Mortgage Overpayments

[midlandsgrimpeur]

That is so true.

We overpaid £100 each month on what "should" have been £400 pm payments.. That turned a 25 year mortgage into a 13 year and 7 months mortgage.

In other words 25 % overpayment resulted in a 45% shorter term. The magic of compound interest!

This is at the crux of what I am trying to get to.

I have three options really:

1) pay off a large lump sum now which exceeds the annual allowance
2) pay a lump sum in annual installments which keeps within my penalty free limit
3) up my monthly payments (as per yourself and PB)

The problem is I cannot find exact figures to tell me what my Year 5 mortgage arrears would be for each option.

The trade off with option 1 is the penalty payment but the bonus is that it would reduce my monthly repayments by 30% which is pretty considerable. Option 2 does similar in terms of reducing monthly repayments, but staggered and not to the same extent as option 1. Option 3 obviously increases them but reduces my arrears by year 5, but I don't know if it reduces my arrears more than options 1 & 2!

 

[Animo]

Options 2 and 3 are basically the same thing, I.e. making overpayments within the annual permitted limit.

If you have the money in a lump ready then I can't see any advantage in paying it monthly - pay the max permitted ASAP in each annual period to limit the interest being charged as much as possible.

 

[T4tomo]

If you have the money in a lump ready then I can't see any advantage in paying it monthly

Well it depends where its invested doesn't it and how that return compares to mortage rate. your statement is only true if the cash is in a biscuit tin.

There is a school of thought* that says if you put your money in a stocks and shares ISA then it will make more than the Mortgage interest, so you should minimise your mortgage payments and stuff your spare cash into an ISA (or a pension^) and then pay off the mortgage with those proceeds at a convenient future point (^allowable 25% lump sum)


*this was a no brainer when mortgage rates were sub 2%

 

[Animo]

Well it depends where its invested doesn't it and how that return compares to mortage rate. your statement is only true if the cash is in a biscuit tin.

There is a school of thought* that says if you put your money in a stocks and shares ISA then it will make more than the Mortgage interest, so you should minimise your mortgage payments and stuff your spare cash into an ISA (or a pension^) and then pay off the mortgage with those proceeds at a convenient future point (^allowable 25% lump sum)


*this was a no brainer when mortgage rates were sub 2%

Well yes, I was operating on the basis that the OP has already decided to pay some money off his mortgage. Don't disagree with your observations though.

 

[All uphill]

Well it depends where its invested doesn't it and how that return compares to mortage rate. your statement is only true if the cash is in a biscuit tin.

There is a school of thought* that says if you put your money in a stocks and shares ISA then it will make more than the Mortgage interest, so you should minimise your mortgage payments and stuff your spare cash into an ISA (or a pension^) and then pay off the mortgage with those proceeds at a convenient future point (^allowable 25% lump sum)


*this was a no brainer when mortgage rates were sub 2%

I'd not consider market investments for a period of less than ten years, especially after the rapid gains of the last couple of years. Imo (and, like everyone else, I know nothing about the future) we are overdue a market correction.

 

[All uphill]

Have a play with this.

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

 

[T4tomo]

I'd not consider market investments for a period of less than ten years, especially after the rapid gains of the last couple of years. Imo (and, like everyone else, I know nothing about the future) we are overdue a market. correction.

Whatever, but most mortgagees are longer than 10 years, so the point on that school of thought holds regardless.

Obviously if you are near retirement, like most of the cyclechat community then savings are more likely to be in safer fixed interest and bank deposits, which usually wont beat your mortgage especially if you pay tax

 

[Bonefish Blues]

They did used to have a comprehensive online calculator which would model all of this. For some reason they took it down about a year or so ago and replaced it with a much simpler one that does not provide the info I need!

Maybe worth a quick scout around other companies' sites to see if you can find one?

 

[All uphill]

Obviously if you are near retirement, like most of the cyclechat community then savings are more likely to be in safer fixed interest and bank deposits, which usually wont beat your mortgage especially if you pay tax

The OP was asking about using a lump sum to reduce the remaining 3 years of a 5 year fixed rate mortgage.


I'm drifting further away from my date of retirement every day. I'm 8 1/2 Years past that date at present. 😄

 

[Pblakeney]

Well it depends where its invested doesn't it and how that return compares to mortage rate. your statement is only true if the cash is in a biscuit tin.

There is a school of thought* that says if you put your money in a stocks and shares ISA then it will make more than the Mortgage interest, so you should minimise your mortgage payments and stuff your spare cash into an ISA (or a pension^) and then pay off the mortgage with those proceeds at a convenient future point (^allowable 25% lump sum)


*this was a no brainer when mortgage rates were sub 2%

That school of thought is based on a fixed 25 year term. Reduce that term and the mortgage compound interest savings outweigh the reduced compound investment interest returns.

 

[Profpointy]

Not a direct answer to the question, and no use to you till the five years are up, but I am very happy with my "offset mortgage" via Barclays. My current account balance is "offset" against the outstanding mortgage so every penny I have reduces the interest on the outstanding debt. I was earning decent money in my last few years working so got substantially ahead of it but still had the ability to use the money if the car blew up or whatever.

Eventually my pension lump sum cleared the small remaining debt, but I still kept up the mortgage (still technically owed £50k or whatever but more than that in the current account so zero interest charged) even though I was then in the black so if I need a rainy day fund I can re-borrow it at mortgage rate.

There is a great psychological boost getting into the position of effectively clearing the mortgage and it's easier to do this with an offset as every spare penny is part of it without having a separate rainy day fund

 

[lazybloke]

I always used to shop around for a mortgage that didn't have monstrous penalties for things like overpayments.

Karl's mortgage calaculator was a good one for identifying repayments at different rates, savings from regular and one-off overpayments etc. intended for the US but percentages are universal!

https://www.drcalculator.com/mortgage/old/

 

[stephec]

That sounds like the best idea.
As an addition, if you can afford it then I'd suggest maintaining your current payment amount (or even increasing it) and reduce the term as the savings on that are massive.

That's what we did.

Coming to the end of a fixed deal our adviser would give us a few options for our next deal, as rates were coming down at the time our monthly payment was coming down as well, so I would always ask, 'rather than the twenty years that's left, what if we do it over eighteen?'

And usually it wasn't more than a tenner a month extra, our twenty five year mortgage was paid off in seventeen years.

 

[Lookrider]

I cannot advise at all really
But it's an interesting topic

If you get a penalty charge for exceeding the max overpayment each year
Then to avoid this can you not use half your payment at the end of the mortgage year and the other half at the start of new mortgage year

Assuming your mortgage started in Jan
Then pay half your overpayment in December
Then half in January
Would this not avoid any penalty charges

 

[wafter]

Can't answer the question directly (well, at least not now anyway), however some suggestions based on ruminations on my own situation.

I hate debt and being aware of the effect of compound interest / weighting of interest payments towards the beginning of a mortgage term was initially keen to smash mine down. I was planning on letting things settle then providing my savings allowed pay off an extra chunk each year (within the 10% allowance).

That said I've since reconsidered, since the relatively modest savings I'd use to pay off some of the mortgage are getting only slighlty less interest than I'm paying on the mortgage so I'm losing very little by not paying it off early. On top of that there's an argument for the "opportunity cost" relative to spending those savings - i.e. it's money that I'd no longer have access to should I face a necessary big spend in the future.

Since you're still relatively early in the term I assume the rate on the mortgage is a bit more than available savings rates (as in my case), so in your position I'd look to:

- Pay off the maximum early repayment for this year (typically 10% of the outstanding amount), stating that you want this to reduce the term rather than the monthly payments

- Invest the rest in a safe savings account - ISAs (tax free) currently have an annual £20k paymsent limit if you've not already used this, while you can receive up to £1k tax-free interest on regular savings (so a pot of about £20k at 4%).. so that's £40k you can invest safely at a tolerable rate.

- Beyond this keep paying the max 10% per year until - if you don't need the lump sum for anything else - it's fully depleted.


When I was considering all this pre-purchase I couldn't find any calculators to tell me the same information you're requesting, so I knocked up a spreadsheet. I can't make any guarantees as to its accuracy (seemed OK when benchmarked against online stuff for other calcs) or ease of use, but I can try and dig it out if you want me to send you a copy