Overpayment query

bargainhunter121

Hello all,

First time poster, long time lurker. I'm hoping someone can provide advice on overpayments to a mortgage. I was wondering in choosing a 5 year fixed term mortgage, what would be more cost effective;

1) having the option to overpay 10% of the remaining loan fee free each year, or

2) paying off a lump sum after the five years concessionary rate has passed.

Been trying to calculate what would be the better option or if there would be much in it, but I'm not sure I trust my calculations..

Any help appreciated!:)

dimbo61

Overpay what you can afford each and every month !
10% of the balance will be a lot of money
See where you are in 5 years

ValHaller

Without data we cannot answer the question directly. You need to know the best rate available to you for a savings account and your mortgage rate.

If the savings rate is higher than the mortgage and likely to remain so, put it all in the savings account. If the mortgage rate is higher than the savings rate, pay down the mortgage within the 10% and put the rest in savings

jamesd

Neither is likely to be the best option. That's likely to be investing the money instead.

If you can't handle the ups and downs of investing then whether it is better to pay early or late depends on the different interest rates available and whether you need the money in a contingency fund or to avoid future interest for other purchases.

If you don't have any other use for the money and can't handle investing and can't match the mortgage interest rate then overpaying as soon as possible is likely to be best. That's based on an assumption that rates on savings do not increase enough over the next five years to become higher than your mortgage interest rate.

The 6% regular saver from First Direct will beat most 75% LT and lower mortgage interest rates. It's limited to a maximum of £300 a month per person.

If you just want to know what is most efficient, that tends to be use of a pension lump sum at age 55. You effectively get tax relief on your equity payments that way.

Thrugelmir

Pay off what you can every month.

Einstein's 8th law of compound interest.

jamesd

The 8th law also says that the greater the growth being compounded the better off you are. Which is why cheap mortgage overpaying is usually not the best approach to make yourself better off, provided you're willing to invest and not getting some gain from something like a LTV reduction.

suse*

For me if I hadn't overpaid as much as I could over the years I'd still be in negative equity right now, and unable to remortgage and stuck on a 6.5% rate. I've managed to get it back to 85% ltv but my plan is to keep overpaying till I can get it down to 60% ltv at least just so I hope that will protect me from any more crashes. Once I have got there my plan is to reasses what the intrest rates and other savings options are like, or if it is just better to keep going and get it all paid off asap.

I am 35 and just really don't fancy the idea of still having to pay rent / mortage into my 50's if I can avoid it.