MSE News: Overpaying your mortgage in December could save £100s

Former_MSE_Helen

"Borrowers with mortgages where the interest is calculated once a year could save by overpaying now..."

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Overpaying your mortgage in December could save £100s




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Mobeer

Also, try to keep the same monthly repayments when paying a lump sum rather than shortening the term of the mortgage.

Econo-miser

This is really excellent advice especially if you have a interest only mortgage. I did this for a number of years, and systematically reduced the size of my mortgage and am now mortgage-free. I would urge anyone who can afford to regularly put some money aside to use it to reduce their mortgage, particularly if they have an endowment policy which is not predicted to cover their mortgage.

My mortgage was an interest only mortgage with an endowment policy that was going to fall short by several thousand pounds. I went to my building society (now a bank) and asked for their advice and they suggested making a regular lump sum payment. They advised me that the best time to do so was in December and as long as I informed them when I made the payment that it was a "capital repayment". So I opened a savings account specifically for this sole purpose (no dipping in for emergencies!) and every month saved a little bit - when I started I could only afford £20 - £50 a month and was only able to make a small repayment that first year, but the following year I increased this to £100 a month. With every annual capital repayment my monthly mortgage payment would go down a little and every year I saved a little more, until I was paying off between £3,000 - £5,000 in December. Eventually, after a few years my outstanding mortgage was less than the endowment policy payout, and when the policy matured I even ended up with a small lump sum.

Every little helps - even if you start small, eventually this will really pay off. Set yourself a realistic and manageable amount you can set aside that you won't be tempted to dip into. It is tough paying out that money in December when there are so many other expenses but what a great feeling every January when I received my annual mortgage statement to see that outstanding balance shrink - fantastic.

stphnstevey

Surely interest is calculated monthly and yearly calculation is very unusual now?

Thrugelmir

stphnstevey wrote: »

Surely interest is calculated monthly and yearly calculation is very unusual now?

Vast majority are. Can't be many people left on annual interest products now.

jamesd

Of course, you should also check what income you can get with the money elsewhere before overpaying.

It's usually easy to beat mortgage interest rates using investments. I'm getting more than 20% foreign taxable interest from a P2P lending site and can get around 9% tax free from a VCT. But if you stick with normal savings accounts it's a easier for mortgage overpaying to be better for you than if you include investment options.

ViolaLass

Mobeer wrote: »

Also, try to keep the same monthly repayments when paying a lump sum rather than shortening the term of the mortgage.

Not sure you've written what you meant. If you overpay and then keep the monthly payments the same, the term will decrease.

Imma_Number

ViolaLass wrote: »

Not sure you've written what you meant. If you overpay and then keep the monthly payments the same, the term will decrease.

The term will not decrease, but you will end up paying it off before the end of the term. Shortening the term is one thing, being allowed to extend it again if things get tough is another.

Thrugelmir

jamesd wrote: »

Of course, you should also check what income you can get with the money elsewhere before overpaying.

It's usually easy to beat mortgage interest rates using investments. I'm getting more than 20% foreign taxable interest from a P2P lending site and can get around 9% tax free from a VCT. But if you stick with normal savings accounts it's a easier for mortgage overpaying to be better for you than if you include investment options.

If it was we'd all be millionaires.

Mobeer

Mobeer wrote: »

Also, try to keep the same monthly repayments when paying a lump sum rather than shortening the term of the mortgage.

My bad advice above.

What I meant was keep the same monthly payments and shorten the term.

jamesd

Thrugelmir wrote: »

If it was we'd all be millionaires.

Hardly. Most wouldn't be investing enough for that. But it's simple fact that just a basic UK stock market tracker fund has historically paid more than mortgage interest cost. Most considering overpaying won't consider that but should at least compare their mortgage interest rate with what they are willing to use before overpaying.