Mortgage Overpayments

uzubairu

ian-d wrote: »

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.

It sure is.

We got a fixed rate with the Nationwide (4.79% 10Yr) in June 2006.
After a few months we saw how little was being repaid we upped our over-payments to the £500 monthly limit.

Our £113,000 loan is now at £99,998.

JimmyTheWig

ian-d wrote: »

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!!!

Ok, I'll try my best.

Firstly, in the first example where you use your savings to pay off the mortgage monthly, you will still earn interest on your savings for most of this time. I.e. at the end of the first year you would still have £74k in savings. Therefore if you are earning £54k in interest in the second scenario you would earn about £27k in interest in the first scenario. This is in addition to the £114k saved.

More relevantly, perhaps, in the real world - in the second scenario where you only meet your minimum mortgage repayments, you will still owe the mortgage company loads of money after 13 years.

It is very difficult to work out which method is better in this way. Things get way too complicated.
All you can look at is therate you get for your money. And if you can get overpayments back there doesn't seem to me to be any reason not to just go for what "pays" the best.
You are currently paying 4.79% on your mortgage. Overpayments will, in effect, earn you 4.79% interest tax-free.
To match this, paying 20% tax, you would need to earn 5.99% on your savings account.
Earning this isn't difficult so I would suggest you put the money into savings. Especially if you can guarantee to have this money every month you should put it into a regular savings account where you should be able to get much better than 6% return.

Once your fixed rate has ended you will, by default, go onto the Standard Variable Rate. I would suggest that at that point you remortgage to get a better rate (fixed, discount, etc). Whether you remortgage or not you will probably be paying a higher rate than you are currently. Say you end up with a 6% interest rate on your mortgage. To beat that you would need, as a 20% tax-payer, to earn 7.5% on your savings. This is unlikely and so at this point I would suggest you _do_ make overpayments to your mortgage.