Overpayments in 1st year is it worth it?

karillian22

After having awful problems getting a mortgage agreed last year I finally got one on the 3rd attempt. It's a fixed rate for 2 years, it's not a fantastic rate or mortgage but I was running out of options and it was a case of taking it or losing my home due to divorce.

Anyway, I have recently finished paying a monthly insurance premium it's only £30pm but I thought rather than getting used to the money and it getting wasted or swallowed up in general household bills I would put it towards an overpayment of my mortgage.

I have looked at the mortgage calculator on here and what confuses me is that in the first year if I make over payments it doesn't seem to make any difference to the outstanding balance at all. In the second year it will take off a little but it's not until about years 5 and 6 that it makes a real difference. So should I wait till June when the mortgage is 1 year old and start paying off the extra?

I know it's not a lot I really can't afford any more at the moment but I am thinking that something is better than nothing and if interest rates are due to go up then I can always cancel the over payments but I will be used to paying the extra anyway. How do I know if it's better to pay it off monthly or put it in an ISA or something and pay off a lump sum at the end of each year? and at what point in the year is it most beneficial to pay a lump sum?

I am pretty naff at figures but I suppose if the ISA isn't paying any more than the mortgage interest then it's better to pay it off the mortgage each month? (I apologise to any mathmeticians out there or money experts for my naievity in all this!)

I have looked on here at other peoples posts but am getting bamboozled by all the huge figures!

The mortgage is for £79000 I pay £574 per month, it's repayment over 15 years. The paperwork says I can pay a max of 10% of the outstanding mortgage so I assume £7900. (I wish!).
I know the above sums will probably seem tiny to some people on here with huge mortgages and huge monthly payments but I don't earn a lot, I just want to try and get rid of what's to me a huge debt in my life.

Not sure if this should go in the general mortgage section or this section??? may try both so sorry if you have already read this!

Thank you in advance for any help you can give!!!!

lincoln-potter

Hi there,

Firstly what rate is your mortgage at present? Depending on the rate there might be better options than repaying the mortgage.

However I personally feel that making OP's is rewarding and benefiting and less tempting to spend than just saving up a pot of cash.

Regarding what point is it best to pay off a lump su, that would depend on how your interest was calculated by the bank. Mine is daily so the sooner I make a OP the more I save. But there are people on here with far more technical know how than myself (mine are 99% of the time just my own biased opinions).

regards
LP

karillian22

Thanks for the reply I have posted on the other mortgage section as not sure if I was in the right bit here!

I have dug out my paperwork and the interest rate is 3.65% I have looked at a section I just found on MSE that answers the question for me sorry I should have looked harder before posting! I would have to have a lump sum to invest straight away to get a higher interest rate on savings.

I assume I need to contact the bank and ask what's the best time to pay off a lump sum then? I also take it then that paying off the extra monthly payments on mortgage as of 1st July when it will be a year old is best??

lincoln-potter

karillian22 wrote: »

Thanks for the reply I have posted on the other mortgage section as not sure if I was in the right bit here!

I have dug out my paperwork and the interest rate is 3.65% I have looked at a section I just found on MSE that answers the question for me sorry I should have looked harder before posting! I would have to have a lump sum to invest straight away to get a higher interest rate on savings.

I assume I need to contact the bank and ask what's the best time to pay off a lump sum then? I also take it then that paying off the extra monthly payments on mortgage as of 1st July when it will be a year old is best??

No worries at all, if in doubt ask i say.

Firstly check that they don't charge you to make an OP (my old man made a lump payment to Halifax and got charged £75 the other day, whereas I didn't get chagred by them.... odd).

I would imagine your interest is daily so fine out if there is a minimum amount you can repay and then as soon as you reach that sum pay it off as you will save more than waiting to the end of the year.

Not sure what mortgage calculator you looked at but paying off in the first few years (including first year) are the most appropriate times as this is the period when the majority of the money yoju

lincoln-potter

Ahh i just typed a long reply and the forum ate it up.

Check the following with your bank
- Is there a minimum amount you can repay (once you reach this amount make the payment rather than wait for a larger sum)
- Check that they don't charge you to make repayments

Then start OP as soon as you can.

karillian22

Hello! Thanks for the reply! Checked through my paperwork it says i can make repayments up to 10% of the outstanding mortgage balance, I won't get anywhere near that!! So is the next step I suppose is to contact the bank then??

As I said earlier the mortgage calculator on here looks as though it will not pay off any extra/make any difference in the first year though so maybe I should save the £30 until July? Although you say it makes a difference from the start, sorry if I am being a bit dense!!!!

lincoln-potter

karillian22 wrote: »

Hello! Thanks for the reply! Checked through my paperwork it says i can make repayments up to 10% of the outstanding mortgage balance, I won't get anywhere near that!! So is the next step I suppose is to contact the bank then??

As I said earlier the mortgage calculator on here looks as though it will not pay off any extra/make any difference in the first year though so maybe I should save the £30 until July? Although you say it makes a difference from the start, sorry if I am being a bit dense!!!!

Not sure what calculator you have looked at, but this one (http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator) says that if you OP £30 per month from now you would save £1679 in interest and take almost a year off your term.

Waiting a year would mean you save less around £1400

karillian22

I see now thanks I was looking at the calculation over the years it says

Without over payment With overpayment
year 0 79000.00 79000.00
year 1 74996.00 74629.00
and so on........

so to me it reads that in the first year nothing gets paid off but in the second year £367 gets paid off? Is that right?

Mallotum_X

If you make over payments then you are paying off the mortgage. It will reduce the balance and it will save interest in the long term. However you need to ensure any fees/charges do not reduce it.

Think about it logically, it i lend you £1000 and you pay me £30 a month then each month the balance falls by £30. Same with a mortgage.

lincoln-potter

karillian22 wrote: »

I see now thanks I was looking at the calculation over the years it says

Without over payment With overpayment
year 0 79000.00 79000.00
year 1 74996.00 74629.00
and so on........

so to me it reads that in the first year nothing gets paid off but in the second year £367 gets paid off? Is that right?

No if you look at the graph you can see the two lines of with and without the OP.

the sooner you pay the more you save, simple as that.

Another site is - http://www.moneyextra.com/mortgages/calculators/overpaying-your-mortgage.php


See for your self, these would be your figures
£79,000 @15 years - £30 OP - saving £1679

If you saved up that £360 and made a lump payment followed by £30 monthly payments you would save £1667, so not a massive difference but you can see you save more by paying earlier.

Jonbvn

OP,

The sooner you pay down the mortgage, the less interest you pay. Make sure there are no early repayment charges (ERC's) for overpayments.