How does £1 equal £3?

JoeyGrey

I've been reading various diaries on the MFW threads and a few people have mentioned that for each £1 they overpay it is actually worth £2 or £3. I just wondered how they worked this out exactly. I understand it is due to paying the mortgage off early and not paying the extra interest, but I would love to know the actual working out.

I can't think of a better way to stop me spending on silly bits and pieces than to think in this way, but I need the logic behind it before my brain will accept it!

Thanks.

skaps

I think you are talking about the interest per day, to work it out you do the following

Interest rate x amount outstanding divided by 365

tomstickland

No, I think they are talking about if they pay off £1 now it's going to save them £3 on their mortgage over the longer term.

LilacPixie

I thought it was for every £1 you overpay its £2 less interest to pay over the 25 years and £3 less to earn

lil_lisa

It's all about the compound interest and it can vary on how you can work it out depending on a number of factors. Mainly, how often interest is calculated, term of mortgage, and interest rate.

Have a look here.... http://www.moneysavingexpert.com/banking/interest-rates#compound

If you want to see how it works out for you then have a look at the mortgage overpayments calculator on here (http://www.moneysavingexpert.com/mortgages/mortgage-calculator?dd). Put your details in then if you put in a one off overpayment of £1 it'll tell you how much it equates too.

getmore4less

£1 on a 5% mortgage costs 5p per year over 25years thats £1.25

If you saved the 5p per year then it is more.

golfiematt

£1 on a 5% mortgage costs 5p per year over 25years thats £1.25

its a lot more than £1.25 because there is compound interest.in other words interest on the interest.
In general the longer the term left the more you save by overpaying, and the same goes the higher the interest.

tomstickland

What you pay divided by what you borrowed is a function only of the mortgage term and the interest rate (assuming monthly calculation).
A ratio of 3:1 is very high. My mortgage rate gives me about 1.8 at the moment.

dimbo61

I used a website called "whatsthecost" and put in my mortgage details and then reduced the mortgage term from 22 years to 10 years now this will save me £50,000 in interest so thats when I had the lightbulb moment!
Enough said.

DVardysShadow

getmore4less wrote: »

£1 on a 5% mortgage costs 5p per year over 25years thats £1.25

If you saved the 5p per year then it is more.

Actually, that £1 is worth £2.25 on your calculation.

With compound interest, it is £1 * [1.05 ^ 25] = £3.37

JoeyGrey

lil_lisa wrote: »

If you want to see how it works out for you then have a look at the mortgage overpayments calculator on here (http://www.moneysavingexpert.com/mortgages/mortgage-calculator?dd). Put your details in then if you put in a one off overpayment of £1 it'll tell you how much it equates too.

Thanks everyone, and thanks for the link lil_lisa. I showed the above calculator to my young colleague who has just bought her first house and is trying to give up smoking. She worked out that by putting her cigarette money into her mortgage she will knock 10 years off the mortgage and save a small fortune.

The lightbulb moment was wonderful to see firsthand