What's the best short term option?

Jhoney_2
Jhoney_2 Posts: 1,198 Forumite
edited 5 May 2015 at 1:37PM in Mortgages & endowments
Hi all,

Someone suggested I post here to get some help.

I have a v.good 2yr tracker deal atm and was going to overpay the savings back into the mortgage every month.

However I am torn because I don't understand the impact the overpayments will make. Although there is higher interest to gain - @ c2%, it's got to better to overpay in terms of preventing accrued interest on the mortgage over the same period hasn't it?

The calculators here say any savings account paying over 1.7% is worth diverting the money into given the present mtg rate, but if my understanding is correct, over the 2 years, I would save more on the mortgage interest?

I should also add that I intend to move and probably reduce mortgage significantly (3/5) in the next 12months so not sure how to make sure I pick the right short term option. Emergencies etc are already covered.

Any thoughts please? Apologies if this seems like a stupid question, but I truly have not been able to resolve this by myself so far.

:beer:
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Comments

  • dimbo61
    dimbo61 Posts: 13,716 Forumite
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    If you have emergency savings I would overpay the mortgage every time.
    Saving rates have never been so poor in many accounts.
    Overpaying every month will help with LTV when you do come to remortgaging
  • Jhoney_2
    Jhoney_2 Posts: 1,198 Forumite
    dimbo61 wrote: »
    If you have emergency savings I would overpay the mortgage every time.
    Saving rates have never been so poor in many accounts.
    Overpaying every month will help with LTV when you do come to remortgaging

    Thanks for reply Dimbo61.

    Would your answer be different if I was already <60 LTV?
  • getmore4less
    getmore4less Posts: 46,882 Forumite
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    It is all about the rate if you can save at a higher rate you accrue more interest than you pay.

    With regular savers and current account juggling giving good rates its down to the effort.
  • getmore4less
    getmore4less Posts: 46,882 Forumite
    Name Dropper First Anniversary First Post I've helped Parliament
    Changes in LTV can be done at change time so is not a factor in overpayment choices.
  • dimbo61
    dimbo61 Posts: 13,716 Forumite
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    In 2005 we took out a 22 year mortgage and put down a 50% deposit.
    Now as soon as the mortgage started we overpaid every single month and saved into the offset account.
    We cleared the mortgage after 8 years of hard work and saved over £75,000 in interest.
  • audigex
    audigex Posts: 557 Forumite
    Definitely overpay as hard as you can

    Your normal payment is roughly 50% interest, 50% capital.

    Your overpayment goes entirely to paying off capital, meaning that capital never accrues interest.

    And if you then realise that the amount you overpay would be the very last bit you paid off, that means it would accrue the most interest.

    The benefits of mortgage overpayment benefits are disproportionate to the amount you pay off: eg if you double your payment, you get far more than double the benefit because you're immediately removing the compound interest on that amount.
    "You did not pull yourself up by your bootstraps. You were lucky enough to come of age at a time when housing was cheap, welfare was generous, and inflation was high enough to wipe out any debts you acquired. I’m pleased for you, but please stop being so unbearably smug about it."
  • Jhoney_2
    Jhoney_2 Posts: 1,198 Forumite
    edited 5 May 2015 at 1:31PM
    That's what I thought and was trying to articulate above. I can pay off c500 pm - probably more but that for now. I've set up the SO and then started thinking...

    My rate is v.low <1.5 and I came over all MSE as one should, and managed to confuse myself!

    Looking around there are good saving rates of 3-4% available, but I keep feeling as though that is short sighted of me and that I should overpay as much as possible whilst my mortgage interest rate is so low.

    And thanks again to everybody for your replies and opinions so far!
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    audigex wrote: »

    Your normal payment is roughly 50% interest, 50% capital.

    Far from it. The interest far exceeds the capital element in the early years. The back end of a mortgage is capital loaded.
  • audigex
    audigex Posts: 557 Forumite
    Even better, then :)

    Perhaps the calculator I was using does different sums to the banks, but it showed my payments as being roughly 50-50.... that said, my mortgage is relatively small, low interest and over a fairly long term (£70k over 25 years at 2.7%) so that may weight things slightly differently.
    "You did not pull yourself up by your bootstraps. You were lucky enough to come of age at a time when housing was cheap, welfare was generous, and inflation was high enough to wipe out any debts you acquired. I’m pleased for you, but please stop being so unbearably smug about it."
  • Jhoney_2
    Jhoney_2 Posts: 1,198 Forumite
    Thrugelmir wrote: »
    Far from it. The interest far exceeds the capital element in the early years. The back end of a mortgage is capital loaded.

    So more reason to overpay verses the savings option?
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