Why does lump sum have little impact?

MickeyM87

Hi All,

I was wondering if you could help me work out why a significant lump um payment into my mortgage has little impact if I set up regular overpayments as well.

I have rounded the figures up (way up) in order to better emphasise the issue.

All examples assume a 4.5% interest rate with repayment term 25years.

If I pay 5K on a 200K mortgage then the total payable drops from 333499 to 323543. An amazing saving over the term.

If I make regular overpayments of 400 a month then the total payable drops from 333499 to 276440!!

This is the sucker punch...

If I make a payment of 5K and set up 400 regular monthly overpayment then the total payable goes from 333499 to 271673 a saving of only 4767!! It therefore seems pointless making the 5K overpayment.

I am not sure if this is a quirk in the calculators (I've tried this on a few including the excellent ones on this site and eggs)

I am also not sure if this is because of the fact the monthly overpayment eats into the debt so much more than the 5K.

Would anyone with a bit of mortgage know-how pls explain this anomoly to me.

Many thanks in advance!


Mortgage Overpay Each Month Lump sum Term (yrs) Total Payable

200000 0 0 25 333499
200000 400 0 15 276440
200000 400 5000 14 271673
200000 0 5000 24Y10M 323543

mpgsheep

Hi there,

Am no expert, but you pretty much explained it yourself:

"I am also not sure if this is because of the fact the monthly overpayment eats into the debt so much more than the 5K."

Basically your 5k lumpsum is only equivalent to approx 1 year of overpayments (400*12=4800). The calculators look at 25 years of overpayments, so 25*4800 = £120,000 (obviously you dont make 25 years of overpayments as the overpayments mean you pay off your mortgage much quicker). It took me some time to grasp this as well!

alex_p

That's quite interesting. It makes sense to overpay £5k since that is taken off the balance owed straight away and therefore not subject to any interest. The £400 regular overpayment means that this process happens every month but on a smaller scale. However over the term of the mortgage 25 years you will overpay 25*12*£400 = £120,000. So £400 regular overpayment has a bigger impact on the amount you save.

mpgsheep

A proper comparison would be to plug in £5000 lumpsum overpayment, and then compare that with £5000 total of overpayments over any length of time - should show that making the upfront £5000 overpayment is best (as is straightaway 5k less to pay interest on over remaining period of loan)

getmore4less

Looking at the examples the terms will be different as there are overpayments start with 25years.

Total


£333,414.72 £200k @ 4.5% £1112pm standard

£325,129.95 £195k @ 4.5% £1084pm 5k new payment

£318,412.27 £195k @ 4.5% £1112pm 5k same payment

saving of around £15k for the £5k overpayment if you keep the payments the same to get full benifit. or £8k if not
Now add £400 overpayments

£276,807.49 £200k @ 4.5% £1512pm

£269,113.20 £195k @ 4.5% £1484pm

£266,988.46 £195k @ 4.5% £1112pm

So the £5k overpayment still saves close to £10k over the shorter period or £7k if you drop payments

The main difference is the time the £5k has to work is shorter so the total saving gets reduced.

MickeyM87

Thanks so much for your replies, I was going crazy on my own trying to work out how the 5K appeared to have so little impact. In some calculators I wasn't even saving the 5K!!

I have to admit, I know it must make sense to pay in a lump sum but I just can't get the figures to prove it to me that a lump sum plus the regular overpayments are worth it :-/

I've tried knocking the outstanding mortgage down to 195K and taking it from there with the 400 overpayments, still doesn;t seem sensible - on paper.

Brainwave... at time of writing...

Looking at the comparison of the 195K with regular overpayments of 400 against the 200K with a 5K lump and regular overpayments of 400 I would finish the mortgage 5 months early, therefore saving the 5 * 400 as well which is another 2K... I think this brainwave holds true!

MickeyM87

Thanks getmore4less.

I was in the middle of my reply when yours came in.

You are right, they key I suppose is the fact I pay my mortgage off a lot quicker and therefore save the money I would usually be paying out to the mortgage.

getmore4less

Look at it another way

£5k over 25 years is £27.79pm total £8337.49 so you are actualy saving £3337.49

thats the max you can save

If you make overpayments £400 on the loan it gets paid off in under 15 years.

so the £5k would be £38.25pm and total £6885 a saving now of £1885 about 1/2 the original saving.