How to convince DH its worth doing?

keeperbear

jamesd wrote: »

It's easy to explain: every pound you overpay on a competitive mortgage instead of putting in a competitive cash ISA makes it take longer to pay off the mortgage and costs you money.

That's because competitive cash ISA rates are higher than competitive mortgage rates, so you lose more in interest on the ISA than you save in interest you don't pay on the mortgage.

Overpaying makes sense when after tax savings rates are below the mortgage interest rate and that's not true today for those with good mortgage rates and unused ISA allowance

An excellent post, but you have forgotten to factor in the arrangement fees and legal fees that must be paid to secure a "competitive mortgage rate" over the life of your mortgage. Arrangement fees and remortgage fees can be considerable, and often mean that the APR on a competitive mortgage rate is actually higher than that of the best ISA rate. Let us say that you remortgage every 5 years to secure the best mortgage rate, and do this four times, the total fees can be considerable. Even the tax free return on ISAs cannot compensate for having to pay these remortgage fees. it Unless you are a total financial wizzkid, it can be very difficult for a "save overpayments in an ISA" strategy to beat straight overpayments on your mortgage.

jamesd

exil, inflation has the same effect on the outstanding mortgage balance as it has on the savings, so it doesn't affect the decision on which is cheaper.

HammersFan, you get exactly the same increasing portion effect when you're saving as you do when overpaying. In one case the interest adds to the savings pot, in the other the interest reduces the mortgage outstanding. All that matters is which has the higher interest rate: just put the money in whichever one does.

keeperbear, you have to pay some (possibly zero, though) fees to get the mortgage, so the only part of them that matters is the difference between the fee for a normal rate and a lower rate. So first pick the deal that makes sense for the mortgage alone. Once you've done that it might be worth checking to see if the savings gain adds enough extra benefit to make paying the extra fee worthwhile. 10,000 in savings would only cover 50 more a year in fee difference at 0.5% interest rate difference between mortgage and savings so it's not going to make much difference to the fees side of the calculation in the early years.

keeperbear

jamesd wrote: »

keeperbear, you have to pay some (possibly zero, though) fees to get the mortgage, so the only part of them that matters is the difference between the fee for a normal rate and a lower rate. So first pick the deal that makes sense for the mortgage alone. Once you've done that it might be worth checking to see if the savings gain adds enough extra benefit to make paying the extra fee worthwhile. 10,000 in savings would only cover 50 more a year in fee difference at 0.5% interest rate difference between mortgage and savings so it's not going to make much difference to the fees side of the calculation in the early years.

I don't really understand what point you are making, but there are not too many competitive fee free remortgages available.

As regards overpayments or investment in an ISA, £10,000 in ISA tax free savings could only be achieved by investing in an ISA over 3 years.

Miss_Penny_Pincher_2

exil wrote: »

Such calculations tend to ignore the effect of inflation. Even at 3%,
this means that £1 today is worth only about 50p in 25 years time - so a gross saving of say £50,000 over 25 years isn't really as large in terms of 2007 £s as it appears.

In the days when inflation was 10% to 20% a year or even more this had the effect of reducing mortgage payments to virtually nothing in real terms in a couple of decades. Not quite the same these days but we don't KNOW that inflation will always stay low.

Exil you might find this comprehensive mortgage calculator interesting as it also considers the effect of annual inflation on mortgage interest. This means it is able to detail real interest as well as total interest.

http://jeacle.ie/mortgage/uk/

Will provide tailor made graphs and pie charts too!

jamesd

keeperbear, are you trying to compare the mortgage APR with the savings interest rate? If so, best to stop, since it's irrelevant to the decision to save or overpay and includes SVR interest rates after the end of the mortgage deal period.

Say I want a 30000 mortgage on a 160000 property. For a flexible tracker mortgage the cheapest two year deal in a search I just did has a 799 booking fee added to the loan and is at 5.39% for two years, total mortgage cost 4304 for two years. The cheapest no fee deal costs 4420 for the two years and has an initial interest rate of 5.94%.

Now you look at whether you're better off saving or overpaying. 5.39% is lower than the ISA savings rate, so you're better off saving than overpaying on the best mortgage deal available for the particular search I did.

If you choose to go with the more expensive mortgage deal and pay 5.94% it's much less likely that saving will be better than overpaying.

The save or overpay decision comes in after picking the best mortgage deal, not before.

APR only matters if for some reason you don't remortgage and go to SVR. In this particular case, the fee mortgage has 7.25% SVR and the no-fee 7.25%. If someone is stuck paying this because they can't remortgage, using the savings to overpay is probably going to be the best option.

HammersFan

Say you had a choice between overpaying on a mortgage at 5.2% and saving in a cash ISA at 5.8% for 25 years and chose to overpay by 100 a month. 25 years later you've saved 31627 in mortgage interest, which sounds great. The problem? The ISA would have made you 37529 in interest and you're worse off by 5902 by overpaying! That's enough for you to pay the mortgage off quite a bit earlier.

HammersFan, you get exactly the same increasing portion effect when you're saving as you do when overpaying. In one case the interest adds to the savings pot, in the other the interest reduces the mortgage outstanding. All that matters is which has the higher interest rate: just put the money in whichever one does.James d.

I made the point because I didn't see the compounding overpayment included in the comparison you made. Adding in a bundle of mortage arrangement fees (they keep getting higher) which are often necessary to get a low rate (these would wipe out most of the interest on a couple of years' maximum ISA savings (about £400 for a couple) in a stroke). Also, ISA interest is often paid yearly I think, whereas overpayments start to have an effect on the day you make them. I think the calculation looks a bit simplistic to be a valid comparison, the two options are closer in overall cost I think. Although ISAs might be a good option for people on really long term fixed rates at around 5%.

keeperbear

jamesd wrote: »

keeperbear, are you trying to compare the mortgage APR with the savings interest rate? If so, best to stop, since it's irrelevant to the decision to save or overpay and includes SVR interest rates after the end of the mortgage deal period.

The APR on a mortgage is relevant as it includes an adjustment for the application fees.

Finally, as HammersFan indicates, your comparisons fail to include the benefits of overpayments on a mortgage that charges daily interest.

keeperbear

jamesd wrote: »

Say I want a 30000 mortgage on a 160000 property. For a flexible tracker mortgage the cheapest two year deal in a search I just did has a 799 booking fee added to the loan and is at 5.39% for two years, total mortgage cost 4304 for two years. The cheapest no fee deal costs 4420 for the two years and has an initial interest rate of 5.94%.

Now you look at whether you're better off saving or overpaying. 5.39% is lower than the ISA savings rate, so you're better off saving than overpaying on the best mortgage deal available for the particular search I did.

For starters, your example is distorted by the extremely low loan to value. £30k is a very small mortgage and close to the 25k minimum that many lenders have.

OK, about your two examples. You have a choice of a mortgage at 5.39% for two years with fees or 5.94% for two years. Let us take the 2nd mortgage first. How do you know what the ISA rate will be in the 2nd year? It might well be less than 5.94%, whereas any overpayments are guaranteed to save 5.94%.

In terms of your first example. £799 in fees over two years are equivalent to £400 of extra interest per annum on your mortgage of £30,000. £400/£30,000is equivalent to an extra 1.33% interest on your 5.39% two year mortgage deal. Thus the actual APR on your two year deal is 6.72%. Try obtaining that guaranteed rate of return from investing in an ISA rather than making overpayments!

Clearly the no-fee 2 year mortgage deal provides the best deal, but I don't see how it provides a worthwhile case for ISA investment rather than overpayments.

skintmostofthetime

Help! Use common english in it's usual format pleeaase. We aint all experts @ this. !!

InMyDreams

I completely concur with jamesd, and it really is a simple as he says.

HammersFan wrote: »

Adding in a bundle of mortgage arrangement fees (they keep getting higher) which are often necessary to get a low rate (these would wipe out most of the interest on a couple of years' maximum ISA savings (about £400 for a couple) in a stroke).

But you pay these fees anyway. Your choice of mortgage will be made independently of whether you overpay or not. You get the best deal for your mortgage, pay the fees (if any) and *then* look at whether your overpayments would be best in the mortgage or in a savings pot.

HammersFan wrote: »

Also, ISA interest is often paid yearly I think, whereas overpayments start to have an effect on the day you make them.

ISA interested may be paid yearly, but it's *calculated* daily which is the important bit. Payments made to the ISA will also start to have an effect from the day they are made.

keeperbear wrote: »

The APR on a mortgage is relevant as it includes an adjustment for the application fees.

Yes, it also includes adjustment for you paying the rest of the term at SVR, which we moneysavers don't do. In any case, the application fee is not relevant to whether you pay off or save, because the point at which you make the pay/save decision, the fee has already been paid and the mortgage chosen on it’s own merits.


Another way to look at it:
Just take each month at a time to start with. Say you've got the 5% mortgage and you have a spare £100 to play with.

Mr. A buys himself a fancy new gym membership for him and his Mrs.

Mr. B overpays his mortgage and his capital is now £100 lower.

Mr. C puts that £100 in an ISA at 6%.

At the end of the month;

Mr. and Mrs. A are feeling guilty about not using the gym.

Mr. B is happy because his mortgage is £100 lower and in addition he hasn’t had to pay the 41p interest on that £100 like Mr. A and Mr. C.

Mr. C’s mortgage balance is £100.41 higher than Mr. B’s (the original £100 difference plus the 41p interest he’s been charged that Mr. B hasn’t had to pay.) But his ISA is worth £100.49. So, does he now make a £100.49 repayment, bringing his capital to 8p *below* Mr. B’s or does he apply the same logic again and keep it in the ISA? Let’s say he keeps the whole £100.49 in the ISA and adds another £100 to it.

Mr. B at the same time puts his spare £100 into his mortgage again.

Mr.and Mrs. A resolve to try harder at the gym.

At the end of month 2;

Mr. and Mrs. A feeling even worse. Maybe next month they’ll spend their £100 on a nosh-up instead to make themselves feel better about not using the gym.

Mr. B’s capital is now £200 less, and by the end of month two he has saved £1.22p in interest. Will this go into reducing the term or the regular payments? Decisions, decisions…

Mr. C’s mortgage is £201.22 higher that Mr. B’s but his ISA is worth £201.46, bringing him to 24p *below* Mr. B’s balance if he was to empty his ISA into his mortgage at this point. But I don’t think he’ll do that…

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Unfortunately these figures and time scales are so small that the compounding effects are obscured by the rounding, but over time, the resultant effect for Mr. C will be that his overall savings (the 8p, the 24p…) will also enjoy the ‘miracle’ of compounding. For those keen enough to spot the apparent compounding discrepancy, more accurate interest amounts on the mortgage are 40.74p (which I rounded to 41p) and (40.74+40.74+40.91)p which I had to round to £1.22, grrrr. For the 6%, 48.68p and (48.68+48.68+48.91)p similarly, grrr.