Overpaying

Hi all,

I have been considering overpaying my mortgage every month. I am nearly 30 and have quite a lot left on it! I can overpay up to £500 per month without fee.

My current interest rate is 2.5% repayment.

Is it worth me overpaying by the max amount every month or should I stick it in an ISA?

Thanks,
Chris

Replies

  • originalmiscellanyoriginalmiscellany Forumite
    1.7K Posts
    Part of the Furniture 1,000 Posts Combo Breaker Mortgage-free Glee!
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    I guess how long is the mortgage?
    Is it fixed or variable rate?
    Do you have any other savings?
    Can you get an interest rate on an ISA higher than 2.5% (Almost certainly yes)?
    For what it's worth, I'd overpay as it's a very efficient way of saving your money and it means that every month that goes by you pay less to the bank, so it's worth keeping your payments the same, so every time you overpay the amount you pay stays the same so you clear your mortgage even quicker.

    But that's just me.
    Other people will say that you should stick your money in an ISA to maximise your savings, but I prefer to clear my mortgage first.

    But I hope lots of people share their thoughts with you!
    Feb 2012 - onwards MF achieved
    September 2016 - Back into clearing a mortgage - Was due to be paid off in 32 years in March 2047 -
    April 2018 down to 28.00 months vs 30.04 months at normal payment.
    Predicted mortgage clearing 03/2047 - now looking at 02/2045

    Aims: 1) To pay off mortgage within 20 years - 2037
  • I have 30 years left on it.

    Its a 1% fixed above base rate, so hopefully should stay put for a while.

    I have some other savings so I can afford to do it.

    Hmm maybe ill see what ISAa are about first before deciding. I'm just thinking of doing it now as the monthly payment is quite low.

    Thanks
  • JimmyTheWigJimmyTheWig Forumite
    12.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
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    The pure money answer is to put it in an ISA that earns more than 2.5% interest. This has various advantages...
    1. The interest you earn will be more than the interest you save by paying it off your mortgage.
    2. You will have an emergency fund buffer if you need it in the future (e.g. you could replace the boiler if it broke down without needing to borrow money at much higher rates).
    3. You get a yearly ISA allowance. If you don't use it in that year then you lose it forever for that year. By building up your ISA now you will be building up a nice big pot that can earn you tax-free interest for many years to come.
    4. You can withdraw the money from the ISA and pay it off your mortgage at any time if the interest rate situation changes.

    However...
    1. The difference is quite small in reality.
    2. I would like to think that you have an emergency fund anyway if you are talking about overpaying your mortgage. Plus, the bigger the emergency fund the more tempting it is to spend some of it on non-emergencies.
    3. In the general case mortgage interest rates are higher than ISA interest rates so you would probably withdraw your ISA money to pay off the mortgage at some point anyway, thus losing the tax-free status.
    4. Irrelevant if you paid it off the mortgage anyway.


    So my real world answer is "do what you feel suits you best". The ISA is the best way in terms of maximising returns, but if you will get a buzz from seeing your mortgage balance go down that you wouldn't get from seeing your ISA balance go up then this may be the incentive for you to pay more off the mortgage.

    E.g. lets say you get 3.1% interest on your ISA.
    Lets say after a period of time you have built up £10k that can either be in an ISA or paid off your mortgage.
    If you put it into an ISA then you will be £5 a month better off than if you had paid it off your mortgage.
    But if you are enjoying seeing the mortgage go down you might, once a month, not have a takeaway but pay the £25 you would have otherwise spent on the takeaway off the mortgage.

    So in one scenario you are £5 better off, but in the other you are £25 better off.

    Obviously the ideal solution would be if you were enjoying seeing your ISA balance go up and you pay the money into your ISA _and_ decide not to have a takeaway - in which case you'd be £30 better off a month.


    My point is that it is how it works for you personally that is probably more important that what saves the most money in interest.
  • How about half into isa and half op on mortgage? You still have the buzz associated with seeing mortgage coming down and building up tax free savings pot
  • I agree with the post above. Set yourself an emergency buffer then nail the mortgage overpayments. Anything above the max allowable overpayment can go an an isa.

    Matt
  • Thanks all, very good advice. I think Jimmys post and the last post have nailed it.
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