Using overdraft to overpay mortgage

EMcG

I wonder if anyone could tell me whether this makes sense. My new mortgage (4.95% fixed for 5 years) allows overpayments of £500 per month.

I am rarely overdrawn but if I were HSBC would charge me 14.8% for the pleasure.

If I were to overpay my £79,500 mortgage by £500 per month I calculate that I would knock 13.9 years off my mortgage (meaning it would be paid in 8.1 years) and save £33,942.65 in interest.

Therefore, would it make financial sense to run a £500 overdraft in order to fund the overpayment?

Am I missing something here?

Any advice gratefully received.

Trow

You are rarely overdrawn - but would your £500 overdraft be able to cope with an additional £6,000 expense in the year? It looks like you are looking at one additional payment of £500 but you would be looking at 12 £500 payments per year to make the saving.

EMcG

I thought this sounded too good to be true!

At the moment after everything comes and goes out of my bank account I am left with about £200 in my account. I was thinking that if I overpaid my mortgage by £500 each month I would end up approx. £300 or so overdrawn every month.

With my overdraft costing 14.8% I thought that to run the £300 overdraft would cost me £3.70 a month or £44.40 a year.

So basically it would cost me £44.40 a year to overpay my mortgage by £500 each month - this seemed like a great idea. But even as I was typing it all down it seemed too good to be true.

Where have I gone wrong in my thinking?

cloud_dog

Ok, forgive me if I am missing something but, surely it is fairly straight forward. For the pleasure of borrowing £500 your bank will charge you 14.8% pa, whilst each £500 would save you 4.95% pa.

Whilst the long term effect of over-paying your mortgage appears considerable you still need to pay the 14.8% interest on the £500 to your bank, almost three times as much - surely this does noy make financial sense!

cloud_dog

bridiej

Yes, seems to me you are paying far more interest on the £500 as an overdraft than as a mortgage...

somefinegal

Hi

No.... Makes no sense to borrow money at a higher rate in order to pay off a lower rate loan ( I cant see the sense in it anyway).

BUT How about the 'one' style of accounts where all money is at one low interest rate (ie average 4.95% mortgage rate) You could ...if it is this type of account, get as much interest free credit on one or two credit cards and pay into the account, saving you interest and therefore reducing the length of your loan. Only thing to remember though is pay off before the interest free period it up (preferably with another interest free card or two). The longer you have a lump sum (interest free) in the mortgage account, the better, as this is then saving you approx 4.95% interest free on that amount.

That might make sense?? (coments appreciated?)

S

MarkyMarkD

E McG is confusing the savings on the mortgage by overpaying £500 per month = £6,000 per year, with the cost of borrowing £500 ONCE on the current account.

Apples and pears.

And somefinegal, the idea you are mentioning is a good one and has been often referred to on the board, but the idea you'll get a "one"-style account with a rate as good as 4.95% is rather deluded. The rates on offset accounts are universally rubbish compared to best buy discounted mortgage rates, so you pay a lot extra for the privilege of offsetting.

JayS_3

Quote:

"And somefinegal, the idea you are mentioning is a good one and has been often referred to on the board, but the idea you'll get a "one"-style account with a rate as good as 4.95% is rather deluded. The rates on offset accounts are universally rubbish compared to best buy discounted mortgage rates, so you pay a lot extra for the privilege of offsetting."

edited


I don't think the offset accounts are universally rubbish. Do you think I am paying for the privilege of offsetting?

MarkyMarkD

In a word, yes.

Moneyfacts best buy mortgage tables show Lambeth BS doing 2 year discount at 4.49% and 3 year discount at 4.59%. So, taking the 4.59% rate, you are paying 0.50% extra for 18 months, then 0.76% extra for the next 18 months, for the privilege of offsetting.

If you had a £100,000 mortgage, that would be an extra £1,890 in interest over that three year period.

Offsetting does NOT come for free.

But as has been pointed out before on here, it depends how much you are going to offset compared to the size of your loan. For the vast majority of customers, the offset is a small amount compared to the loan - so offsetting doesn't pay.

Just to give simple examples, if you offset £10,000 rather than investing it earning 5.5% (current Egg new customer rate) which is 4.4% after basic rate tax, you'd save £10,000 x 5.12% (average rate on your mortgage over the three years) x 3 years = £1,536. But you'd lose the £10,000 x 4.4% x 3 years = £1,320. Net interest gain = £216.

So, for a basic rate taxpayer, they'd need to have around £87,500 of savings offset to be worth paying the higher mortgage rate on the offset.

For a higher rate taxpayer, the interest lost is only £10,000 x 3.3% x 3 years = £990. So net interest gain = £546. And the break-even point is then only £34,000 or so.

Offsets are fine for people with huge savings compared to small mortgages, who also pay higher rate tax. But for other people, they are an over-promoted con.

Jay, I'm very happy if you are happy with offsetting - and hope that your stoozing money is so large that offsetting proves beneficial for you. But I stick to my original assertion that you pay extra for the privilege of offsetting.

cloud_dog

I'd have to agree with MMD.

Have said before that I love the idea of an offset mortgage but can never make the financial calculations come out in favour of offsetting.

If you haven't I suggest you read the "Offestting - The Numbers" thread, as in there is a calculation that will show you how much better / worse off you are by offestting.

There are other products that allow a degree of flexibility. I have a Nationwide BRT Mortgage that allows over-payments but these over-payments can be 'retrieved' without incurring additional cost if I wish. I'm not saying that this particular mortgage will suit your situation / needs but its worth looking around and at the small print.

cloud_dog

JayS_3

MarkyMarkD

Interesting points, we keep looking at the pros and cons. However, it was important to us to be able to overpay large amounts and not be tied in (Lambeth BS ties you in until July 2007, and I suspect does not allow overpayments). Luckily, our savings are large enough to make offsetting work, and we want to stooze, unfortunately, my husband pays higher rate tax and I pay basic rate tax, but we have the get out clause if it doesn't work, which we would not have with Lambeth, or most of the best buy re-mortgage deals that pop-up first in the best-buy calculators, as most have tie-ins or non/limited overpayments.

JayS