Confused about how overpayments and remortgaging work

stellar2011

Hello all,

I have what's probably a silly question.

I'm a year into my first mortgage (:D) which is a 3 year fix, running out in Sept 2015. It's 4.79% rate of interest and right now there's about £180k left to pay over 29 years.

I'm soon going to be in a position where I could overpay up to the limit, of £500 per month, for a period of around 18 months. For sake of argument let's say those 18 months start in Jan 2014.

But I have been advised by a friend that it's much better to save the overpayments in an ISA or similar, and then have £9,000 to add to the equity when remortgaging in Sept 2015.

I understand that it's better in terms of saving interest payments to make the £500 overpayments regularly. But I'm quite attracted to the idea of saving up the cash and using it to pay down the equity at the point of remortgage. Psychologically it feels richer! :cool:

I won't be moving house when I remortgage, but I probably will the next time it comes up (in 5 or 6 years' time), and that will probably be to a bigger and more expensive house. Having more equity would therefore be a good thing.

I guess it boils down to whether overpaying = increasing equity?

Please help a confused first time buyer!

Thanks very much.

ViolaLass

Overpaying does mean increasing equity. Whether your plan or your friend's is better depends on the interest rates on your mortgage and savings.

resilie

Overpaying increases equity and saves on interest. So unless you find somewhere giving you more interest (and don't forget tax!) than your mortgage currently is (which is highly unlikely in the current climate) overpay

stellar2011

Thanks both. I would use an ISA to avoid tax, but of course the interest rate won't be any higher than the 4.79% on the mortgage.

So when remortgaging... my capital will have increased either way by approximately the same amount? Possibly by a little more, if I overpay regularly rather than by waiting?

ViolaLass

If your mortgage interest rate is higher than your savings rate (which would appear to be the case) then overpaying will bring your mortgage down by more. Make sure you tell your friend!

dimbo61

Just overpay the mortgage that way you save 4.79% Tax Free.
If you build up the overpayments you can sometimes have a mortgage holiday if you Really need too.

CFC

The earlier you overpay the better

MisterMotivated

+1 for overpaying, though you'd be wise to hold some of the money back in case of emergencies if you haven't already done so (unless, as dimbo61 mentions, you're allowed to take a repayment holiday or to draw back your overpayments)

stellar2011

Thank you all. This is pretty unanimous, I will have to have a discussion with my friend!

I will take the opportunity to save up a personal "cushion" of three months' payments, as I don't have one now and it sounds like a good idea (I will check, but don't think a payment holiday is an option on this mortgage).

After that sounds like regular overpayments of as much as I can afford is the right way to go. I'll have to imagine it like a savings account but not liquid!

Cheers.

redonion

stellar2011 wrote: »

Thank you all. This is pretty unanimous, I will have to have a discussion with my friend!

I will take the opportunity to save up a personal "cushion" of three months' payments, as I don't have one now and it sounds like a good idea (I will check, but don't think a payment holiday is an option on this mortgage).

After that sounds like regular overpayments of as much as I can afford is the right way to go. I'll have to imagine it like a savings account but not liquid!

Cheers.

I think a Santander rep told me that they advise having 2 or 3 years' salary put by. Recalling this makes me question my own memory: can he really have said that? I think he did! This is good advice if you can afford it, but made me laugh. What fraction of the first-time-buyer public has that I wonder?

Certainly 3 months to me sounds like a minimum.

dimbo61

Emergency savings !!!!
3 months if in a normal secure job with little chance of unemployment
3-6 months if job in risky industry and working for a company
9/12 months if self employed
Now if you build up overpayments of 3/6 months of mortgage amount you can then ask ( Only if you really really need too ) for a holiday for a couple of months.
We are £19,000 ahead on our payments so we take a few months when needed