Best time to make overpayments?

optimist_2

Hello everybody,

When is the best time to make overpayments on a repayment mortgage? At the beginning, in the middle, at the end - or anytime?

Thanks

Kaz2904

Do you mean during the month or over the term? At the beginning is the optimum time but if you are near the middle or end don't let this put you off overpaying because it will still make a difference.

mau408

It depends upon whether your interest is daily or annually calculated and it depends on your mortgage lender.
Overall in general the earlier the better but it also depends on circumstances too like if you have job insecurities and tax free savings stocked up.
See other thread with regarding Halifax mortgages that I have started and still querying the rolling year period and how it is calculated - 'A Total MFW'. I am trying to get verification of the theory though.

Hope this helps.

comping_cat

Im lucky with my mortgage, i can make unlimited overpayments, and can make them via my internet banking, so if i ever have any extra i can just transfer it when its there - so i transfer money at lots of different times!!!! As the interest is calculated daily, anytime i pay in helps reduce the interest!!

David_B_2

I'd agree with what's already been said above. If your interest is calculated daily then over pay anytime. If it's at the end of the month/year then and make sure you overpay before the interest is calculated.

Like catowen mine is calulated daily so I pay when ever I have the extra cash for the mortgage. Therefore reducing my interest from that point (well next day anyway).

All the best.

jamesd

It also depends on the interest rate of the mortgage. If the interest rate on the mortgage is below the rate you can get on ISA savings accounts, it's better to put and keep the extra money in the ISA accounts, then use that money to pay off the mortgage early once it exceeds the mortgage balance remaining.

optimist_2

Thanks for all your help. As I thought, a lumpsum will be much better paid at the beginning of the term. The interest on my mortgage is paid daily, so I can just pay money off whenever I like! With respect to ISAs, isn't it better to strike a balance between overpaying on the mortgage and keeping some savings?

Many thanks

jamesd

optimist wrote:

As I thought, a lumpsum will be much better paid at the beginning of the term. The interest on my mortgage is paid daily, so I can just pay money off whenever I like! With respect to ISAs, isn't it better to strike a balance between overpaying on the mortgage and keeping some savings?

If you have higher interest rate ISAs available the best time to make a lump sum payment is at the end of the mortgage, not at the beginning.

There's no purely financial reason for making any overpayments to the mortgage at all if the ISA is paying a higher interest rate. Indeed, you're better off with an interest only mortgage and making all the capital repayment into the ISA if you can do so within the ISA annual limit of 3000 per person per year. Then you can repay the whole mortgage once the ISA value exceeds the mortgage outstanding.

Reasons for paying into the mortgage instead of the ISA when the ISA is paying a higher interest rate include a desire for certainty, ease of use, a desire not to be able to get at the money and the effect on benefits if you become unemployed - the ISA money will be counted as savings and will reduce or eliminate benefits, while the mortgage equity won't.

If a couple had a mortgage at 5% and had 6000 in money available at the start of the year for overpaying their mortgage, they would be 60 better off at the end of the first year by using the ISA at 6%. If they never overpaid again and the difference in interest rates remained the same they would be 306 better off in 5 years, 627 better off in 10 and 1321 better off in 20 years.

If you are going to overpay the mortgage, then with daily interest calculation the best time to do it is as soon as convenient.

missmadness

Currently my husband and I have a fixed rate (for 7 years) endowment mortgage. The reason we went for an endowmment mortgage is because we have two children (one of which I have to pay childcare fees for) so at the moment every penny counts and this mortgage is cheaper than a repayment mortgage. When my youngest daughter goes to school in a year and a half's time, the money I have been paying for childcare can go straight into overpaying each month on the mortgage. But with an endowment mortgage where we only pay interest and the lump sum of the amount borrowed stays the same, does overpaying work?

jamesd

Overpaying into the mortgage works and reduces the amount owed and interest paid each month. Depending on the lender and your choices that might either reduce the monthly payment or it may keep the monthly payment the same and continue reducing the amount owed each month by the difference between the old and new interest payments.

The endowment is speculating on stock market performance and it is possible that the market could have a sudden drop in the few years before it ends that may prevent it from fully paying off the mortgage. The lower the monthly payment into the endowment, the lower the safety margin.

If you're using ISAs for savings or investments and the interest rate is above the mortgage interest rate you're probably better off putting the money into the ISA instead of overpaying the mortgage. Then it's a fund for emergencies or to help to cover the possibility of an endowment shortfall.

Putting the extra money into a stocks and shares ISA is likely to be better than increasing payments into the endowment. Good choice of investments is key, though.

jessielicious

BF and I took out our mortgage last year and now that we are settled are starting to look at making overpayments. Ive just had a look at our documents from the bank but I can't really get my head round it. Can anyone explain the following to me please?

"You are able to make overpayments to the sum of 10% of the loan amount on any part of this mortgage in each 12 month period. If you make an overpayment or lump sum payment then the amount you owe, and so the amount of interest you pay, is reduced immediately."

So how do I work out how much I can overpay? Sorry if I sound dense, finance makes no sense to me at all.