Overpayment vs Savings- Maths problem?

davenottingham

It's often said that if your mortgage rate is higher than your post-tax savings rate then overpay your mortgage.

Therefore, if I had £1000 free to either overpay on mortgage or put into savings and the rates were the same (at say 5%), where should I put it?

So I used an overpayment calculator and a compound interest calculator and here's what I found:

OVERPAYING A MORTGAGE BY £7500.
Based on overpaying a lump sum of £7500 on a 10 yr £100,000 mortgage @5%, I would save £4587 of interest and the mortgage term reduces to 9 years.

SAVING £7500 INSTEAD:
Placing £7500 in a savings account @ 5% over 9 years (using the reduced term as the mortgage) I would earn £4135 interest.

THEREFORE.....
Even with the same interest rate on your mortgage rate and post tax savings rate, does the above show that it's more efficient to overpay the mortgage......

...or have I missed something vital?

(Forgive me ..maths is not a strongpoint..all the figures are just for example only).

Thrugelmir

davenottingham wrote: »

Therefore, if I had £1000 free to either overpay on mortgage or put into savings and the rates were the same (at say 5%), where should I put it?

Mortgage as interest is charged monthly.

John424

I am not sure its that simple. You need to weigh up other factors such as liquidity loss i.e. may be easier to get at your money in a savings account.

mungobella

I think in terms of the maths, you need to look at the savings over 10 years, as you are for the mortgage. The mortgage term is reduced to 9 years, but your calculation on what you're saving on interest is done over 10 years. The savings account needs to be the same. It probably also has something to do with when interest is calculated, as mentioned above.

dimbo61

You would do very well to get 5% tax free from any savings account at the moment and if you have a mortgage rate of 5% and you overpay then you are saving 5% TAX FREE.
As another poster has pointed out you lose the liquidity if you overpay the mortgage ( but as this puts you ahead in your mortgage payments you could have a Mortgage Holiday if necessary )

davenottingham

Thanks for your replies.
As you suggest mungobella, if you use 10 years for the savings calculation (instead of 9) you earn £4717- therefore more than the than interest payable if you overpay the mortgage.
5% is an optimistic savings figure- the illustration was fabricated just to query why the same saving and mortgage rates give different interest earnings and charges (and ask why my calcs maybe going wrong...)