overpayment question

Z1ppy_2

afternoon.

Having read lots of posts here i would like to use some of my savings to make overpayments on some of my mortgages (we have three!!:mad: )

we have fixed rate on our home for the next 18 months. they allow overpayments of £500 per month for free but put a charge of 0.0125% for anything overthat.

on that basis, if we were to make payment of £10,000 there would be a charge of £150 which i believe is a one off charge.

our mortgage on the home is 221,500K so we have a long way to go but am i right in thinking that a large overpayment of say 10K would save more in interest than the fee they charge???

thanks for your help as i am confused now!!:o

TOPAZ_2

It would depend on your interest rate on the mortgage

and you also have to consider the lost interest on your savings

i.e. the calculation that you need to do is

Interest saved on mortgage
less
Interest foregone on Savings
less overpayment charge
equals ??? - if this is a positive number - i.e. you have saved more than it has cost you then its a good idea to make the overpayment

There are other options as well
a) drip feed £500 per month from savings into mortgage - no overpayment charge
b) drip feed savings into an account that pays more interest than your mortgage

or do both

Hope this has helped
Topaz

Z1ppy_2

Many thanks.

i intend to make monthly overpayments of £500 per month regardless and our interest rate is fixed at 6.58. Believe my savings earn minimal interest, (about 2 % i think)

without doing the calculations i assume it would pay to make lump sum payment then overpayments monthly thereafter....

i can feel a diary coming on!! we have a sizable mortgage debt with our home mortgage as well as two others and i am keen to make a dent in 2009!


Many thanks

CLAPTON

0.0125% of 10,000 is £1.25

Z1ppy_2

hummm..maybe i got my . in the wrong place! i was advised overpayment fee on £10k would be £150. therefore must be 0.015% fee on amount overpaid.

CLAPTON

150 on 10,000 is 1.5%

Trying_to_be_good

Having got the maths bit out of the way, it looks like you'll be much better off paying the chunk off the mortgage. Make sure you have an emergency fund, though, for unexpected expenses (you might be able to get the overpayment back, or you might need to have a separate pot of money that you keep as savings).

Z1ppy_2

i knew i should have paid attention at GCSE Maths!

as for reserve pot, agree! when i get back next year i will do some calculations to make sure we have enough to put into our rental property an still have a reserve.

if i recall, i can take mortgage holidays to the value of the overpayments made but will need to check this carefully!

thanks for your assistance!