Overpaying mortgage - peoples experiences

fewcloudy

Hi

I'm not sure most on here DO overpay actually, but I might be wrong.

I agree with what's been said and of course I do wish I had started earlier. However, 6 months into my 1st mortgage there was no chance I could have, not even 6 years into it! House prices here in Edinburgh are high and we had a 95% LTV at near 8% IIRC (1993), fixed for 3 years. It's only much later we were in a postion to overpay and that was just a lucky break. In between those two scenarios, when I could've payed a bit more I chose to live a bit better instead, and don't regret that at all. So a clear case of wanting my cake and eating it too!
Our current mortgage started in 2008 with repayments of £1050. But less than two years later, repayments were down to neary £560 due to interest rate free fall, so these last 4 years have allowed both things to happen; live a lot better and overpay a lot too.

The investating/saving rather than overpaying comes up often and makes better financial sense. I overpay despite (knowing) this. People are people, with different ways of viewing the same thing. My reasons for overpaying are;

• The money is gone and I'm not tempted by having easy access to a large pot to spend on a great holiday/new car.
• It's satisfying seeing the mortgage amount and term drop quickly.
• Everything I overpay is on my monthly statement as a facility to take back if I really did need it, so it kindof IS a saving thing too (and not taxed either).

fc

SG27

I don't like to compare investing and overpaying. They are too different. Overpaying is 0 risk guaranteed return of your mortgage rate. Investing can give big gains or big losses and nothing is guaranteed. I think it's better to compare it to savings rates.

I overpay £100 per as an increased DD and also the odd random £10s when I have spare. I started overpaying about 3 months into my mortgage once all the DDs had settled down and I knew my budget.

Soot2006

I have no risk tolerance and no money to lose so no chance of investment from me. By the time I have saved enough to be worth investing I will probably be gone.

Overpaying what I can in terms of SURPLUS after "life" (a good life, not totally frugal and not totally frivolous). I have emergency savings, not much, but just to cover serious problem in the house. Then each month I pop £10-£100 as an overpayment. It's capital towards my house, it's not a lot of money, but playing with the overpayment calculators make me feel it's worth it for me It's money I might otherwise spend on something silly that I don't really need.

jamesd

SG27 wrote: »

Investing can give big gains or big losses and nothing is guaranteed. I think it's better to compare it to savings rates.

A mortgage is usually around 25 years. That sort of time period is ideal for investing.

Here's what the Barclays Equity Gilt Study (50 odd years of annual reports of investment returns) found the past rates for beating cash were, for money invested at the start of a period and taken out at the end, from page 94:

18 years: 99% chance of beating cash
10 years: 90% chance of beating cash
5 years: 75% chance of beating cash
4 years: 72% chance of beating cash
3 years: 69% chance of beating cash
2 years: 66% chance of beating cash

Looking back since 1899 there were 95 18 year periods. In 94 of those if a lump sum was invested once at the start investing beat cash (page 69 of 2012 Equity Gilt Study). Over 23 years there were no periods where the equity investing produced less than a positive result after inflation (page 68 Figure 7).

A 99% chance of beating cash, which is roughly equivalent to mortgage interest rates, isn't guaranteed but that's what a single lump sum achieved historically. For regular payments there are lots of starting points so the chance goes up.

This matters a lot to people who want a mortgage gone because it's likely to get it cleared faster than overpaying.

It can matter even more to people who also want a pension or to retire early because using a pension lump sum, available from age 55, is an almost free or free way to do the clearing, paid for largely or completely by tax relief.

Thrugelmir

jamesd wrote: »

18 years: 99% chance of beating cash
10 years: 90% chance of beating cash
5 years: 75% chance of beating cash
4 years: 72% chance of beating cash
3 years: 69% chance of beating cash
2 years: 66% chance of beating cash

Beating cash not the interest on a mortgage .

jamesd

Soot2006 wrote: »

I have no risk tolerance and no money to lose so no chance of investment from me. By the time I have saved enough to be worth investing I will probably be gone.

What do you do in your pension? Assuming you have one? No risk tolerance means cash deposits in a pension that aren't particularly likely to beat inflation, so you'll hugely increase the cost of any particular amount of retirement income.

Soot2006 wrote: »

it's not a lot of money, but playing with the overpayment calculators make me feel it's worth it for me It's money I might otherwise spend on something silly that I don't really need.

Psychology is very important with this sort of thing and if that's what works for you, while investing doesn't, that's what you end up having to do, even if it is more costly for you. Faster doesn't help if you can't sleep at night or just don't get motivated enough to do whatever the alternative is.

What I do is have pretty charts showing my progress towards retiring and such. Nice long pattern of growth, with ups and downs along the way. So that helps to motivate me.

Just do whatever works for you, so long as you know about the alternatives and have experimented with them and know they aren't for you, doing something beats nothing!

fewcloudy wrote: »

I'm not sure most on here DO overpay actually, but I might be wrong.

I'm pretty sure a lot do when they would be better off doing other things, but just don't know enough about investing to use it and not willing to try. Hopefully discussions like this might spark a few into giving it a try because it's also the first step along the path to early retirement via pension investing. The thing about overpaying is that it's easy and certain, while investing is harder and inherently uncertain. And people like easy and certain.

Back when I started here in 2005 or so I was ignorant about investing and nervous about it. So I jumped in with moderate amounts of money and started learning and practicing. No time like the present for anyone in a similar situation today to give it a try with regular investments, perhaps while doing other things.

fewcloudy wrote: »

The investating/saving rather than overpaying comes up often and makes better financial sense. I overpay despite (knowing) this. People are people, with different ways of viewing the same thing. My reasons for overpaying are;

• The money is gone and I'm not tempted by having easy access to a large pot to spend on a great holiday/new car.
• It's satisfying seeing the mortgage amount and term drop quickly.
• Everything I overpay is on my monthly statement as a facility to take back if I really did need it, so it kindof IS a saving thing too (and not taxed either).

fc

If that's what motivate you, life is good. You might try playing with an early retirement prediction instead if that works for you, though.

I got an interest only mortgage a few years ago. Could have bought with cash, income multiple was a bit over 1. I keep a fair bit of uninvested money in an offset account but what I focus on now is early retirement. It used to be when I could maintain my minimum lifestyle without benefits for life if I couldn't work but I reached that after perhaps 7-8 years of saving then investing. For me the peace of mind of knowing I can live indefinitely without a job if I had to, and watching my retirement income/age improve is more valuable than having the mortgage gone.

jamesd

Thrugelmir wrote: »

Beating cash not the interest on a mortgage .

Cash is roughly equivalent to mortgage interest rates. It doesn't mean cash in a 0% interest current account.

The beating margin is usually high, given that the average return is 5%+ plus inflation. It's just the odd bad starting and ending points that cause the failure cases after many years to allow the growth trend to do its compounding work.

Anyone who doesn't know how variability affects things might find it useful to go to Firecalc and just click on the Submit button on the right of the page. It'll show lots of different outcomes for a single lump sum investment with income being taken from it that illustrate how things vary. Lots of attention paid to the worst cases because you have to plan for them, but the more likely cases are a good deal better.

shireknight

Ok took out a 20 year mortgage (fixed at 4.98% for the first 10 years) in January 2007

At the end of 2007 I changed jobs and found myself with extra income so immediately looked into making overpayments on my mortgage.

Reading the mortgage documents told me that I could make penalty free overpayments of 5% per year so quickly made a 5% overpayment in November before the end of the first mortgage year, in February 2008 I made another 5% overpayment and kept doing this every February up to and including 2013.

In 2013 I calculated that it wouldn't be worth making anymore annual overpayments because the outstanding balance was now so low however I found out via a post on this very forum that my mortgage company unofficially allows you to make overpayments of £500 per month so I started making overpayments of £450 per month (in order to remain under their radar just in case)

So now we come to today, I am still making overpayments of £450 per month and according to my calculations if I keep doing so then my mortgage will be paid off in November 2015.

That's a full 11+ years before my mortgage was originally due to end and over a year before my ten year fixed rate deal even ends lol.

If you can afford to make overpayments start now and pay in whatever you can but make sure you read your mortgage T's & C's to ensure you don't incur any early repayment fees.

dimbo61

Overpaying has other advantages !
Once you have built up 3/4/5/6 months of mortgage payments you can if you wish have a " mortgage holiday" for a couple of months.
Overpaying the mortgage pays you the mortgage Interest rate TAX FREE !
Overpaying means you will be mortgage free years earlier ! Not when you are 65 as many mortgages tend to do.
Many borrowers tend to now extend the term as long as possible ! Do you want to work to 65 because you have too.
Overpaying means you build up equity quicker hence getting a better deal when you have to remortgage as LTV better.
Overpaying saves paying extra Interest to your lender.
I hope to be mortgage free in 12/18 months and take early retirement at 55 why ? Because we can afford too as mortgage free so the biggest expense most people have is gone.

jamesd

Are you really close to being 55, when you could clear the mortgage efficiently with a pension lump sum instead of overpaying? That gets you a combination of higher income and mortgage clearing. It's just about the most efficient common way to clear a mortgage there is.