Whether to overpay mortgage...?

Abatement

We have a mortgage of c. £335,000 on a house worth c. £450,000. We are on a 15 year mortgage term, and have a 4.5 year deal, with about 18 months variable (currently 2.29%) and then 3 years at 3.49% fixed.

We have the option to overpay by 10% each calendar year, and are likely to be in a position to do that in most years for the foreseeable future. However, I can't decide whether or not it is likely to be a good option to overpay this year . On the one hand the current rate of 2.29% is quite low relative to ISA/savings amounts, which suggests its not worth paying off the mortgage. However, the option to pay off 10% is sort of a 'use it or lose it' option, and if I don't pay it off, I'll have a higher balance in later years when we move up to the higher rate of 3.49%.

Any suggestions, or is this is an impossible question? Alternatively, would I be better off reducing the term to (say) 10 years and increasing my payments that way?

dimbo61

With a £335K debt I would not want to reduce the term even if you earn Very good money.
10% of a £335K mortgage is £35K and that is a lot more than you can save in a Cash ISA each year (£5640 Each )
So if you have the spare money I would make sure you have a large emergency pot Up to £16K and then overpay as much as you can each year for the next 4.5 years

Abatement

Thanks dimbo61. So you think overpay the 10% this year, even though the mortgage rate is low at the moment?

Abatement

gentle bump...

ScotlandM

Even 3.49% can easily be beaten. And as it's fixed you won't have a problem with any interest rise that could come

dimbo61

Yes put all your money on red !!! No black ? no shares in china or is that USA and apple
If only I could be sure which one is going to make me the most money.
Lots of wise people on here who can show you how to make milions from the stock market/bonds/gold/shares in a diamond mine in London
Or you could just clear you debts asap and then invest money in stocks and shares ( which you can afford to lose!!)

getmore4less

I suspect you are a 40% tax payer.

Whats the rate after the fix?

Do you have any savings/investement/pension.

Max cash ISA (build up some emergency funds)

Possibly S&S for longer term savings more emergency

10% off the mortgage

Any left best accounts you can find.

WHat are the penalties for excess overpayments

Reducing term is potentialy a permanent change commiting to higher payments.

dimbo61

£335K mortgage ! if you are not paying 40% TAX can I please have your accountants phone number ?

JimmyTheWig

Abatement wrote: »

We have a mortgage of c. £335,000 on a house worth c. £450,000. We are on a 15 year mortgage term, and have a 4.5 year deal, with about 18 months variable (currently 2.29%) and then 3 years at 3.49% fixed.

We have the option to overpay by 10% each calendar year, and are likely to be in a position to do that in most years for the foreseeable future. However, I can't decide whether or not it is likely to be a good option to overpay this year . On the one hand the current rate of 2.29% is quite low relative to ISA/savings amounts, which suggests its not worth paying off the mortgage. However, the option to pay off 10% is sort of a 'use it or lose it' option, and if I don't pay it off, I'll have a higher balance in later years when we move up to the higher rate of 3.49%.

We're talking in the region of £35k a year.
Assuming that you aren't raiding previous year's ISAs to func these potential overpayments then comparing to an ISA is a little futile due to the limits on how much you can put in one in a year.
You may as well use your ISA allowance - again this is a "use it or lose it" limit.
After that (unless you or your spouse don't pay income tax) you're looking at paying tax - presumably at the higher rate.
You could go for the Vanquis 4.06% five year fixed savings account. After 40% that would give you 2.44% - barely beating your current mortgage rate.
And remember that your current mortgage rate could go up (and is very unlikely to go down) before the fix kicks in.

As long as you're leaving enough of a safety cushion / emergency fund then I'd pay as much off the mortgage as possible.

Abatement

ok, consensus seems to be in favour of paying off the mortgage and leaving the term as it is for the time being. I thought that was probably going to be the winner, but just wanted some second opinions. We're coming towards the time for starting a family so the flexibility of lower mortgage payments is probably useful to have, in case anything untoward happens.

princessdon

I personally use ISA's first then 8% savings accounts (for both of us) then overpay.

If you save - when you "remortage" at the end of the deal you can always lump sum it.

but I am not qualified nor have any vast experience other than balancing a line between paying off a mortage and getting interest on savings.