mean is you've realised every month when you have some money left in your current account the day before you get paid, you could pay it into your mortgage. And yes, decent idea, why not. Check you don't get charged for overpayments but the limit for overpayments tends to be much higher than you're talking about. Ignore the overdraft bit, it really is just a red herring and potential for disaster. Speaking from experience. Treat that as a real safety net for when something really goes wrong.

 

[Callie]

Silly question, but assuming you are allowed to overpay, why would payments not reduce the balance?

They don't always take the overpayment off at the point it is made. Sometimes the overpayments are set aside (for want of a better phrase) and deducted as a lump at the end of the period (2yrs,5yrs whatever) so you are lining the bank pockets as they would be taking the benefit of having that money instead of you having it in the bank accruing interest potentially

 

[UnderOpenSky]

They don't always take the overpayment off at the point it is made. Sometimes the overpayments are set aside (for want of a better phrase) and deducted as a lump at the end of the period (2yrs,5yrs whatever) so you are lining the bank pockets as they would be taking the benefit of having that money instead of you having it in the bank accruing interest potentially

Thanks. Thats something I need to check then. I can live with a small of lost intrest over a few years for the psychological benefit of seeing the mortgage get smaller, but I'm dammed if I'm giving them the money to just hang on to.

 

[marty21]

Tbf , the only time I took any advice on mortgages was in 1996 when I took out a 2 year fixed rate recommended by a financial advisor. When that ran out we went on the variable rate for about 22 years (luckily coinciding mostly with low interest rates)

 

[quimcunx]

I was half listening to a podcast the other day where an economist said while the 'correct' answer is invest (in a index tracking, low fees thingy) that's not what he and his family did, they paid off their mortgage as that is what mattered to them. Also said financial decisions are made at the dinner table not the blah blah ( can't remember)

I think it was the freakonomics podcast.

The thing with personal finance is it's not a straightforward relationship, money in money out, save a bit for a rainy day if you possibly can. our relationship with money is (highly) emotional.

 

[Fuzzy]

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.

I've used this and it's really helpful to see what even a small monthly over payment can make to you overall term and the total amount you will repay ove the life if your mortgage.

 

[Callie]

I'm sure my overpayments are not the most cost effective and beneficial way if doing things. I just want my mortgage paid asap (as soon as I can...) which equates to overpaying each month, paying off some extra when the term is up if I can. Otherwise from previous experience I am liable to spend my savings! Also I get a bit jittery about having savings locked down to get a higher rate, I'm scared I'd need easy access to savings.

Experience is teaching me that I can do a bit of both (having ££ locked down plus more easy access)

 

[quimcunx]

I'm sure you can access savings quickly (ish) if you need to, you just lose the rates you would have got, and maybe have to pay some fee. Wouldn't know!

 

[hash tag]

Silly question, but assuming you are allowed to overpay, why would payments not reduce the balance?

Like I say, the terms of the mortgage might not permit it. To lend on a fixed rate, they have probably borrowed on a fixed rate. Also, they may have budgeted to receive a certain return on their loan. Like some have mentioned, it might be possible to overpay by a maximum of 10% PA. That was the case with our mortgage.
Check terms and condition of mortgage before making any decisions.

 

[AnnO'Neemus]

I think the risk for some people with overpaying rather putting it in a savings account is that if their personal circumstances change: illness, accident, redundancy, etc, if a person were suddenly in a position of having to pay their mortgage with no salary coming in, or only Statutory Sick Pay (which is around £90 a week), then they might regret ploughing lots of money into mortgage overpayments, because a lender isn't going to say, 'Oh, Mrs Smith made overpayments for the past three years, which equates to around a year's worth of mortgage payments, but now they've been made redundant/had a stroke and can't afford their mortgage, so we'll let them off paying their mortgage for a year because they've overpaid previously.'

It would be advisable for people to ensure they have savings and can make several months mortgage repayments just in case they need to.

 

[stdP]

'we'll let them off paying their mortgage for a year because they've overpaid previously.'

It'll depend on the terms of your mortgage of course, but that's precisely what my overpayments allow me to do.

 

[AnnO'Neemus]

It'll depend on the terms of your mortgage of course, but that's precisely what my overpayments allow me to do.

Yours is an offset one, though, isn't it?

 

[stdP]

Yours is an offset one, though, isn't it?

I'd never heard of the term "offset mortgage" before, but after a quick search, no it isn't. It is, as far as I can tell, a bog-standard repayment one.

 

[maomao]

a lender isn't going to say, 'Oh, Mrs Smith made overpayments for the past three years, which equates to around a year's worth of mortgage payments, but now they've been made redundant/had a stroke and can't afford their mortgage, so we'll let them off paying their mortgage for a year because they've overpaid previously.'

Pretty sure most mortgages let you do this. In fact my bank let me spread overpayments I'd made out over several months during covid to account for the wage drop I'd had from being on furlough.

 

[kabbes]

Regardless of whether Ann is correct on that specific point, though, it is still good advice to prioritise having several months’ wages as rainy day savings before paying off the mortgage. That buffer could be vital at short notice

 

[platinumsage]

Pretty sure most mortgages let you do this. In fact my bank let me spread overpayments I'd made out over several months during covid to account for the wage drop I'd had from being on furlough.

It used to be an entitlement on many mortgages - you could stop repayments and use your overpayment reserve until it ran dry, or even re-borrow your overpayments back. However that changed in the financial crisis and now most mortgages issued since then won’t let you do those things automatically. Instead there might be some discretionary facility where if you ask nicely the lender might give you a bit of flexibility taking into account previous overpayments. Covid was a whole different thing where lenders were required to be very lenient with repayments, but I wouldn’t count on that being possible in the future unless it’s specifically written into your t&c.

 

[Athos]

Putting aside the need to have an emergency fund, and the psychological aspects of early mortgage repayment, I'd have thought that, for most people (especially with a fixed rate mortgage), the best thing they could do with any 'spare' at the end of the month would be to put it into a pension. Not only do pension funds typically have higher returns than the cost of borrowing over the medium to long term, you also benefit from tax relief and possibly matched contributions from an employer.

 

[platinumsage]

Putting aside the need to have an emergency fund, and the psychological aspects of early mortgage repayment, I'd have thought that, for most people (especially with a fixed rate mortgage), the best thing they could do with any 'spare' at the end of the month would be to put it into a pension. Not only do pension funds typically have higher returns than the cost of borrowing over the medium to long term, you also benefit from tax relief and possibly matched contributions from an employer.

It’s certainly a good idea to balance mortgage overpayments, pension contributions and savings accumulation, but I wouldn’t necessarily advocate going all-in on one of them in particular.

Having a nice pension you can’t access for another ten years wouldn’t be much comfort if your house is repossessed because you can’t quite afford the mortgage repayments.

 

[Athos]

It’s certainly a good idea to balance mortgage overpayments, pension contributions and savings accumulation, but I wouldn’t necessarily advocate going all-in on one of them in particular.

Having a nice pension you can’t access for another ten years wouldn’t be much comfort if your house is repossessed because you can’t quite afford the mortgage repayments.

Yeah, I think it best to have a balance. In particular, enough put aside in accessible savings to cover any unforeseen expenses.

In terms of not being able to afford mortgage repayments, that's why I've always gone for a fixed rate, and had various forms of income protection/critical illness cover (either through work, or bought privately).

But I'm still surprised how many people overpay rather than put at least some of the surplus in a pension. My back-of-a-fag-packet 'calculations' reckon that, over 20 years, you'd typically get roughly twice a much from paying into a pension as you'd save from overpaying a mortgage - tens if not hundreds of thousands on a reasonably normal wage and mortgage.