Are we making the most of our overpayments this way?

Minute

Hi

Our mortgage rate has just dropped into the C&G variable rate of 2.5% from 5.1% after 5 years fixed. It is, incredibly, fully flexible in terms of how many overpayments we can make or changing deal should rates rise too much.

So although our monthly payment should drop to about £1100 from £1400 we have asked C&G to include overpayments every month so we reduce the capital owed asap.

Just got the statement to confirm that: in effect we still pay £1400 a month including roughly an overpayment of £295 and £5 interest.

2 questions:
- I'm now confused as i've just read somewhere that "For overpayments to have the greatest effect, you need to ensure that you choose, or switch to, a mortgage offering daily interest calculations". Our interest seems to be calculated monthly - is that bad?

- Overpaying £300 a month from now on (as long as rates are lowish), I would have thought surely this will reaaally decrease the length of our mortgage / capital still owed (£205000). By how much can I dream of reducing the amount owed over, say, the next year and next 5 years?

thank you!

bhindi

Hi

Just thought this calculator will be of use to you. I also am looking to overpay my mortgage each month, and this tool has been brilliant to show me where the benefits are etc.

The other thing I just wanted to say, is you might also do as I am and think about possibly making your overpayments into a savings account instead. I have just discovered that First Direct will pay a gross 8% for money that I dont touch for 1 year.. (Can withdraw early but would lose the annual £124 (net interest) But I can only invest £300 per month at most, but i have done the sums and it will still be worth it. http://www.fool.co.uk/mortgages/mortgage-calculator/overpayment-calculator.aspx

I hope this helps.

Minute

Hi Bhindi

thanks for your input and tip. I had thought about putting the money into a savings account but from the info it seemed generally that in the longer term saving money and paying off a chunk off the balance later might not be as good as making regular overpayments.

Any other replies the daily interest / monthly interest ? would be appreciated :0)

Thrugelmir

Your mortgage interest is calculated daily and charged monthly.

Overpaying your mortgage is a good discipline to have. As there's no way of touching the money once its paid in.

You can gain around .5% by using ISA's to save instead. Which may not be significant enough to warrant considering.

bhindi

Thrugelmir, Does that mean that the regular savings account that I have set up that pays 8% gross (but i pay tax) is not a good idea to pay into then. I can invest £300 a month into that, and my partner has an account too, so we will be putting £500 into these acounts between them.

Because I have opted out of my NRam fixed mortgatge (4.99%) and taken a HSBC at 2.49%, (1.99% plus base rate) I was woried that if rates went up, i just might get fingers burnt. This new mortgage is 8 years, but assuming I can overpay by £500 a month, then It might be as little as 3.5 years.)

So we thought savings might be a better option and then in 12 months pay the money into the mortgage, and then probably continue to do this each year.

I was concerned that the way interest performs on a mortgage I was unsure if this was the best option to go, but its not to late for me to cancel it.

Debt is £40,000

thanks

getmore4less

Just got the statement to confirm that: in effect we still pay £1400 a month including roughly an overpayment of £295 and £5 interest.


£40k @ 2.5%, interest should be over £80pm not £5

bhindi

Getmore4less, Minute's mortgage is still at £205k, its mine Bhindi thats at £40k.

Minute, I'm sorry to have hijacked your thread, but as you can see I'm still unsure on how compound interest works.. have no idea now if Im better off in throwing the money at the mortgage or saving it on my regular savings....

Please if anyone can help simplify this ..We would be so greatful.x

blueberrypie

bhindi wrote: »

Thrugelmir, Does that mean that the regular savings account that I have set up that pays 8% gross (but i pay tax) is not a good idea to pay into then. I can invest £300 a month into that, and my partner has an account too, so we will be putting £500 into these acounts between them.

Because I have opted out of my NRam fixed mortgatge (4.99%) and taken a HSBC at 2.49%, (1.99% plus base rate) I was woried that if rates went up, i just might get fingers burnt. This new mortgage is 8 years, but assuming I can overpay by £500 a month, then It might be as little as 3.5 years.)

The interest on a FD Reg Saver is 8% gross, which is about 6.4% after tax is paid, if you're a standard-rate taxpayer.

So for every £100 you are earning interest on in that account, you're £6.40 better off.

Your mortgage rate is 2.49%. So if you were to "save" in your mortgage (i.e. overpaying), you would be £2.49 better off.

So it's an easy decision.

Check the terms of your mortgage to make sure that making a single large overpayment each year will not incur charges.

Minute

bhindi wrote: »

Minute, I'm sorry to have hijacked your thread, but as you can see I'm still unsure on how compound interest works.. have no idea now if Im better off in throwing the money at the mortgage or saving it on my regular savings....

Please if anyone can help simplify this ..We would be so greatful.x

No worries Bhindi :0)
I find these very confusing too, my basic understanding is that the value of savings can drop dramatically with time, so I'd rather put money into monthly overpayments rather than a savings account.

thanks all for your input

Thrugelmir

blueberrypie wrote: »

So for every £100 you are earning interest on in that account, you're £6.40 better off.

No it isn't. The account only lasts a year. You would need to have your money invested for a full year to achieve 6.4%.

Money invested for a shorter period earns a lower rate.

Thrugelmir

bhindi wrote: »

Please if anyone can help simplify this ..We would be so greatful.x

If you can earn a higher net rate on your savings than you pay on your mortgage. Then save the money.