Using overdraft to overpay mortgage - Would this be benefical?

getmore4less

Debt for paying of debt only works if the rate is lower.

If you have a decent disaster fund for loss of income then just over pay what you can without penalty and save the rest in the best rate you can get, monthly savers usualy give the best rates.

BigJohn3

ViolaLass wrote: »

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.

I think that either my understanding of how mortgages work is completely wrong or I am not articulating my point very well here. I've repsonded to this reply but this isn't aimed at you personal but the thread in general so please don't take offence as none is intended.

I realise that in a normal/perfect circumstance you wouldn't incur a debt penalty to overpay elsewhere. What I am hypthosising is whether the overall benefit to my household would be more if the mortgage is lowered. So saying that 5% is less than 19% is not the be all and end all of the matter or really the right measure for what I am looking at.

Ignoring the credit rating element for a minute, looking at the overpayment calculator on this site, if I overpay £500 a month for the next year (which is fixed at 5.63% anyway) my mortgage would be down from £123,000 to £113,639. This compares to £119,846 if I don't over pay. That is a reduction in one year of £6207 plus a lower lump sum to pay interest on going forward, hence even more of the lump sum gets paid off in subsequent years.

Looking at the example quoted in the overdraft letter from the HSBC, the rate is 19.9% EAR. So if I took out the full £1000 at the start of the year and repaid it at the end of the year I would be charge £199.68. So for £500 it would be £100ish.

If I ignore the credit rating as I said, that seems like quite a good pay off. Pay £100 in fees but leave myself £6k better off in the long run and it only gets better as the years go on until it is all gone in 10 years rather than 21. I don't actually need the whole £500 every month, definitely not for 365 days of the year and certainly not for the whole life of the mortgage but for ease lets go with those figures.

Also as mortgages are calculated daily, the sooner the overpayment is made the better so saving up an annual lump sum to pay in wouldn't be as benefical if driving down the mortgage as quicly as possible is the aim.

Hopefully this makes it clearer what I am driving at and why it theoretically struck me as a good idea.

Thoughts? This could be where I find out that my knowledge is actually patchier than a tramps trousers!

dimbo61

When I go overdrawen with my Bank I get charged not only XX.XX% but also £5 fee.
Yes if you can overpay £500 each and every month you will save a huge amount in interest I know because thats what we have been doing for the last 6 years.
We have saved over £50K so far and hope to be MF within the next 3 years well before retirement.
But it takes hard work. Set up your mortgage payment to include the extra £500 and that is your normal mortgage payment from now on ( you will get used to it )
Not saying its easy and £500 a month would pay for a nice car or holidays to sunny places every year but do you want a mortgage till you are 65?

blueberrypie

BigJohn3 wrote: »

Ignoring the credit rating element for a minute, looking at the overpayment calculator on this site, if I overpay £500 a month for the next year

BigJohn3 wrote: »

Looking at the example quoted in the overdraft letter from the HSBC, the rate is 19.9% EAR. So if I took out the full £1000 at the start of the year and repaid it at the end of the year I would be charge £199.68. So for £500 it would be £100ish.

I think you're comparing two different things.

On the one hand, you're looking at the savings from overpaying by £500/month - i.e. £6000 in one year.

On the other hand, you're looking at the cost of borrowing £500 on your overdraft. Where is the other £5500 coming from?

You need to compare the cost of a £6k overdraft with £6k overpayments, or compare the cost of a £500 overdraft with a single overpayment of £500.

BigJohn3

blueberrypie wrote: »

I think you're comparing two different things.

On the one hand, you're looking at the savings from overpaying by £500/month - i.e. £6000 in one year.

On the other hand, you're looking at the cost of borrowing £500 on your overdraft. Where is the other £5500 coming from?

You need to compare the cost of a £6k overdraft with £6k overpayments, or compare the cost of a £500 overdraft with a single overpayment of £500.

You are totally correct. I realised last night when I was think through this and realised the flaw in my theory. I thought there must be one.

In our circumstance we could still get quite a few months of overpayments in (as we have £250-£300 in our budget we can allocate to it) before taking a break to top our funds up. This would still give us the benefit of having the payments in as soon as possible and subsequent interest calculations being done on this lower figure.

Thank you all again for your feedback and I now have a much better idea of the pros and cons of this idea. I think I will use it sparingly whilst contiuning to work towards having our finaces in a position where it wouldn't be necessary.