Mortgaged Overpayment

**eek** · 12 May 2022, 10:26

Originally posted by The Trade Winds View Post

Could somebody explain something to a financial thickie...

My mortgage is due to finish in 2 years time. I enquired about making overpayments as I've got a small cash lump sum & they said I can overpay 10% this year and another 10% next year but it won't reduce my monthly payments just the outstanding balance at the end of the term.

So, what is the point? Better invest it elsewhere for a couple of years?

It reduces the amount of interest added to the loan each month so you will end up paying it off in 20/21 months time rather than in 2 years time.

**malvolio** · 12 May 2022, 10:29

Rather depends on what kind of mortgage it is, but a simple repayment one is mostly interest payment until very close to the end of the term, so taking lumps out of the capital doesn't have much impact on the repayment. Sounds illogical but you're basically paying for the use of the initial capital sum over the duration of the loan, rather than paying back the capital.

Other option is to pay the whole thing off now, but that probably won't save as much as you think since the interest will still need to be paid.

**WTFH** · 12 May 2022, 10:32

Originally posted by The Trade Winds View Post

Could somebody explain something to a financial thickie...

My mortgage is due to finish in 2 years time. I enquired about making overpayments as I've got a small cash lump sum & they said I can overpay 10% this year and another 10% next year but it won't reduce my monthly payments just the outstanding balance at the end of the term.

So, what is the point? Better invest it elsewhere for a couple of years?

Paying off a lump sum will mean the mortgage will finish sooner.
You'll still pay the same monthly, but just the end date will be earlier.

There's not a great benefit of paying it off at this late stage - i.e. if you've had it for 23 years and have 2 years to run, almost all the money you pay in will go to repayment, very little goes to interest.
Overpayments make a bigger difference in the early years of the mortgage when most of the money you pay goes against interest.
...please note that this depends on the type of mortgage you have, and the deal that you've got with it.

At this stage, I'd say invest the money in something you can get it out of quickly if needed (e.g. Premium Bonds - might not be the highest return, but there's no risk)

**The Trade Winds** · 12 May 2022, 10:50

Originally posted by eek View Post

It reduces the amount of interest added to the loan each month so you will end up paying it off in 20/21 months time rather than in 2 years time.

Actually I won't be paying it off, it's just the term of the current deal that's up in 2 years - I'll still have £100k outstanding if I don't overpay.

**WTFH** · 12 May 2022, 11:06

Originally posted by The Trade Winds View Post

Actually I won't be paying it off, it's just the term of the current deal that's up in 2 years - I'll still have £100k outstanding if I don't overpay.

OK, so your mortgage doesn't finish in 2 years time.

That's a BIG DIFFERENCE. What they are saying is correct, if you overpay now, it will just reduce the outstanding balance.

So, now you need to check the terms of your mortgage to see what it says about mortgage overpayments.
Also, if you're thinking of changing your mortgage, start looking at your options.

And if overpayments might be an option for you in the future, then see if you can get an offset mortgage.

*Note - I find it a bit odd that posters who go on about investment platforms and managing their portfolio don't seem to get that a property is a big investment and getting to grips with how that investment works is possibly more important than all the other distractions of £10k here and £10k there, compared to a £500k investment.

**WTFH** · 12 May 2022, 11:31

Just to put a few figures on it...
I had a 20 year repayment mortgage that was costing about £2k per month.
In year 1, over £12k went towards interest, the rest to the loan amount
By year 5, that was £10k in interest, the rest to the loan amount
If I had stuck to the plan...
Year 10 would be £7k interest
Year 15 would be £4k interest
Year 20 would be £467 interest

So, reducing your mortgage in the early days has a bigger effect long-term.
e.g. putting in 10% in year 3 took over 2 years off my mortgage. It saved me £50,000, for an investment of a lot less than that.
I put another 10% in the following year and that brought it down again by more than 2 years. A 20 year mortgage became a 15 year mortgage, so that was £120k of payments that didn't need to happen for a total investment of about half that.

**zonkkk** · 12 May 2022, 11:31

Definitely overpay the max your current contract allows you to. It saves you quite a bit of money in interest.

My bank allows me to choose what I want my overpayment to do, decrease my monthly payment or decrease my term. Check with your bank.

**DaveB** · 12 May 2022, 11:50

Not something you can do now as there are probably penalties for trying to change mortgage deals at this point, but if you have a lump sum in savings then it is definitely worth looking at an offset mortgage. As a general rule if you have savings worth more than 10% of your mortgage value it's worth doing.

The money in your savings offsets the value of the mortgage and you only pay interest on the balance. If you have £250,000 mortgage and £25000 in savings your mortgage payments are based on a balance of £225,000 not £250,000. So more of your monthly payment goes to pay off the capital and less on the interest.

If you are in position to make annual dividend payments from Your Co. rather than monthly then you can get a big chunk of cash set against the mortgage that you draw down on over the year. It will generate a better return than any current instant access savings account since the effective interest rate on the savings is the same as your mortgage, and depending on your mortgage rate a lot of notice accounts as well.

**Lance** · 12 May 2022, 12:37

Originally posted by DaveB View Post

Not something you can do now as there are probably penalties for trying to change mortgage deals at this point, but if you have a lump sum in savings then it is definitely worth looking at an offset mortgage. As a general rule if you have savings worth more than 10% of your mortgage value it's worth doing.

The money in your savings offsets the value of the mortgage and you only pay interest on the balance. If you have £250,000 mortgage and £25000 in savings your mortgage payments are based on a balance of £225,000 not £250,000. So more of your monthly payment goes to pay off the capital and less on the interest.

If you are in position to make annual dividend payments from Your Co. rather than monthly then you can get a big chunk of cash set against the mortgage that you draw down on over the year. It will generate a better return than any current instant access savings account since the effective interest rate on the savings is the same as your mortgage, and depending on your mortgage rate a lot of notice accounts as well.

^^^^^^^ THIS

Offset mortgage. Max out dividends at start of the year and put straight into the offset savings account. Draw down over the year as necessary.
The reality is that the interest payments will still be less than you could get in a stocks and shares ISA over the long term, but offset provides better flexibility.

Mortgaged Overpayment