Make overpayments now or remortgage for less later?

insywinsyspider

Hi,

I'm due to remortgage next year & have got some savings that I'd now like to use to help pay off the mortgage somehow.

Generally what is the best way to do this? Or will it make no difference?

1) Make overpayments on the current mortgage?

or

2) Wait until the remortgage & then put down an extra lump sum beforehand (effectively take out a smaller mortgage)?

Grateful for any insights!

chezmonster

That depends on wether you can get a better rate if you put down a larg amount.

Not that I have a clue really.

ailuro2

Either way you will end up with a smaller mortgage.:j

Yes, it depends on your mortgage rate and what interest rate you can get on your wad of cash bewteen now and remortgage time.

The sooner you start to overpay,though, the sooner the millstone of a mortgage starts to get lighter.

Things like pensions, emergency funds etc do need to be in a good position too and should be taken into account.

insywinsyspider

Thanks for these really useful replies. I'm new to the forum & really impressed with the advice received.

I think my main concern is if I pay a lump sum off the current mortgage now, then it'll only pay off interest rather than capital.

But if I wait until the remortgage next year, then the lump sum will come directly off the capital, so the new mortgage will be considerably smaller, so that gives the option to maybe reduce the term.

Is this correct or am I missing something fundamental?

MarkyMarkD

Yes, you are.

If you overpay, it will ALWAYS pay off capital. Your regular payments pay the interest plus some capital (if your mortgage is a repayment basis one).

Kaz2904

The way an overpayment saves you interest is by not costing you any on the amount of capital you have repaid. The interest is calculated by what is owed on the mortgage.
It depends what interest rate your mortgage is at and what rate you can get on isa's and after tax on savings.

insywinsyspider

Thanks for the replies!

So, just to confirm that I understand correctly...if I make overpayments on my current (repayment) mortgage, then the overpayment goes directly to pay off the capital? Is this correct?

The type of scenario I'm worried about is as follows...

Say if someone had a £100K repayment mortgage & made approx £20K overpayments.

(a) Would the capital now be reduced by that £20K? ie, when they come to remortgage early next year, the capital is now down to £80K? So can take out a new mortgage (at time of remortgage) for £80K?

(b) Or would it be that some of the overpayment goes towards interest on the £100K, so the capital would NOT go down to £80K? Say it only went down to £90K because half of the £20K overpayment went on interest. £10K has just "disappeared" into interest on current mortgage... so when time comes for remortgage the capital is now £90K!

If (b) is correct, then wouldn't it make more sense to wait until the remortgage? In the meantime, keep the £20K in decent ISAs, shares & savings. Put down the £20K at remortgage, then the £100K mortgage turns into a £80K mortgage with less interest to pay anyway etc?

Sorry if still being very dim. Grateful for a simple, clear explanation!

Lotta_Littlies

a) is correct

Lotta

Snow_Dog

Trying for simple after beer, but here goes.

If you currently owe £100K, over the course of 2007 you would pay off some of the capital (the £100K) and the interest accrued over that year.

So, at the end of 2007 you would perhaps be down to £96K and have paid £4K off the capital and say £3K in interest.

If you were to suddenly pay off £20K at the start of 2007, it would be paid off the capital, so you would be left owing £80K.

Then at the end of the year of making regular monthly payments you would end up owing say £75K.

Paying lump sums or regular overpayments always comes off the capital (the amount you owe).

The confusion may come when people say you are mostly paying interest at the start of the mortgage, which technically is true of normal regular mortgage payments. Overpayments are however all capital repayment.

johnydeath

Also look into regular overpayments in a different way - on non flexible accounts such as fixed rate where you can be penalised for early redemption, some lenders allow a one off 10% overpayment, in January for example.

My lender actually allows a flexible overpayment, monthly at your discretion, upto £499. The system does not detect it as an overpayment, therefore you are not hit with an early redemption charge.

You could consider saving your lump sum and using the interest as a regular overpayment under the threshold, if that is allowed and suits your purposes.

That way, if you need the lump sum for anything in the future, you will still have it. Pay the extra lump sum towards the mortgage and your flexibility is gone.

insywinsyspider

Thanks for all the helpful replies.

Snowdog - you are right - I WAS confused because I read that you're mostly paying interest at the start of the mortgage, so it is good to now know that overpayments are all capital repayment.

Johnydeath - thanks, good idea - given me something to think about there - retaining flexibility by using interest as a regular overpayment.

Mortgage is on a fixed rate of approx 4.6% until near end of 2008. After that goes to variable rate, so will remortgage then for better deal.

Also just checked what overpayments are allowed currently - can make £500 overpayment per month.