I don't get it. Am I being really stupid!?

temba

Maybe it is because it is nearly midnight, but I can't work this out.

My mortgage is £68100, and it has 22 years to run. I am paying interest and repayments and the rate is 4.79. On Friday I decided to overpay by £80 a month. I'm very excited that the mortgage calculator informs me that this will take off 5.5 years and save me £11598. ie, TOTAL amount payable=£98695 instead of £110294.

BUT....... I've just worked out that if I carry on paying my mortgage as I was before, and save £80 in a savings account each month, then even BEFORE ANY INTEREST HAS BEEN ADDED, in the 16 years I would save £15360, ie MORE than if I overpayed on my mortgage. What I mean is, although I wouldn't be mortgage free any sooner, the TOTAL amount I would save would be more.

I just don't get it am I being really thick and missing something? I do want to be mortgage free asap, but not if it COSTS me money!

Lazy_Runner

Hi

I am not an expert but my guess is that after 16 years, the mortgage won't be paid off.

I don't know the amount owed on the mortgage after 16 years, but I will bet that you won't be able to pay if off with your savings.

I suspect that the amount of your savings will only be able to pay off the mortgage after year 20 or 21 (complete guess).

So you will continue paying the mortgage amount and your savings amount for an extra 4 - 5 years.

HTH

LR

roswell

Theres a reason to this firstly Id assume the interest rate on your savings is higher than your mortgage rate, secondly you havent accounted for tax on the interest so the amount could actualy be lower after 16 years. on the other hand if you are fixed for the next 16 years at 4.79% you could risk saving it on the assumption you can beat the interest rate for 16 years you would be money up ,, if you cant beat the interest rate and tax you will be short ... for a guarenteed result overpay the mortgage

tomstickland

All you have to do is compare the mortgage rate with the post-tax savings rate. If the savings rate is higher (unlikely) then saving is better.

temba

Thank you for your replies.

You are right, the amount I will have saved (£15K) won't be enough to pay off the remaining capital after 16 years. But that doesn't matter does it:

What I still don't get is that

If I pay the mortgage as I have been doing for the remaining 22 years then the total I will pay is £110K and at the same time I save £80 pcm for 16 years, I will end up paying back £110K, and having £15K in savings. ie: total amount debit £95K

If I overpay by £80 I will have paid off my mortgage in 16 years, but it will have cost me £98K.

ie, it will take longer doing it the first way, but I will be £3K better off. (more if my saving get (albeit taxed) interest which presumably they will)

I don't mind having my mortgage longer if it costs me less.
Am I missing something obvious?

temba

roswell wrote:

you havent accounted for tax on the interest so the amount could actualy be lower after 16 years.

sorry I didn't explain properly: I'm assuming for the sake of this argument that my savings accumulate NO interest whatsoever, either taxed or not.

Tomstickland: thank you. I'm assuming my savings will have NO interest, and I will still be better off.

I just don't understand why it would ever be financially better for me to overpay

tomstickland

Your maths must be wrong somewhere.
I'll have a closer look.

tomstickland

I've not done the maths, but I've spotted the inconsistancy in the question.
You need to compare both methods over the same time period.
ie:
pay mortgage for 22 years and save for 22 years
vs
overpay mortgage for 16 years and then save the whole monthly payment amount for 6 years.

temba

EVERYONE I'M SORRY I'VE WORKED IT OUT NOW

I know why I was being so dense.........

In the saving scenario, the total amount payable needs to include the £80 which I would "pay" into my savings each month, which obviously negates whatever the "savings" add up to, with the exception of any interest accrued. Therefore, as I was sure was the case before I started trying to do the maths, it is better to overpay.

I am sorry if I confused anyone in this post. I'm also highly embarressed that my A-level maths failed me! Thank you to everyone who replied and tried to help me work it out.

Can I wipe this post and start again please?! :embarasse

Dan29

Surely the mortgage overpayment scenario also needs to include the £80 you overpay each month though?

To try to keep things simple, if you put £80 a month into an ISA paying 5.8% tax-free, surely this is better than overpaying a mortgage fixed at 4.79% by £80 a month?

EDIT: I'm sure someone will check my sums (Tom? ) but I reckon that by paying £80 a month into an ISA with an interest rate of 5.8%, at the end of 16 years you would have £25,196. £110294 minus £25196 = total amount payable £85,098 meaning you'd be £13,597 better off if my maths is correct (unlikely ).

Gorgeous_George

The other point worth remembering is that overpayments will be less accessible than savings thereby removing the temptation to buy that new car or designer kitchen.



GG