Reply to: Mortgaged Overpayment

[The Trade Winds]

There is the rub. Horrible time right now... or is it? Has it hit bottom, will it drop further, who knows. But yes that's the consideration. Can you beak the mortgage with Premium bonds, do you know any better options. It's a bit of a balance hence my last comment about paying off for peace of mind rather than chasing the pennies.

Personally, I think it has further to drop. Recession on the cards, possibility of another bombshell event (there seems to be enough of them around); who knows?

Probably safer overpaying this year and next and just be thankful for knocking a couple of extra grand off the mortgage and hope that my premium bonds pay oout.

[WTFH]

There is the rub. Horrible time right now... or is it? Has it hit bottom, will it drop further, who knows. But yes that's the consideration. Can you beak the mortgage with Premium bonds, do you know any better options. It's a bit of a balance hence my last comment about paying off for peace of mind rather than chasing the pennies.

Exactly. And if you're someone who doesn't understand:
1. How mortgages work
2. How share investment works
Then I'd refer to my earlier post - understand what your biggest investment is, and monitor it, before thinking about smaller ones.

[northernladuk]

Yes, but is it wise to invest in shares over a 2 year time frame?

There is the rub. Horrible time right now... or is it? Has it hit bottom, will it drop further, who knows. But yes that's the consideration. Can you beak the mortgage with Premium bonds, do you know any better options. It's a bit of a balance hence my last comment about paying off for peace of mind rather than chasing the pennies.

[ladymuck]

+1 for an offset mortgage. The best product I ever had; it was a Barclays/Woolwich base rate tracker which, at the time I had it, was great. Interest rates were around 5% when I took it out then we had a bit of a recession and the base rate dropped to something paltry. I kept my payments the same and in 5 years knocked an extra 7 years off the mortgage due to overpayments and the savings balance.

[The Trade Winds]

Plenty of online overpayment calculators that will show you how much you save on interest and how quicker you pay the mortgage. Many of them with nice fancy graphs. just plug the numbers in to that and you'll get a visual on what the outcome is.

My question would be how much can you make on the money elsewhere. If you are confident making more that the interest on the mortgage then it makes no sense to pay the mortgage off. If you think you can make 6% in shares for example but your mortgage is only 3% then don't bother paying off IMO. That said if paying your mortgage early gives you peace of mind then go for it.

Yes, but is it wise to invest in shares over a 2 year time frame?

[northernladuk]

Plenty of online overpayment calculators that will show you how much you save on interest and how quicker you pay the mortgage. Many of them with nice fancy graphs. just plug the numbers in to that and you'll get a visual on what the outcome is.

My question would be how much can you make on the money elsewhere. If you are confident making more that the interest on the mortgage then it makes no sense to pay the mortgage off. If you think you can make 6% in shares for example but your mortgage is only 3% then don't bother paying off IMO. That said if paying your mortgage early gives you peace of mind then go for it.

[WTFH]

What I would say is keep squirreling the funds away and come the end of the year once we hopefully have a bit more of a handle on what is going on, overpay it then if you feel confident enough there is plenty more in the war chest.

Hence the suggestion for an offset mortgage.

I think it's also worth checking that when someone switches mortgages from one deal to the next, that they actually look at the figures - not the adverts.
If you have a 25 year mortgage and pay it for 5 years, then switch to a new 25 year mortgage, you've just added 5 years on to your repayments. Switching to save money works best if you are also reducing the repayment period. Unfortunately some people seem to think that they are switch to a lower rate for a year or two and making a big saving, but if they actually looked at total repayments over time, it might not be as amazing as they thought.

[Martin@AS Financial]

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?

With most mortgages (bar products with no early repayment charges), you can overpay by an additional 10% of the balance per year penalty free.

With all of the uncertainty at the moment what with the pandemic, inflation, world events etc, I would if it were me hold onto the funds rather than overpaying the mortgage. The reason being is that lets say you have £10,000 and your project finishes early - that £10,000 depending on your war chest and mortgage payment will hopefully bridge the gap between finding your next contract. If you had asked me this question a few years ago I would have said to get the mortgage paid off asap but I personally think having access to cash right now is super important. The issue with making overpayments right now is should anything go wrong, you have to go cap in hand to your lender and ask for it back via a further advance which will be subject to underwriting / credit score etc.

What I would say is keep squirreling the funds away and come the end of the year once we hopefully have a bit more of a handle on what is going on, overpay it then if you feel confident enough there is plenty more in the war chest.

[swamp]

When you remortgage (in two years' time) the Loan To Value will have a large bearing on your next mortgage cost. The best deals require 60% LTV or less. If making overpayments can get you across that threshold (or a higher one like 70%), then that will be a massive benefit.

[Lance]

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.

[DaveB]

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.

[zonkkk]

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.

[WTFH]

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.

[WTFH]

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.

[The Trade Winds]

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.