Are we making the most of our overpayments this way?

blueberrypie

Thrugelmir wrote: »

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.

The same holds true for the mortgage overpayment though. In this case, putting £500/month into a mortgage with interest at 2.5% isn't going to save as much by the end of the year as putting the same £500/month into an account with interest at 6.4%.

Miss_Poohs

My head is fried with this.

I'm planning on paying a lump sum to my mortgage this year 10% of the balance of the mortgage while maintaining my normal monthly payment, so as not to incur any penalty.

Does it make a difference that I plan to pay it in a lump sum?

Trentenders

Miss_Poohs wrote: »

My head is fried with this.

I'm planning on paying a lump sum to my mortgage this year 10% of the balance of the mortgage while maintaining my normal monthly payment, so as not to incur any penalty.

Does it make a difference that I plan to pay it in a lump sum?

As interest is usually calculated daily, the earlier you make the payment the better. For example, better to overpay by £100 per month than waiting to pay £1,200 at the end of the year*

*Assuming:

• that there are no penalties for paying in
• no minimum overpayment amounts, etc.
• that you do not have the £100 per month put into a savings account that pays a higher interst rate (after tax) than your mortgage rate (if you can find such a vehicle, stick your money there, rather than overpaying).

Miss_Poohs

I was planning on making the payment sooner rather than later.

I only took this mortgage deal out in November, so I need to be careful not to incur a penalty.

It's not a huge mortgage anyway - but I'd like to get it whittled down where poss, and savings aren't what they were.

Thrugelmir

Miss_Poohs wrote: »

and savings aren't what they were.

In fact even better as capital is repaid quicker shortening the term of the mortgage even further.

Miss_Poohs

I meant saving accounts

goodanna

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

blueberrypie

goodanna wrote: »

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

I'm not really sure what your question is.

Almost all (maybe all) mortgages these days have the interest calculated daily. It might only show up on the statement once a month, but it's daily interest. (The same holds true for savings accounts, loans and credit cards.)

So if you're making an extra payment, the sooner you make it, the less interest you're charged.

RenovationMan

We could beat our current mortgage rate but choose to put our money into direct mortgage overpayments. We do this because we get more motivation from seeing our mortgage debt go down than we get from seeing our savings go up. Paying off a mortgage early is a long drawnout affair and so you need to do whatever it takes to motivate yourself over the long-haul. If you are like us and get motivated by reducing debt, then make overpayments. The difference between mortgage interest rates and savings account interest rates are marginal for most people anyway.

We set ourselves short-term (3 year) tasks where we have a specific milestone to reduce the monotony of mortgage repayment. Currently we are trying to hit a 50% LTV rate within 3 years. This has 1.5 years to go and then we'll come up with another 2 or 3 year challenge.

Just make sure that if you go down the overpayment route that you have sufficient emergency savings.