Does overpayment equal the mortgage interest rate?

essexsi_2

Hi all,

If I make an overpayment on my mortgage @ 5.79%, does this basically mean I am getting an equivalent savings rate of 5.79% on that overpayment?

Does that make sense!

Thanks for your help. Cheers Si

Kaz2904

Unless you get charged to do so, yes!
To beat it you would have to earn 5.80% non tax payer, 6.97 basic rate tax payer or 8.36% higher rate tax payer.

JimmyTheWig

Yes, I believe so.
You need to remember that there is no tax to pay on this 5.79% you are getting (it's not earning anything - you're just not paying it) and so you would need to be earning 7.2% on your savings to beat this rate if you pay basic rate tax on your savings interest.

Have you used your cash ISA allowance?
Has your spouse, if you have one?
Do both you and your spouse (if you have one) pay income tax?
If the answers to any of the above are no then you can get interest on your savings without paying tax and it should be quite easy to beat that 5.79%.

Also, check with your mortgage company when overpayments have an effect? I believe most calculate interest daily, which is fine, but if it is calculated annually then you need to time it right.

JimmyTheWig

Kaz2904 wrote: »

Unless you get charged to do so, yes!
To beat it you would have to earn 5.80% non tax payer, 6.97 basic rate tax payer or 8.36% higher rate tax payer.

I believe you need to divide the gross rate by 0.8 to get the basic rate, rather than multiply it by 1.2 - there's a difference.

6.97% interest taxed at 20% means you would get 80% of 6.97%.
6.97 x 0.8 = 5.58, which isn't good enough to beat paying off the mortgage.

7.2% interest taxed at 20% means you would get 80% of 7.2%.
7.2 x 0.8 = 5.76, which is about what you need.


So I say you need 7.2% as a basic rate tax payer and 9.6% as a higher rate tax payer.

FairyElephant_2

Martin has a nice little calculator thingy where you put in your mortgage rate and what rate tax you pay, and it tells you how much you need to get on savings to make it more worthwhile than paying off your mortgage. (Sorry I would link you to it but I dunno how!).

As a rule of thumb, I just take 20% off the interest rate advertised, as I am a standard rate taxpayer, unless of course it is an ISA where it is just a straight comparison with the mortgage rate really.

That said, make sure you have a 'cushion' you can fall back on if needs be.
I am lucky that I can get my mortgage overpayments back in a few days just by phoning the mortgage company (worth checking if you can do this), so I'd do that if I could, instead of dipping into the ISA, or the Halifax 10% reg saver where my monthly savings go.

HTH,

FE

essexsi_2

Thanks very much for all of your replies.

I certainly did not take the tax into account at all, thank you for that point. My mortgage is with Nationwide and can overpay by £500 per month penalty free. How easy is it to get these overpayments back from nationwide?

If it is easy does this make sense-
-use cash Isa allowance each year for easy access savings cushion
-use other savings to overpay as much as possible each month
-when other savings are used up, then get overpayments back from NW
-fill cash isa again
-start overpaying again

Would that have an affect on the mortgage.

Cheers Si