Is it really worth it...?

rich744

I have a Mortgage of just over 90K. With just under 20 years remaining. The interest rate is 2.5 percent.

Is it really worth overpaying this loan..?

INflation is running at 4.8% RPI. Isn't this outstripping the true value of this loan anyway......

My natural inclination is to overpay, because I just want to be mortgage free!!!

Realistically, I could probably overpay 200-300 a month.

What do you think......

alex_p

Well given 90K over 20 years @ 4.5% you will pay £25K interest over that term, which is not a huge amount. If you pay this off in 10 years instead you would pay £12K interest saving £13K.

Play around with a mortgage calculator or spreadsheet to see if the numbers make sense. Factoring in inflation is quite difficult given that it will change over the term as will the rate if you're on a float.

SeriouslySeekingtoSave

If you can better the interest rate in savings then it is better to save. I know it doesn't feel quite the same but if that is how the numbers crunch...

One suggestion is to build up a 'savings' total and then minus it against your mortgage. That way you can still feel like u are making inroads into your mortgage ;-)

ReadingTim

Inflation is a red herring, unless you're getting pay rises equal to or greater than the rate of inflation. If you're not, inflation just makes things more expensive.

If you can get a better rate of interest in a savings account than you're paying on your mortgage then you're better off saving. If you can't, throw the cash at the mortgage.

That said, are you limited by either the amount or number of overpayments you can make by your mortgage provider? Can you borrow the money back at a later date if you need to (ie an overpayment, not a repayment)? Are you a basic or higher rate tax payer, as that will have an impact on the savings rate you need to achieve to make the calculation.

You'll need to check your mortgage T&Cs and your rate of income tax, as you haven't given enough information to give a proper answer

rich744

Thanks for the comments folks.......

There is always a psychological element at play. I've got the type of personality that wants to CLEAR DEBTS, and be mortgage free. But also want to make the RIGHT financial decisions.

There are no restrictions on making overpayments, but don't think overpayments can be returned. I am fortunate enough to be on nationwide's original standard variable rate which now stands @2.5%. I am a standard rate tax payer.

I have around £10k In a equity ISA, and another 3k in a cash ISA.

At times i'm tempted to just throw all the funds I can muster at the mortgage. I hate being indebted.

macman

Sounds plausible if you really believe that the mortgage rate is going to remain at 2.5% for the next 20 years. It's only a matter of time before base rate starts to rise, and once it does then I suspect it will be a monthly 0.25 increase for a year or so until we are at maybe 4%.
Of course, if you were on a five year fix then you'd be laughing.

dimbo61

In 1991 the bank of england base rate was 15%!!!! so thinking that rates will stay low for the next 20 years is a bit of a gamble.
Now building up savings in cash ISA,s paying more than your mortgage rate and overpaying to clear the mortgage asap is not such a gamble.

Baby_steps_2

One thing to consider is the financial implications going forward if you remove your ISA money. That money will never get the tax free status it has now back if you pay it off the mortgage. So if in 5 years you are going to be able to save I don't know say £1000 a month you will only get tax relief in an ISA on the first £5100 after that you will be taxed on any interest your savings might make. Its worth considering for financial planning reasons, especially now where you should be able to get a savings rate higher than the mortgage interest rate.:D

rich744

dimbo61 wrote: »

In 1991 the bank of england base rate was 15%!!!! so thinking that rates will stay low for the next 20 years is a bit of a gamble.
Now building up savings in cash ISA,s paying more than your mortgage rate and overpaying to clear the mortgage asap is not such a gamble.

Interest rates are ridiculously low. However, few enjoy rates in the range of 2.5% Normal rates for those with 10-20% deposits is around 5%.

The degree of personal debt the average Joe is carrying will ensure 'relatively low rates' for years....

Rates have really become related to credit worthiness. Average CC rates are 15-20% how is this reflecting the current bank rate of 0.5%?


If Bank rate were to climb by even 3% this would cause mass defaults on mortgage payments. Huge numbers of people are teetering on the edge of the debt abyss....

elwistua

I am in a similar situation to you, 13 years and owe £88k. We have reduced the term from 23 to 15 years 2 years ago and are comfy with the repayments and have money left over every month so could OP but I/we feel there are still things we would like to do before we are 40 (4 years for me) and would like to do them.

Good luck with your decision.

RosieTiger

Then do both, keep your savings but overpay with any other money you have coming in.