Mortgage overpayment maths question

drjones

Morning all,

I'm trying to work how to roughly estimate how much overpaying my mortgage effectively returns over it's term, in AER, so I can compare it to other investment options. I'm aware there will be a lot of guesswork involved and that the exact answer can only be calculated with hindsight

Is it simply AER=average mortgage rate over term?

Or is it something more complicated like working out the expected interest saved over the remaining term for the planned over payments made each year (adjusting for inflation)? For example

Effective AER for over payments made in a given year = ((over payments this year / (interest saved over remaining mortgage term -inflation)) *100) / number of years remaining



Thanks!

Gary123456790

Hi,

Basically if you overpay your mortgage by any amount you are not paying interest at whatever the mortgage rate is. Your mortgage rate can be compared to investment products.

So my mortgage is 3.49%, if I could invest and earn more than 3.49% (after any taxes) then it would be better off investing than overpaying.

I know your mortgage and investment rates will change over time but no use making it complicated. The gain on any investment has to overcome not only tax but any investment fees and time spent managing the investment.

Of course overpaying reduces your LTV which may help if you move, and you should keep a rainy-day-fund for when car/boiler/health breaks.

Gary.

somnus

I'm no expert on this but I've used an Android app called Karl's Mortgage Calculator that is pretty good and shows figures and graphs of the savings made by overpaying.

getmore4less

as above

keep it simple

if you can invest at a higher rate than the mortgage do it if not overpay.

Long term issue is you don't know the rates and swaping between the two is not allways easy with many products(both mortgage and investments).

drjones

Thanks a lot for the replies. You're right, there's no point complicating something that's mainly determined by the unknowns anyway.

I'll have a play with that Android app too, thanks for the suggestion. I also find the calculators on this site really useful.

Thrugelmir

drjones wrote: »

Thanks a lot for the replies. You're right, there's no point complicating something that's mainly determined by the unknowns anyway.

If you posed the question. What would give me a guaranteed return? Then paying down the mortgage is the answer.

Once the debt is clear. You have cash to invest.