How to convince DH its worth doing?

Kantankrus_Mare

I like your explanation Inyourdreams. Very good and well put.

Ok another question for you. If you pay off a lump of £500 pound with the nationwide, they will ask if you want the monthly payments reduced or the term reducing.
Obviously when paying only ten pounds extra a week, this doesn't happen so would it be more beneficial to save the tenners until £500 has been reached and then pay lump sum off mortgage? Im thinking not but don't have a great understanding on how mortgages work or are calculated, so would be interested in your views.

InMyDreams

Kantankrus_Mare wrote: »

I like your explanation Inyourdreams. Very good and well put.

Ok another question for you. If you pay off a lump of £500 pound with the nationwide, they will ask if you want the monthly payments reduced or the term reducing.
Obviously when paying only ten pounds extra a week, this doesn't happen so would it be more beneficial to save the tenners until £500 has been reached and then pay lump sum off mortgage? Im thinking not but don't have a great understanding on how mortgages work or are calculated, so would be interested in your views.

So you have a spare £10 a week to overpay your mortgage. From a purely numbers POV, you will save most by putting this into the highest interest account you can find, assming this is higher than your mortgage rate. Remember to take any tax into account when you compare; ideally use an ISA and/or a non-tax-paying spouse. (We used an A&L 10% regular saver in my name last year, proceeds now in an A&L 8.1% ISA in dh's name, and have just opened an 8% regular saver in my name for this year's 'overpayments'.) The regular savers can be good for this if you're not paying tax, but you'd have to put in monthly rather than weekly, and wait for the whole year before touching it, rather than withdrawing when it reached £500.

There are other considerations though... this is the MFW board afterall. You have to be disciplined enough to think of this savings pot as offset mortgage, and treat dipping into it in the same way as you would treat remortgaging.

One you've saved your target £500, you can then either a) transfer the lot, plus interest. The interest will wipe out the extra interest you've paid by not paying directly to the mortgage, and a bit of extra capital too. Or b) keep the money in the savings pot and continue to add to it, thereby increasing the difference even more. But do be careful if you do this... As accessible as this money might be, you have to treat it as untouchable as the rest of the equity in your house, otherwise at best you undo all your moneysaving and at worst you may end up in very deep water!

jamesd

HammersFan wrote: »

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%.

For all of the savings options, you get compounding starting from the day you pay the money in.

This differs from how mortgages work - those do put you at a disadvantage if it's annual calculation because they don't include the payments made during the year. Not an issue for savings.

Pick the mortgage first based on what is the best deal for the mortgage. Only then should you look at the interest rate on the mortgage and see if it's higher or lower than the savings rate.

The complication is simple, not simplistic. It really is as easy as just comparing the interest rates.

jamesd

keeperbear wrote: »

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.

The APR includes the mortgage interest rate after you have remortgaged. It's useless for this purpose. All that matters is the actual interest rate you're paying during your deal period. APR is also useless for comparing mortgage deals, for exactly the same reason.

The calculation assumes daily interest for both. If the mortgage is using monthly or annual interest, that makes saving an even better option, because the mortgage overpayments are ignored for a while.

jamesd

keeperbear wrote: »

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.

Please do try it with your own mortgage search using whatever parameters you find most interesting. I restricted the search to only flexible mortgages with no early repayment charge for a remortgage deal so you'll get different deals offered if you use different restrictions. These are the for-fee deal (799 fee, payments of 187.11) and the no-fee deal (0 fee, payments of 192.19). Both are available up to 50,00 loan at up to 90% LTV. It looks as though the Money Supermarket "true cost" is wrong where the fees are added to the deal - it ignores them instead of including them. Something to watch out for when using it - I believed it instead of checking when I did this quick lookup. Sorry about that.

I used a low outstanding mortgage amount because you suggested a no-fee mortgage and low mortgage values is where no-fees mortgages are most competitive. It is the cheapest deal in this case, even though Money Supermarket claims it's not. So in this case, you'd need to get a savings rate above 5.94%. You can but it's not common.

Now I raise the mortgage amount to 100,000 per your latest suggestion. Money Supermarket claims the best deal is 14084.97 over two years, 799 fee plus 23 months at 612.39, 5.39%. It ignored the fee, though. Next best that comes close to no fee (valuation 325, 200 rebate) is claimed to be 14437.84 over two years, 23 months at 609.91, 5.43%. It claims the cheapest no fee deal is 14734.72 over two years, 640.64 per month, 5.94%.

Assuming you do actually have to pay someone to do a valuation, the one with a valuation and rebate is probably the cheapest mortgage deal of these three for this term and has a 5.43% rate which is easy to beat with savings. If you can avoid getting a valuation done, then the no fee deal might be better, at 5.94%, which is harder to beat with savings.

You don't know what the ISA interest rate will be in the second year. Or even next month. If it goes lower than the mortgage rate you can use the money to pay off part of the mortgage. Until then, you have benefited from the better interest rate on savings.

Pick the best mortgage deal first. Then compare the rate you're paying to the savings rate to see if you can do better.

keeperbear

InMyDreams wrote: »

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.

Sorry, but it is not that simple. Not all mortgage deals allow you to make unlimited and unrestricted overpayments. If that is the case, you cannot decide on the "best mortgage deal" independent of your decision to overpay or invest in ISAs. The two decisions are linked.

keeperbear

jamesd wrote: »

Pick the best mortgage deal first. Then compare the rate you're paying to the savings rate to see if you can do better.

Another poster made this same point. However, it is not that simple. Many of the best mortgage deals DO NOT allow unlimited and unrestricted overpayments. If that is the case, you cannot decide on the "best mortgage deal" independent of your decision to overpay or invest in ISAs. The two decisions are linked.

By firstly locking yourself into a mortgage loan with a limited overpayment facility, you have no option but to invest in ISAs even if the prevailing ISA rate declines below your mortgage rate.

Unless you can predict interest rate movements, the safest option is to overpay your mortgage. Finally, what happens when your "overpayment" savings account exceeds £3,000 per annum? You are left paying 20% or 40% tax on your savings.

keeperbear

jamesd wrote: »

It looks as though the Money Supermarket "true cost" is wrong where the fees are added to the deal - it ignores them instead of including them. Something to watch out for when using it - I believed it instead of checking when I did this quick lookup. Sorry about that

This is a REAL problem when you are trying to decide whether to overpay or invest the money in an ISA. Fees quickly increase the overall mortgage interest rate on low mortgage amounts, rendering the total interest rate much higher than even the best ISA rates. I tried to invest in ISAs rather than overpaying, and the monetary gain is really not worth it. Much better to make overpayments and see your mortgage decline.

Finally, when the BoE next cuts interest rates, I bet ISA rates fall much quicker than mortgage rates.

jamesd

If you're saving more than 3000 a year then you'd either be overpaying on the mortgage as well or using the stocks and shares ISA allowance, whichever seems best to you. Up to you to pick a mortgage which allows the overpayments you think you'll want to make. That's part of the reason I chose to search for fully flexible mortgages with no early repayment charge.

InMyDreams

keeperbear wrote: »

Sorry, but it is not that simple. Not all mortgage deals allow you to make unlimited and unrestricted overpayments. If that is the case, you cannot decide on the "best mortgage deal" independent of your decision to overpay or invest in ISAs. The two decisions are linked.

I agree with your second sentence only. Which actually makes saving rather than overpaying an even more attractive offer. (Note *saving* rather than *investing*.) If you are saving, you don't need to make overpayments at all, thereby maybe even allowing you to get an even better rate on your mortgage. You can overpay when the deal comes to an end (if you don't want to carry on saving). Of course if during this time your savings rate falls below the mortgage rate I guess it may look like you've lost out for that period as you can't bung the lot into the mortgage, but then hopefully the gains on having the smaller mortgage rate on the rest of your mortgage balance will more than make up for it. If you can get a more flexible mortgage at the same rate anyway, then that's the one you would have gone for in the first place, so there isn't a problem.

If you are set on having the option to overpay the mortgage anyway, you are restricting yourself from the outset, but at least you then have the choice of overpaying or saving.

If you don't place this restriction on the mortgage, then you can't overpay but you can still save in savings account along side.

So yes, actually, maybe I do agree with more than just your second sentence, the decisions could be linked, but not in the way you are implying. Saving is always an option, overpaying maybe not. It's not the decision to save that will end up restricting your options.