The maths behind aiming for mortgage-free

Jonbvn

ScoobyLoot wrote: »

I was talking about my own mortgage, and as was plain, my calculations are based on the original term with the option to reduce payments. If I reduce the term, I increase my payments and you're back to messing with incomings and outgoings again and cumulative effects.

If you make a lump sum overpayment you can either reduce the term or reduce the or reduce the monthly payments. If you reduce the term, then the intention would be that each monthly payment should remain at the existing amount.

ScoobyLoot wrote: »

As stated, I am better off at the end of the original term BUT only if I save all those pounds as if I were paying the mortgage. The margin for spending some of that money is tight. And as my calculations showed, in real terms I'd be £18,000 better off by 2029 in terms of what is in my pocket, NOT the overly simplistic view of how much interest I'd saved on the mortgage.

You would be less well off if you spend the money instead of saving it. You must be a genius!:rolleyes:

ScoobyLoot wrote: »

If what matters to you is the amount of money you have as a result of money in versus money out over time, then you need to have a much deeper look than a cursory glance at two numbers.

I agree that the key point is the amount wealth you can accumulate over time. Being mortgage free should play a part in this, but should not be a goal in iteslf. However, deciding whether to overpay your mortgage or not is simply a comparison of your mortgage interest rate vs. your net savings rate.

Jonbvn

ScoobyLoot wrote: »

heheheh that is indeed the goal Floxxie. I just wanted to know what the effects of different approaches were, and thought others might be interested to know what it meant from a different angle. Little did I know it'd be like being Darwin confronting the religious beliefs of others

You may be interested to know that we do not overpay our mortgage at the moment, since it is a very low rate tacker. We can get better much better returns from various savings and investments. Application of a simple rule, which you seem not to understand.

I doubt very much that you can any savings accounts which beats your 6.29% mortgage rate, so you should overpay.

ScoobyLoot

Jonbvn wrote: »

You would be less well off if you spend the money instead of saving it. You must be a genius!:rolleyes:

Your sarcasm is unnecessary. Yes that's an obvious point but in making it you're actually missing the point, which is that once you're mortgage free if you're tempted to spend more than even a little of your new surplus income, your accumulated wealth can very quickly become lower than the level it would be at if you, say, just paid the amounts the bank asks for. In the example I worked out, if I spent more than £2K extra a year (not a lot if you think some people might splash out more once they haven't got a mortgage) of my extra money once mortgage free, my accumulated wealth would be lower than if I'd just saved now and paid the mortgage amounts asked for by the bank.

It's swings and roundabouts really, and each person's mathematical sweet spot will vary, naturally. What I found interesting is that the strategy chosen doesn't always result in the gains you might automatically think it would by looking purely at the reduction in interest paid.

Mock if you like, but unless you've got an accurate model of your mortgage's behaviour and have bothered to calculate your accumulated wealth based on different approaches to paying said mortgage, then you perhaps don't appreciate the nuances of how things interact over time. It came as a surprise to me because I held the same initial thoughts.

Maybe my maths is wrong but experience tells me that that's unlikely and that most people quickly glaze over or at worst become hostile when confronted with anything beyond their complexity level. It's the easiest thing to do rather than trying to figure it out.

It took me three months to find a mortgage "expert" at my bank (after being sent round the houses) who actually knew precisely how they calculate their mortgages. Without that info all I'd have to go on is my statements and two interest rates for comparison. I wouldn't be able to model how it actually behaves - just like most of my bank's mortgage "experts". Once you actually get talking to someone who knows what they're talking about, it's great. I was able to have a conversation with them and found a subtlety of their calculations that means you can be charged slightly more interest than is strictly fair. Result: I get sent a cheque that more than covers the difference. :j

Jonbvn wrote: »

I agree that the key point is the amount wealth you can accumulate over time. Being mortgage free should play a part in this, but should not be a goal in iteslf. However, deciding whether to overpay your mortgage or not is simply a comparison of your mortgage interest rate vs. your net savings rate.

Being MF does play a part, you're right. Is it right for you? That depends. I guess the only cautionary tale I would say from what I found FOR ME and MY mortgage, is not to think that once you (I!) are mortgage-free that you can splash out the extra £1K or whatever it might be that you have in your pocket every month. To be quids in, you might, at most, be able to splash out a few hundred a month out of that figure.

So pay your mortgage by one method or another that works best for your accumulated pot, get some rounds of beer in when you've paid it, do what you like, become a space tourist, who cares?

Like Brian said in Life of Brian, "you've got to work it out for yourselves." :beer:

ailuro2

See my sig and you'll know why I get the feeling you're someone who signed up just to try and baffle the not-so-sure MFWannabees with a long winded post and some arithmetic.

No-one needs to find out exactly how the bank calculates their mortgage, anyone can use https://www.whatsthecost.com and look at the detailed calculations it gives out. Much easier for those folk who prefer an old fashioned bit of paper to Microsoft Excel.;)

My thoughts - you must work for a bank - they are the only people who would benefit from persuading their customers not to utilise the any flexibility on their mortgage to pay it off early when interest rates are in their customer's favour.

I am looking forward to my holiday in Orlando this Christmas, and tot he many more things we'll be able to do now the mortgage is gone..... surely this increased quality of life will add years to my life expectancy thereby netting me more money from my pension , so making me better off in the long run?

Some things you can't do arithmetic for, and peace of mind is one thing you didn't calculate for.;)

getmore4less

ScoobyLoot wrote: »

As stated, I am better off at the end of the original term BUT only if I save all those pounds as if I were paying the mortgage. The margin for spending some of that money is tight. And as my calculations showed, in real terms I'd be £18,000 better off by 2029 in terms of what is in my pocket, NOT the overly simplistic view of how much interest I'd saved on the mortgage. .

If the savings rate is lower than the mortgage rate this is impossible.

The best option is to overpay THEN save.

getmore4less

Lets do some numbers

keep it simple £100k mortgage with £1k pm available.
mortgage rate 4% savings rate 2.5%

you don't need super accurate calculators to do this.

www.whatsthecost.co.uk will do.

senario 1 yours:

£100k 4% pay £606pm.
mortgage paid off in 240 months
Save £394pm 2.5% for 240months £122,552.47

senario 2 :

£100k 4% pay £1000pm
Mortgage paid off in 122months.
Save 1000 pm 2.5% for 118months £134,899.70

these will be off by a bit because of the exact timing on paymentsbut only a hundred or so.

Nice_guy

If mortgage rates are historically higher than savings rates, would it not make sense to overpay a mortgage by as much as possible while the rates are low?

Nice_guy

ailuro2 wrote: »

Some things you can't do arithmetic for, and peace of mind is one thing you didn't calculate for.;)

Couldn't have said it better myself

getmore4less

And again with an initial £10k savings pot

senario 1 yours :

£100k 4% pay £606pm.
mortgage paid off in 240 months
Save £394pm 2.5% for 240months with a £10k starting pot £139,036.74

senario 2 :

£90k 4% pay £1000pm
mortgage paid off in 108 months
Save £1kpm 2.5% for 132months £151,778.80

Gorgeous_George

The key point for me is that overpaying when I am young makes me richer when I'm old. There is a balance to be had.

All the corpses in the graveyard are mortgage free.

Saving £10,000 in interest in years 16 to 25 is not worth £10,000 at today's rates due to inflation.

GG