Should I overpay now?

Sara42

I don't seem to be able to find a way to calculate whether it'd be worth overpaying £10,000 on my current mortgage and wonder whether you can help me with it.
I have already used my fee-free allowance for overpaying this year, the current balance of my mortgage is £26,000, variable interest 2.49%, 4 years remaining (until 2016)
I am planning to pay it off after 1st July 2013, from which I will not be penalised for any overpayment.
My question is, bearing in mind that I will be charged £100 (1% of £10,000), would it still be worth to pay that amount now than waiting to July 2013?.
It seems that most I'll get for my money (given I would only tie it up till July 2013) is 2.75% from ISA cash and 2.30% (taxable) for the rest.
Can you help at all? Any advice would be appreciated
Thanks
Sara

Wh05apk

If you are paying 2.49% with a 1% penalty, then you only need to achieve 1.49% on your savings to match it (assuming a full 12 months)

So unless you are desperate for the feel good factor of paying your mortgage off, I would hold back.

Sara42

Thanks very much for you quick reply. I'm new to this and posted my first mail today...not sure how this works but hope you will see this big THANKS.

Sara42

Wh05apk
Would you be able to tell me how you made the calculation (about 1.49%)..?
thanks again

cottonhead

Maths is not my strong point but the sooner the mortage is gone the better in my opinion. Gives you a bit more freedom sooner rather than later. Check out the mortgage overpayment calculator its really surprising how much you can save in interest by overpaying.

m0ns00n

Sara42 wrote: »

Thanks very much for you quick reply. I'm new to this and posted my first mail today...not sure how this works but hope you will see this big THANKS.

Your mortgage interest rate is currently 2.49%. Any amount you overpay by will save you 2.49% in interest costs (over 12 months).

If you overpay by £10,000 you will save £249 in a year (10000 x 2.49%).

However, because you need to pay a 1% penalty on this overpayment, you are actually only making an interest saving of 1.49% (this would be 2.49% - 1%).

This means your overpayment of £10,000 will only save you £149.

1.49% is quite a low rate of return, so you would be better investing the money in an ISA and savings accounts, as you will probably earn more than 1.49% on them.

There are pages on MSE listing the best ISAs and savings accounts:

ISA: http://www.moneysavingexpert.com/savings/best-cash-isa
Savings: http://www.moneysavingexpert.com/savings/savings-accounts-best-interest

You should be able to earn at least 3% interest, which for a sum of £10k would be £300. This is twice as much as the £149 you'd save by overpaying on the mortgage.

You'd therefore be best investing the £10k now, and waiting until next year to pay off the mortgage when you aren't subject to any penalties.

In fact, you could even argue that while your savings are a higher rate of interest than the mortgage, you shouldn't bother overpaying at all.