Overpay before renewal - worth it or not?
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DragonQ
Posts: 2,193 Forumite
I'm trying to work out what to do about my mortgage. I'm currently one year into a two year fix at 1.99% and I can overpay by 10% a year without penalty. Interest rates have dropped a fair bit since I got it so I hope they stay that way for another year at least. When it comes time to renew, this will be the state of play:
Remaining mortgage: £258000
LTV: <80%
Another 2-year fix from my current provider would be at 1.44% with a £900 fee, assuming I don't touch the mortgage term. I've worked out that I'd reduce the mortgage by over £19.2k over the two years, £8.2k of which would be interest + fees.
However, if I overpay by £12k before renewing I can get into the <75% LTV bracket, which'd be 1.24% instead. Again, if I keep the same repayment amount and mortgage term, I'd reduce the mortgage by £20.5k, £6.9k of which would be interest + fees. I could even overpay now but it'd only reduce my interest payments over the next year by £200 or so, thus it seems pointless.
So it seems to me that paying that £12k upfront would save me ~£1.2k over the following two years, whilst also reducing the mortgage balance by that amount. On the other hand, I'd need to get 5% interest on that £12k for it to be worth not doing it, unless I'm missing something? Obviously having £12k in cash can be useful too but I think we'll have enough spare for emergencies. I've seen online calculators for this but none of them seems to take into account the interest you'd otherwise earn on cash you don't use for overpayments, making them rather useless!
At the same time, reducing the mortgage term doesn't seem to have a large effect - dropping it from 23 years to 19 years bumps my monthly payments by over £100 but only saves me £30 over the two years in interest payments. Obviously it means I pay off the mortgage faster but I could equally just keep the extra £100 a month in cash and rebuild my savings instead?
Basically I am not sure what the best approach is here because there are so many variables. Overpay or not? Do it now or just before the mortgage renews? Increase monthly payments or not? I'd be interested in hearing everyone's opinions on this, especially factors I'm not considering that might affect the decision.
Remaining mortgage: £258000
LTV: <80%
Another 2-year fix from my current provider would be at 1.44% with a £900 fee, assuming I don't touch the mortgage term. I've worked out that I'd reduce the mortgage by over £19.2k over the two years, £8.2k of which would be interest + fees.
However, if I overpay by £12k before renewing I can get into the <75% LTV bracket, which'd be 1.24% instead. Again, if I keep the same repayment amount and mortgage term, I'd reduce the mortgage by £20.5k, £6.9k of which would be interest + fees. I could even overpay now but it'd only reduce my interest payments over the next year by £200 or so, thus it seems pointless.
So it seems to me that paying that £12k upfront would save me ~£1.2k over the following two years, whilst also reducing the mortgage balance by that amount. On the other hand, I'd need to get 5% interest on that £12k for it to be worth not doing it, unless I'm missing something? Obviously having £12k in cash can be useful too but I think we'll have enough spare for emergencies. I've seen online calculators for this but none of them seems to take into account the interest you'd otherwise earn on cash you don't use for overpayments, making them rather useless!
At the same time, reducing the mortgage term doesn't seem to have a large effect - dropping it from 23 years to 19 years bumps my monthly payments by over £100 but only saves me £30 over the two years in interest payments. Obviously it means I pay off the mortgage faster but I could equally just keep the extra £100 a month in cash and rebuild my savings instead?
Basically I am not sure what the best approach is here because there are so many variables. Overpay or not? Do it now or just before the mortgage renews? Increase monthly payments or not? I'd be interested in hearing everyone's opinions on this, especially factors I'm not considering that might affect the decision.
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Comments
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Have you thought about remortgaging to an offset product in 12 months time when your fix is up? Sounds like a good solution from what you have described.I am a Mortgage Adviser
You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.0 -
If you have no other debts !
£12,000 spare cash earning very little interest in a savings account ?
Then overpay ASAP and try and overpay every month.
If you do get the LTV below 75% you will have the pick of the market0 -
Why? Having an offset mortgage is like having the money earning 1.2% interest or something.MrMortgages wrote: »Have you thought about remortgaging to an offset product in 12 months time when your fix is up? Sounds like a good solution from what you have described.
No it's not earning very little interest. It's earning 3-5% (around 3.6% on average), which is way higher than my current mortgage rate and even higher than what it would be when I renew (since rates are lower now). That's why I don't understand the point of overpaying right now.If you have no other debts !
£12,000 spare cash earning very little interest in a savings account ?
Then overpay ASAP and try and overpay every month.
If you do get the LTV below 75% and have the pick of the market0 -
No it's not earning very little interest. It's earning 3-5% (around 3.6% on average), which is way higher than my current mortgage rate and even higher than what it would be when I renew (since rates are lower now). That's why I don't understand the point of overpaying right now.
Are you getting that 3.6% guaranteed at a bank or is it more gambled in stocks/bonds etc? If bank, is it liquid or lots of notice to move it out?0 -
If you are earning 3-5% on your savings great.
Wait till your current fix is coming to an end and then overpay what you can afford.
If that gets you a new deal with 75% LTV even better.
I would still get into the habit of overpaying every month.
We love offset mortgages and have always overpaid.0 -
not clear from your posts but you are not thinking of changing now you are talking about when this fix ends?
if you overpay now
£12k @ 1.99% for 1 year is £238 saved.
+ if you keep the payment the same you save a bit more.
reducing the rate from 1.44% to 1.24% on £250k saves £500py0 -
At the same time, reducing the mortgage term doesn't seem to have a large effect - dropping it from 23 years to 19 years bumps my monthly payments by over £100 but only saves me £30 over the two years in interest payments. Obviously it means I pay off the mortgage faster but I could equally just keep the extra £100 a month in cash and rebuild my savings instead?
The only difference between reducing the term and overpaying is down to control. You can overpay once and then never again, reduce your term and you're committed.
What LTV band you're in is irrelevant. If you're beating the mortgage interest rate, then you want to extend the term as much as you can & don't overpay. It would even be beneficial if the lender would give you a mortgage holiday.
There are psychological benefits to paying off the mortgage and the money is in some ways safer than sitting in your current account (try claiming any means tested benefits with 30k sitting in the bank).0 -
Instant access, no risk.Are you getting that 3.6% guaranteed at a bank or is it more gambled in stocks/bonds etc? If bank, is it liquid or lots of notice to move it out?
Correct, I still have a year left on my current fix so wouldn't change in that time.getmore4less wrote: »not clear from your posts but you are not thinking of changing now you are talking about when this fix ends?
if you overpay now
£12k @ 1.99% for 1 year is £238 saved.
+ if you keep the payment the same you save a bit more.
reducing the rate from 1.44% to 1.24% on £250k saves £500py
This is what I thought, yet it doesn't seem to be mentioned anywhere that suggests overpaying mortgages. Maybe those articles and calculators are aimed at people with standard-rate mortgages (4+%)?The only difference between reducing the term and overpaying is down to control. You can overpay once and then never again, reduce your term and you're committed.
What LTV band you're in is irrelevant. If you're beating the mortgage interest rate, then you want to extend the term as much as you can & don't overpay. It would even be beneficial if the lender would give you a mortgage holiday.
There are psychological benefits to paying off the mortgage and the money is in some ways safer than sitting in your current account (try claiming any means tested benefits with 30k sitting in the bank).
I suppose one upside to overpaying is that if mortgage rates ever do rise considerably you're better off having a lower amount owed.0 -
I think the problem is the industry does not think that their customer understand that there is a correlation to payments and term or just find it difficult to explain.
The reality is that what you pay determines how long it takes to pay off the debt..... all term does is set a minimum payment.
There is the problem that not everyone is able to manage their finances based on voluntary payments so best to stick to shorter terms so they don't have the flexibility.
I suspect for the broker getting the client to say I want to know my payment for at least X years and have it paid by the time I am YZ is the safe regulation sell.0
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