Mortgage Overpayments

ian-d

Hi all, I have a Nationwide mortgage (fixed, split into 2 accounts when I moved house!) and wanted some information on overpayments.

It seems that I'm earning very good money and instead of putting money into savings each month I thought it might be wise to make overpayments on my mortgage.

As I see it, with a £200k mortgage (on a £500k house), with 28 years to run, on approx 6% interest, if I make overpayments of £500 per month, I'll save approx. £114k and save 13.6 years (according to What Mortgage' calculator).

Does that sound about right? Does it make sense to do this rather than put in a savings account?

I've been told that because I have effectively two mortgages (around a 50/50 split) I'm entitled to make over payments of up to £500 for each account. Is that right...without charge?

Advice appreciated.

ian-d

Oh, the reason for my questioning this is that it tells me I would save £114k and 13.6 years, but if I work that out, it means I've made £500 x 13.6 years overpayments which is around £80k, so have I infact only saved £114k - £80k = £34k?

If that's the case, then £34k dividend by 13.6 years would be approx. £2500, which isn't a great deal than having a savings account with £35k in it....or am I working it all out wrong?

Daft_Pegasus

28 years on a £200K mortgage means that in total you would pay back over £413K to the bank

As you say if you over pay by £500 a month then this reduces by £113K (I make it £114K but I'm not arguing over it:rotfl:)

Thus in total you would pay back to the bank £300K.

The £500 x 13.6 years are included within this so you would save all £113K and not the £34K figure you mention.

Hope this helps.

JimmyTheWig

ian-d wrote: »

I've been told that because I have effectively two mortgages (around a 50/50 split) I'm entitled to make over payments of up to £500 for each account. Is that right...without charge?

The general rule is you are allowed to make overpayments of 10% of your balance each year without charge. Don't know if this is the deal with Nationwide or not, but if it is then £1000 a month overpayments would be fine.

if I make overpayments of £500 per month, I'll save approx. £114k and save 13.6 years

I think that it does mean you will save £114k in interest. But that figure is very misleading.
It compares paying off your mortgage to stashing the cash in a biscuit tin for the length of the entire mortgage.

If you leave your mortgage as it is then you would pay £114k more interest over the 28 years than you would if you pay the extra over 14.4 years.

I'm just talking myself round in circles here.

Listen, what you need to do is compare the rates of interest you would get if you put the money into savings against the interest you pay on your mortgage.
Remember that by putting the money against your mortgage that is then locked in until you remortgage.

The thing that is going to make all the difference is tax. If you can get away without paying tax on your savings (e.g. ISA, non-tax paying spouse) then putting the money into savings is probably best.
If you are a higher rate tax payer (quite possible from what you have said) then this means an interest rate of 6.5% on a savings account is only worth 3.9% to you - in which case putting the money against your mortgage is probably best.

For the first year you are looking at having an average of £3000. A 2% difference in interest rates on this is worth £60 to you over the year. The second year you are looking at having an average of just over £9000. A 2% difference in interest rates on this is worth £180 to you over the year. In the third year you are looking at an extra £300 interest with an interest rate difference of 2%.
This means if you are a higher rate tax payer then you are looking at an extra £540 by paying the money against your mortgage after three years.
I wouldn't carry the calculation on past then as you are probably looking at remortgaging by then.

28 years is a very long time to pay money back over. You will save yourself serious interest by paying it back quicker.
Whether you do this by paying off your mortgage or by some other tax-efficient scheme is up to you.

JimmyTheWig

Daft_Pegasus wrote: »

The £500 x 13.6 years are included within this so you would save all £113K and not the £34K figure you mention.

That's a much better explanation than my waffle!

ian-d

Thanks for the help but I feel more confused now than before haha. Can you work me through this scenario? Let's say that I have the £80k needed already in a savings account building on a 5% net interest rate (low tax band, i pay myself in divs up to the limit!)

If I took all this money out and drip fed my mortgage each month by £500 I would save 13.6 years and £114k in interest...but I will have spent £80k getting to that stage.

However, if I left the £80k in a 5% net interest savings account, I would build £4k (very approx.) per year, x 13.6 years, would be £54k. Those two figures combined is more than the £114k saved.

Am I completely missing the point here. Geez, I though I was good at maths but this really has me confused!!!

eamon

The general rule of thumb is that if the interest on the savings is less than the interest on the loan then it is better to use the savings to pay the loan.

Mortgages tend to cloud the issue because they run for a lot of years. Therefore the interest charge includes an element of Time in the calculation. This can cause the interest to be less than the interest paid on savings. You should treat Time as being the same as an interest charge. Thus the longer Time taken to repay the loan the more money that you pay in interest and the less Time taken to repay the mortgage the less money that you pay in interest.

My opening sentence therefore remains true!

yours

Eamon

ian-d

I think I'll work on the basis of retaining what savings I have, and instead pay £500/£1000 a month out of salaries/dividends coming in, that way the interest accrued from a savings account would be small in comparison to the money saved immediately in mortgage reductions.

I think that's right, or a logical way to look at it...I hope

Jesthar

Ian,

I also have a Nationwide mortgage (5 year fixed rate, got it around a year and a half ago just before everything went south ), and my first suggestion would be to check how much you are allowed to overpay by each month without incurring a charge - mine allows up to £500 a month. If you can afford to overpay that much easily per month, you REALLY should do so - ESPECIALLY at the start of a mortgage, which is when overpaying counts for most (it stops you being charged extra interest over the whole life of the mortgage!).

If you look at a mortgage projection statement (my financial adviser gave me one when I got the mortgage), for at least the first TEN YEARS of a normal mortgage most of the money you pay doesn't come off the capital, it goes on paying off the interest. Can't remember the exact figures, but I do remember that after the first couple of years of paying over £500 a month to them (i.e. not overpaying), I would only have knocked about 2k off the capital - so, out of 24 payments I would have made, only FOUR of them would actually have knocked anything off the money owed, the other twenty would have been purely paying the interest!

However, I've been making overpayments of £150 a month for about a year now (I've been able to afford to since pretty much the start of the mortgage, thankfully), which means so far I have knocked around an extra 2k off the capital - that's an extra 2k which is not having nearly 6% interest accumulating on it!

The other thing to check (and the best bit of my mortgage) is if any overpayments you make can be 'borrowed back' immediately if you need them. If this is the case (and it is for me), you can regard overpaying as a savings account, except rather than earning interest, you are SAVING interest - an din a compund manner, as you wont then be changed more interest on that interest when it gets added to the capital. That's why I'm intending to up my overpayments any time I can afford to.

Having a moderate nest egg of savings to hand is also good (I certainly do), but in the long run whatever I can afford to save at the moent is best going to pay off the mortgage.

Hope that helps,

~Jes

ian-d

Jes, thank you for your excellent response. I too am on a fixed, but only until the end of this year, at which point I'll get a shock as I move from my existing 4.79%, but fortunately am financially secure not to worry too much about it.

Because my mortgage is split into two accounts, from when I moved (and the original fixed term meant combining not possible) I've been told I can make overpayments of £500 per month on each account, so a combined £1000 which is great news. I also can take the money back if needed, as the covering letter makes that clear, which as you say, means you can essentially treat the overpayments as being stored in a savings account should you need them back.

The reason I want to do over payments is that like you, I've seen how little actually comes off the mortgage in the early days, it mostly all goes on interest and it's painful to see.

I'm ideally looking to be mortgage free by 35, with enough savings to live off bank interest if I have to. I'm on target so far

Daft_Pegasus

If you're fixed until the end of this year and you can afford it then I'd suggest overpaying to the maximum (£500) each month and not worrying too much about the figures you've given above. Any overpayment will pay off in the long term.

The important thing is to get your next mortgage right when this deal expires.

As you have £80 000 in savings and you sound like you're self employed, I'd be looking at an offset mortgage so you have the ability to overpay as much or as little as you like and, if the work dries up a little, you have access to the savings if necessary. However I've made a number of assumptions based on little bit's of information you've given so I could have misunderstood.