Using overdraft to overpay mortgage - Would this be benefical?

BigJohn3

I've just been looking at the mortgage overpayment calaculator as we plan to restart this now that the kids are coming out of nursery and we theoretically have some money spare each month. Overpaying by £500 a month (max allowed) we cut 11 years off the term and save nearly £50k in interest. Whch would be nice!

Currently we have money "spare" at the end of each month but not always £500 so a thought occured to me. Would it work out as an overall saving to use our approved overdraft with HSBC to make the overpayment? I don't know what the actual rate is but when we have dipped into it before for a few hundred pounds it only seemed to be a charge of £5 max per month.

As background, we have a good joint income, an excellent credit rating with no missed payments etc and don't ever go anyway near the overdraft limit (which I think is about £1200 - £2000 depending on what account we use.) Using an amount of the overdraft should only be a short term measure as we are accumulating more funds every month we aren't paying nursery fees so soon we should be able to budget it wholey from our wages every month. As it is a voluntary overpayment we could always stop it for a period if there are other emergency demands for our cash.

I am not proposing using the whole £500 each month but for the sake of the arguement the same question would apply of is it ultimately going to save me a lot of money.

The 3 things I want to know are:

1) Does anyone know what the interest rate is for a HSBC current account agreed overdraft?
2) Is there a calculator anywhere that I could do the sums to find out an estimate of what the overdraft interest fees would be?
3) I assume that this couldn't harm our credit rating at all as long as we didn't go over the agreed limit. Is that correct?

Thanks for your advise and comments in advance.

Stuart

holly_hobby

Using your overdraft/having an OD balance, is reported as a debt to CRAs by the banks on a monthy basis, which will obviously have an affect on your credit profile and any financial application, as it will appear from the outside that you are living beyond your means month by month.

Authorised OD rates are lower than unauthorised rates, and are displayed within your branch and also on their website.

Your monthly fee statement (if ODrawn) should also show the rate and cost of credit and any associated fees.

However, I would be surprised if your OD rate (even if authroised) is lower than your mortgage rate - and as such I wouldn't recommend borrowing on a higher rate product, however I understand that you are looking at this to reduce the term, but this will have to be balanced on the overall costs that operating your overpayment schdule will incur over the reqd term.

TBH its not something I would recommend for the reasons given.

Sure others will be along with comment and advice ..

Hope this helps

Holly

BigJohn3

Thanks for your reply Holly. I hadn't really thought that using an approved overdraft would be viewed in that way but I suppose you are correct. Our current overdraft payments are usually when one account has gone overdrawn whilst cash is in the other so is short term and not due to having any money, just not enough time to effectively manage things.

I've dug out our overdraft agreement and you are correct in that at 18.29 APR it is higher so not ideal for long term use.

I was looking at it from the point of view that if it was overpaid, the term would come down, as would the amount left to pay as we stopped just chipping away at the interest and not the actual debt. Using the calculator, without overpaying after 10 years when it could have been paid off we will still have £80k to play for another 11 years.

I think I will need to revist our finances to check exactly are incomes and outgoings are and then make a judgement call as to whether it is benefical to spend some money now to hopefully mean our outgoings in the future are much lower.

I'm interested to hear anyone elses thought on whether you think I would be making a big mistake using any of the overdraft facility to achieve this goal. I reiterate this is not a long term plan, just to start the overpayments off as soon as possible.

Cheers Stuart

DannyboyMidlands

What are your mortgage rules regarding overpayments? Does it have to be a regular amount or could you just save your spare money every month and overpay as a lump sum say twice per year? Then you could leave the overdraft alone, for emergencies.

BigJohn3

Danny - We can overpay up to £500 a month with no fee on a flexible basis so could stop and start it whenever. I know we can pay off a lump sum when our current fixed term comes to an end in 12 months time but not sure about other times. I understand what you are suggesting and it makes a sensible option which I will look into with the lender.

The way I am looking at the overpayments is the sooner and more frequently you can make them, the bigger and better headway you make with actually paying off the underlying debt and not just the interest. Currently if we pay £10k in a year we are only taking off £3k from the bottom line and I want to break that cycle as soon as possible. Hence thinking outside the box a bit.

We do have savings in an ISA for major emergencies i.e. losing jobs etc and our income should allow us to do this easily every month in the near future once we have paid for a few large ticket items in the last few months. I just wanted to get going on this ASAP.

Soot2006

BigJohn, I wouldn't recommend dipping into the OD to overpay on the mortgage, however what I do is see what I have "extra" at the end of the month and make a manual overpayment via my internet banking. Sometimes that is £300, sometimes £100 and something nothing (December!), but it has a positive impact on my mortgage statements and means I am not using money I don't truly have.

**Obviously this depends on your mortgage terms - mine has flexible overpayment ability**

GAH

I echo whats been said above. Just overpay on what you can afford without dipping into the O/D.

It will showon your credit rating as a debt and can be viewed unfavourably if you are looking to obtain further credit.

The mortgage calculator is good, but what it doesn't take into account is that your mortgage rate will almost certainly rise over the coming years.

opinions4u

Cut it down to this:

1) How much is the EAR on your overdraft?

2) How much is the rate of interest on your mortgage.

The answer to those questions will tell you if there is any value at all in the idea. I think it's highly unlikely that there is.

newgirly

Hi, why don't you go over to the mortgage free wanabeee board, there are lots of people making a bit extra to overpay without having to borrow, even some on very small incomes, good luck !

BigJohn3

opinions4u wrote: »

Cut it down to this:

1) How much is the EAR on your overdraft?

2) How much is the rate of interest on your mortgage.

The answer to those questions will tell you if there is any value at all in the idea. I think it's highly unlikely that there is.

Thank you all for your comments and advise. I will take it into account.

In regards to your point about the interest rates, yes the overdraft interest rate is higher than the mortgage rate but as I've mentioned I was looking more at lowering the overall base value of the mortgage rather than wasting payments on just the interest, which will mean I pay less in the future so it isn't quite as clear cut as a simple comparison of what I would pay today.

The main thing that would put me off is the effect it would have on the credit rating which I hadn't really thought would happen on an approved overdue but it makes sense now it has been pointed out.

Thanks again everyone and I will take a look at the mortgage free section to see what they are upto. I wonder how much I can get for two noisy under 5's? That would cut my outgoings in half straight away.

ViolaLass

BigJohn3 wrote: »

In regards to your point about the interest rates, yes the overdraft interest rate is higher than the mortgage rate but as I've mentioned I was looking more at lowering the overall base value of the mortgage rather than wasting payments on just the interest, which will mean I pay less in the future so it isn't quite as clear cut as a simple comparison of what I would pay today.

But whatever you save on the mortgage will be spent on overdraft interest. Unless the overdraft rate is lower then it's a daft plan. Save the money over £500 a month up and just make a lump sum payment when your current mortgage ends next year.