Should I overpay now or wait until my fix is over?

csq

I have entered second year of my five year fix at 5.59%, first time buyer mortgage with Nationwide. I am allowed to overpay up to £500 a month, which I have not done yet.

Some people tell me I should overpay whenever I can, but I had thought that since it would not make a difference to my current monthly payments, there was no point. I wanted to save money instead, and add to LTV when I my fix ends and I want to remortgage. I am told that I am wrong and that this is unwise, and by overpaying now, I can effectively shave off years off my repayments, and lots of £Ks in %. I don't understand how this works.

I have a few £K in savings. Should I invest this into my property via overpayments now, or wait till my fix ends and use it for my LTV?

Thank you in advance.

MallyGirl

It depends on whether you might need the money - do you also have some form of emergency fund as well? It is worth checking whether you could get your overpayments back if there was a need.

If you have other funds then it is a question of interest rates. Are your savings earning more than 5.59% net (7+% gross depending on your tax situation). If not then reduce your interest owed by overpaying the mortgage to get more bang for your buck

comeandgo

Any monies you overpay is taken off the capital value of your loan so if your morgage has reduced to £145,500 and your monthly morgage payment is £500 most of that £500 will go to pay your interest for that month and a small amount goes to reduce the £145,500 to say £145,450. If you pay in an overpayment of £500 then all of that £500 is taken off the £145,450.

csq

Thank you Mally.

No, these are the only savings I've got at the moment, and they're on my ISA so earning the measly 0.5% per year

csq

Thank you comeandgo, I understand that. However how is overpaying £5000 in ten monthly installments now better than adding that £5000 in 4 years time when my fix period finishes? That's the bit I really want to understand.

comeandgo

You will have had the benefit of reducing the capital amount by an extra £500 each month and paying less interest on the capital amount so more of your monthly payment going towards reducing the capital amount. Hope that makes sense but you will be better off using it to reduce your mortage - plus with Nationwide if you do have an unexpected bill you can take that overpayment back - well you can with my Nationwide mortgage but it is an old one so do check on that.

csq

Yes, I can use my overpayments to fund underpayments on my mortgage too. Thank you.

JimmyTheWig

csq wrote: »

Thank you comeandgo, I understand that. However how is overpaying £5000 in ten monthly installments now better than adding that £5000 in 4 years time when my fix period finishes? That's the bit I really want to understand.

If you pay £500 now, you will owe less now. That means interest charged now will be less.

Lets say it was just a single £500 payment you were thinking of making.
You could put this £500 into a savings account and in 4 years have £500 plus 4 years worth of interest. You could pay the whole of this off your mortgage.
Or you could make an overpayment and in 4 years time your mortgage balance will be £500 lower. But it will be even lower than this because the balance was lower all that time and so interest added on will have been less.

The pure money question, then, is whether the interest rate you get on your savings (after tax, where applicable) is more than the interest rate you pay on your mortgage. The mortgage interest rate is almost definitely going to be higher, so best to put it there.

But as has been said you need to be careful about having money stashed away for a rainy day. What will you do if the boiler breaks down or you need urgent car repairs or you lose your job or your friend needs bail?
It may be silly to save paying mortgage interest on this money now to then end up taking out a loan at much higher rates in the future.
If you can get your overpayments back then that might be the best of all worlds. If not, probably worth building up an emergency fund first.

JimmyTheWig

csq wrote: »

these are the only savings I've got at the moment, and they're on my ISA so earning the measly 0.5% per year

I'm sure you can do better than that if you decide to keep them (or some of them) in the ISA!
See http://www.moneysavingexpert.com/savings/best-cash-isa.

Yorkie1

The usual advice on here is to ensure you have up to 6 months' worth of outgoings for a rainy day fund. Make sure you have pension provision. And then consider overpaying the mortgage.

As others have said, because interest is charged daily on the outstanding capital amount of the mortgage, when you pay a lump sum (e.g. £500) off your mortgage, the capital balance is instantly lower and so the ongoing daily interest charges are lower.

dimbo61

If you have 3/6 months of income in savings upto £16K then overpay the mortgage by £500 a month if you can afford too!
This will save your Interest rate TAX free and save you thousands in interest over 25 years