The maths behind aiming for mortgage-free

Gorgeous_George

As basic rate taxpayer, I save at 4.3% to 5% and pay my mortgage at 1.34%.

Rocking horse science it ain't.

Is anyone suggesting that I should overpay?

GG

getmore4less

Gorgeous_George wrote: »

As basic rate taxpayer, I save at 4.3% to 5% and pay my mortgage at 1.34%.

Rocking horse science it ain't.

Is anyone suggesting that I should overpay?

GG

You put you money where it earns the most
it is the net position that counts.

JonnyBravo

ScoobyLoot wrote: »

Your sarcasm is unnecessary.

I guess he was returning the favour.

ScoobyLoot wrote: »

Little did I know it'd be like being Darwin confronting the religious beliefs of others :rolleyes: :rotfl:

:rolleyes:


As you've said you're happy with your maths and the rather strange conditions which mean lump sum payments can't reduce your term or some other such stuff..... (couldn't be bothered to read it all after so many wrong assumptions being made)...... let's assume most of the people on here are also bright enough to have looked into their positions and be perfectly happy with their strategies.

Cheers,

JB
(Mortgage-free in 22 payments on current timeline)

:cool:

Rob71

ScoobyLoot wrote: »

If you want to be better off you have to continue living as if you're overpaying the mortgage once it's complete - i.e. by paying yourself instead and saving all that money.

I spent an "entertaining" evening not long ago, trying to work out whether to clear a lump sum or not. Basically I agree with what you're saying - unless you squirrel the money away that you *would* have paid the into the mortgage (once you've stopped paying) you won't really be quids in.

If you overpay 250pm instead of saving, there's not much in it - you need to continue overpaying (once the mortgage is cleared, but for what should have been the period of the mortgage) in order to be quids in - because you don't physically "realise" the benefit/saving of overpaying unless you continue to save the money.

Having said that, truthfully, I just want to have flexibility in my financial arrangements for my own peace of mind - and that means not having to pay large lump sums to the bank each month... i.e. I want to clear the mortgage ASAP and then have the freedom to do what I want with my cash.

ScoobyLoot

Rob71 wrote: »

I spent an "entertaining" evening not long ago, trying to work out whether to clear a lump sum or not. Basically I agree with what you're saying - unless you squirrel the money away that you *would* have paid the into the mortgage (once you've stopped paying) you won't really be quids in.

If you overpay 250pm instead of saving, there's not much in it - you need to continue overpaying (once the mortgage is cleared, but for what should have been the period of the mortgage) in order to be quids in - because you don't physically "realise" the benefit/saving of overpaying unless you continue to save the money.

Having said that, truthfully, I just want to have flexibility in my financial arrangements for my own peace of mind - and that means not having to pay large lump sums to the bank each month... i.e. I want to clear the mortgage ASAP and then have the freedom to do what I want with my cash.

Cheers Rob :beer: yeah that's exactly my point - that there isn't a lot in it. Sounds like we both went through a similar "entertaining" evening trying to work out what works best.

At the end of the day people have to do what works best for them - I don't have any particular view as to whether someone should or shouldn't overpay having found this out. It's just that if you do, the difference to your pocket isn't as vast as the reduction in interest would naturally lead you to believe, and I think that's worth knowing.

For me for instance, I take away the notion that I can be a bit more flexible as to whether I overpay or not. As along as I squirrel away the loot for the original term of the mortgage one way or the another, be it before or after the mortgage is actually cleared, I'll end up with pretty much the same result. I can choose to aim to be mortgage free, or not, without having a vast effect on the pot of gold I see at the end of that time. :beer: And of course we'll all be earning more in 20 years, plus with inflation effects, the amount that the mortgage would cost as a proportion of income will reduce anyway, so if I don't overpay now it won't be quite such a drain on resources in the future, and that gives more leighway on what to do too.

Rob71

Hey ScoobyLoot... I've just revisited my spreadsheets to make sure I wasn't completely barking mad!

Here's what I came up - feel free to point out the error of my ways!

Mortgage of 100,000 over 20 years (starting today, let's say).
Overpayment potential of 250pcm.
Mortgage rate 4% (I'm on an SVR atm).
Savings rate 1% before tax (I'm getting more than this, but this is just for illustration).

If I do nothing, I will repay £145,435.28.
If I overpay, I will repay £126,898.12 in 12.35 years.
That's a saving of £18,537.16 in interest payments.

Saving the money instead will net me £1,879.70 interest (forget about the principal, we're only "interested" in the interest!:D).

The cost of saving versus repaying is £16,657.46! :eek:

Whilst that's a saving in terms of cost, I still don't have the cash in my pocket.

Now, like I say, at the moment I can save 250 pcm at 8% (before tax) with a regular saver. If I put that in to the mortgage at the end of the year, I end up better off, but not before.

If I want to end up better off in the long run, then I must clear the mortgage quickly, then continue to make those payments (once the mortgage has been paid), in order to actually have anything substantial in my pocket. Saving interest payments means nothing because you don't have the cash in the bank... I think that's your logic, that's basically mine. The only way I could realise my capital would be if I actually sold the house.

The logic of "pay the debt if the interest rate is higher than the savings rate" won't actually put money in your pocket - there are nuances and variables, and getting the best balance is quite tricky between getting working capital/investment versus clearing debt on an asset...

ScoobyLoot

JonnyBravo wrote: »

As you've said you're happy with your maths and the rather strange conditions which mean lump sum payments can't reduce your term or some other such stuff.....

My mortgage is presently fixed rate. I can dump money into it (in addition to the 20% overpayments I'm limited to) at the end of the fixed period. In doing so I can either choose to reduce the term or reduce the payments. It's swings and roundabouts. I worked on the basis of keeping the term the same but reducing the payments, which is what I chose to do the last time the last time my bank recalculated my mortgage for me. That's not really a strange condition, it's just what I kept to to keep a known position for comparing different options.

I'd be interested to know whether choosing to reduce the term of the mortgage at that point (but keeping payments the same) makes any significant difference to the end pot you have, or whether the conclusion is the same: that you have to squirrel away the overpaid amounts after the mortgage is cleared, for the original life of the mortgage, in order to be quids in at the end. Since the effect of reducing the term is the same as overpaying on a variable rate mortgage, I suspect the conclusion will be the similar.

JonnyBravo wrote: »

(couldn't be bothered to read it all after so many wrong assumptions being made)......

One, which wasn't wrong, it just kept the original term of the mortgage for the purposes of calculating the basic repayment amount requested by the bank for a given interest rate. Surely keeping the default end date constant is the easiest way to compare the effects of overpaying, since it gives you a fixed point to compare against when one scenario lets you complete say 4 years early, another 5, etc. and a fixed point to compare the amount in my pocket at that time.

I don't see what's wrong with that. Without having one fixed point, you can't make comparisons of the results of the rest of the calculations. Since my aim was to see "how much will I have at date X if I do this, this or this", using the original end date of the mortgage seemed eminently reasonable to me.

ScoobyLoot

Rob71 wrote: »

Hey ScoobyLoot... I've just revisited my spreadsheets to make sure I wasn't completely barking mad!

Here's what I came up - feel free to point out the error of my ways!

Hi Rob. Nice that someone trusts my maths and my judgment! Yeah I've done that too. I'm about to grab some lunch and bust the housework for a bit, but I will have a spin with your figures later on and I will get back to you.

Initially though, you're looking at the reduction in interest payments on the mortgage, which is the wrong thing to look at. If you want to know the difference in what's in your pocket at the end of the 20 years you need to compare the following:

1) Doing nothing - saving £250pcm at 1% for 20 years.
2) For this you need to know how early overpaying by £250 will complete your mortgage! Then you want to tot up:
a) (Cost of basic mortgage payment + 250) at 1% for (20 years - actual mortgage duration)

That will give you the amount in your pocket at the end of 20 years for both strategies.

Rob71 wrote: »

The logic of "pay the debt if the interest rate is higher than the savings rate" won't actually put money in your pocket - there are nuances and variables, and getting the best balance is quite tricky between getting working capital/investment versus clearing debt on an asset...

Huzzah!! That's right; it can't be boiled down to a simple "this number's bigger than this one" argument because that's only partially true. Taking some of the examples provided on this thread - thinking of the one paid off 11 years early, but actually only £12.7K better off at the end of it. You can bet the interest bill on the mortgage if it hadn't been overpaid would have been a lot higher than £12.7K for those 11 years. But you're not better off by that higher amount. So you're right - looking at just the interest rates, or just the reduction in interest paid on the mortgage doesn't mean that you're better off by that "saving" at the end of the term.

Rob71

Right, I think this kind of explains what I mean...

Going back to my previous example (100k over 20 yrs @ 4%) I'd be paying £606pm.

If I paid off 10k right now, I'd "save" on interest payments over the term to the tune of £14,543.53, and my monthly payments would then become 545.38.

Now if I saved the difference of the two payments over the term of the mortgage I would have £14,543.53 (excluding interest) actually in my bank account - using the 1% example I gave, this would be £19,635.82.

If I left the cash in the bank for 20 years, instead of paying off, I'd have £12201.90 at the end... there's not much in it, but at the least you'd need to be banking the difference in order to realise saving.

If I were to up my overpayments by that much... arrrgggghhhh, my head hurts!! :rotfl:

StuartGMC

A few points to note which haven't been considered:

1) Considered in terms of the risk (which is of course the product of likelihood and consequence) over time related to your health and ability to continue to pay the mortgage. As we age, so there is increasing chance of poor health; whilst we all have life cover insurance, permanent income protection is costly and I believe few people have it in their 20-40s?

If you pay off the mortgage early then you are doing so in a period when health remains good, so now, without the mortgage your basic income necessary for the standard of living is lower. If you are unable to continue working and still have the mortgage then you may be unable to continue to pay it, being forced to move out... Also, once MF, your baseline income requirements are lower, and you can therefore pay a lower premium for permanent income protection.

2) No consideration has been given to the savings made by not having to pay insurance for life cover on the mortgage, or redundancy cover. If you also paid income protection insurance you could be looking at, say, £50 per month which you no longer need to spend. So, instantly you have £300 per year of savings.

3) So far the calculations on interest earned have been based upon straight savings rates, but returns from the market over 10yrs will be greater.