Help - large mortgage payments or large overpayments

Stressfree_WB

Hey everyone,

I'm hoping to get a response to my question because two mortgage advisors could not answer. My question:

Is there a difference for interest purposes between having large monthly mortgage payments OR having smaller monthly payments BUT making larger overpayments? ( I know you can only make 10%)

I have a feeling it may not make a difference on the overall interest I pay, but any guidance would be grateful because I'm due to remortgage. Hope it makes sense

( in case anyone in interested, I started with my mortgage 5 years ago £119,000 I have paid £39k off so far. This year 2013 I paid the 10% OP and so I have managed to save another 12k through good budgeting while still managing to have a life! I plan on paying the 12k off my mortgage in July when I go onto the base rate. I'm then thinking of remortgaging with another firm and reducing my term to maybe 5 years if possible.... Just want to be mortgage free so that I can be stress free and relax even more! )

originalmiscellany

Well surely when you remortgage, check you can make infinite overpayments, then you can take a mortgage of say 20 years, but if you're able to overpay every month you can without incurring any costs/charges, but if the worst thing happens and you become very ill etc, you're able to have a low mortgage monthly rate.

Does that make sense and does it work?

Stressfree_WB

This makes sense. The main thing is health. I don't want to be worrying about big mortgage payments! Time to rethink strategy - thanks

jackomdj

It may be worth you looking into offset mortgages if you are able to save a lot. You then only pay interest on the net balance, you can sometimes also make overpayments, we do as I like to see the mortgage balance coming down, but having it in your account means it is accessible if necessary.

Stressfree_WB

jackomdj wrote: »

It may be worth you looking into offset mortgages if you are able to save a lot. You then only pay interest on the net balance, you can sometimes also make overpayments, we do as I like to see the mortgage balance coming down, but having it in your account means it is accessible if necessary.

Funny you mentioned offset mortgages because that's exactly what the mortgage adviser said today id never really looked into it till now.

Think I will use the 12k I've saved and use it in the offset.

bossymoo

I've not looked recently but I found offset mortgages in the past were poorer rates. So any portion saved is countered by a higher rate on the rest.

I would probably take the mortgage over a longer period, for smaller repayments then overpay as much as I could.

Not all are limited to 10% although fixed rates often are. Trackers or variable can be unlimited.

To answer your original question, if you borrow £100k at 2.7% and for example your monthly payment is £700 (shorter term) you would pay the same amount of interest as if the payment was £500 (longer term) and you consistently topped it up by £200 each month. And the top ups would naturally shorten the term, to be the same as the first scenario.

The benefit being, that if something unexpected happened, you could stop the top ups without asking permission or applying for a payment holiday.

Hope that makes sense. Presuming you are looking at capital repayment here, otherwise it's a moot point.

Stressfree_WB

jackomdj wrote: »

It may be worth you looking into offset mortgages if you are able to save a lot. You then only pay interest on the net balance, you can sometimes also make overpayments, we do as I like to see the mortgage balance coming down, but having it in your account means it is accessible if necessary.

bossymoo wrote: »

I've not looked recently but I found offset mortgages in the past were poorer rates. So any portion saved is countered by a higher rate on the rest.

I would probably take the mortgage over a longer period, for smaller repayments then overpay as much as I could.

Not all are limited to 10% although fixed rates often are. Trackers or variable can be unlimited.

To answer your original question, if you borrow £100k at 2.7% and for example your monthly payment is £700 (shorter term) you would pay the same amount of interest as if the payment was £500 (longer term) and you consistently topped it up by £200 each month. And the top ups would naturally shorten the term, to be the same as the first scenario.

The benefit being, that if something unexpected happened, you could stop the top ups without asking permission or applying for a payment holiday.

Hope that makes sense. Presuming you are looking at capital repayment here, otherwise it's a moot point.

Thanks My decision has come down to a 5 year fixed deal over 10 year term at 2.49 % ( 300 fees) and put my 12k in a savings account somewhere

Or

An offset mortgage , 5 years fixed at 3.49 over a 10 year term (300) fees and use the 12k to offset.

I can't figure out which one would save me more interest?????!!!

jackomdj

The things I like about my offset are that every day the bank takes into account the money in all my accounts. So for example you have your £80k mortgage, you have your £12k savings, on payday you have all your pay in your current account so you only pay interest on the net of this (anything extra is paying off capital because they assume you have no savings when setting your payments). The next day they recalculate based on all your money, mortgage etc.

Because you are not earning interest on your savings you do not pay tax on it :-)

I try to keep money in my account for as long as possible, so most of my spending goes on my Amex card, which is set to pay off in full by dd (so no interest to pay), I then get cash back via the Amex card (so double win!)

We have had ours a long time so are very fortunate to have a great rate (.75% above BOE base rate) but the more you offset the less you have to worry about the % rate.

Stressfree_WB

I ended up going with the offset mortgage. I like the idea of having savings at the end of my mortgage term. 10 year term, 5 year fixed rate at 3.49. I now have 16k in the offset saving account so ultimately I'm paying interest on 62k.

Thanks for the advice.

suse*

When you remortgage you want to check how far away you are from 65 or 75% ltv, as each time you go past one of those you can get lower rates and better deals. So even if you can't overpay more than 10% now, doesn't mean your remortgage can't be less than the current final redemption figure. To get you into a better ltv bracket you could pay the difference from your savings, so you get a lower rate on the remortgage still. Then put the rest in your offset and start saving the difference in lower payments too in the offset as well.

I am not sure I am explaining that very well but I managed to just get an offset but at 84%ltv so I am desperately overpaying and saving so in 5 years I can change deals to hopefully a lower rate. Then also get to the point that some others have where the offset covers the whole amount, so I can work part time if I had to as I also have health problems.

the font has gone weird for some reason as I am posting from my phone and can't seem to change it, but hopefully that makes sense.

Stressfree_WB

Hi suse ,

Your right about the ltv ratio. In July 2013 i paid 10k off my mortgage so that I could get a good deal when I re mortgaged to the offset mortage deal. Like yourself I plan on having my offset savings the same as my mortgage balance. Have a look at my other thread "2.5 mortgage free plan"