Overpaying mortgage - peoples experiences

jamesd

You don't have to put pension money into stocks and shares if you don't want to. You can put it into cash deposit accounts inside a pension if you prefer.

Say someone paid £80 into a pension, net, instead of using that same £80 immediately for a mortgage overpayment. Basic rate tax relief of £20 would be added. If over 55, when there's enough to make it worthwhile, they could take out a £25 lump sum to use against the mortgage. The £75 left in the pension, if invested, could draw around 6% a year, taxable, so £3.60 net a year.

So it's pretty easy: pay in £80, take out £25 and have an ongoing income of £3.60. It's an easy way to increase the amount of money you have in retirement while also paying money off a mortgage. The £75 left in the pension cost just £55 net, so you just made 36% on the money.

This sort of thing works best for people who are combining pension and mortgage clearing, since the effect is to trade capital for income, even with that 36% boost to the money producing the income.

No need to touch any other lump sum money if you don't want to. This bit can be tracked independently and used solely for the mortgage if desired.

Overpaying is not a great way for a person anywhere close to 55 to clear a mortgage. It's very inefficient compared to making use of the lump sum from a personal pension.

Being mortgage free or having huge amounts of equity in your home does not help with other investments. It means you've lost huge amounts of compounded growth over the years to get to that point and it's unlikely that a person could ever recover all that lost growth by putting all of the money that was used for the mortgage payments for the other things.

Thrugelmir

jamesd wrote: »

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.

I invest in Companies not indices. Also I work on the basis that my winners exceed the losers. So not a question of a guaranteed return as you appear to suggest. Invest in the wrong company or fund and it's so easy to lose money. The stock market is replacing BTL as people believe it's an easy way to make money. In the belief they've found the holy grail. Everything happens for a reason. BTL's drivers were credit expansion by the banks and lax lending criteria. While recently the stock markets have relied on QE (globally) and low interest rates. At some point there will be a correction. So personally I would prefer to remain conservative in my approach.

jamesd

It's definitely not a guaranteed return even using indexes rather than companies, though using individual companies does increase the ups and downs a lot. 99% isn't a guarantee even though that's been the experience long term. It's absolutely essential to recognise and accept that there will be drops, frequently and by varying amounts, along with the ups. Someone who just can't deal with that emotionally is much better off sticking to mortgage overpaying, even though it's not the best use for their money if they could deal with the alternative. Doing something beats doing nothing.

I agree with you when it comes to new investors over the last few years, since say the start of 2009. While there have been significant drops in many markets overall it's been a very good time to be invested, probably the best I'll see in my lifetime. It would be a bad idea for someone to go in expecting that to continue forever, because it won't. It's not emotionally easy to watch the drops. that's one reason why it's good to get started as soon as possible with even low amounts of money, to get some experience with the emotional reactions and find out how you react to them.

When it comes to new investing today there are some areas I'm not very keen on, like the US and most government bonds. just because the prices there are above long term averages in relation to company earnings and because of the QE effects. That means it's not one of the better times to be putting money there. But this sort of thing is more how than if. First thing for people to do is notice the long term trends and start to learn and practice. Much easier to learn when there's some money actually at stake. Not as comfortable, but easier.

But this section probably isn't the best for anyone who wants tips on how to start investing. Might be a better post for someone to make over in the investing section if they want to.

Mokka

Overpaying, if you can afford to, is great because it will save you money on interest in the long run, but don't forget to build up contingency cash reserve -unless your mortgage is thoroughly insured against income loss, sickness etc.

Hughesy84

Mokka wrote: »

Overpaying, if you can afford to, is great because it will save you money on interest in the long run, but don't forget to build up contingency cash reserve -unless your mortgage is thoroughly insured against income loss, sickness etc.

Exactly what I was thinking about this morning when thinking about this thread :T

Not all mortgages allow payment holidays so its possibly more important to build up some reserves just in case.

jamesd

It is more important to have reserves because even if it's possible to take a break from paying, that is at the discretion of the lender. Count on them not being willing to do it if unemployed or long term sick. This is also part of why offset mortgages are better than mortgages that only allow overpaying and withdrawing of capital: you have a right to the money in the offset savings account while withdrawing overpayments is at the discretion of the lender. Combine that with interest only but repayment monthly payment levels and you can readily build up a very large emergency fund.

fewcloudy

I think what comes across in this thread is that it is better to do something rather than nothing, if you have the spare cash to do it...

And what you actually might end up doing depends upon a number of factors such as your age, your attitude to risk, your current mortgage rate, whether you have a pension or not, etc etc.

So for each person, their personal situation dictates a 'best course of action', and a bit of research needs to be done to ascertain just what that is. And once you have worked out what that is, get cracking, the sooner the better!:)

themull1

jamesd wrote: »

You're being harsh. Inflation makes overpaying easier as time goes on. The mortgage amount owed doesn't increase but wages tend to increase at a bit above inflation, so over time the amount of spare money available increases compared to the size of the mortgage balance.

There are loads of people who dont even get a pay rise, never mind more than inflation - i wish.!!

Ronaldo_Mconaldo

We took out a 30 year mortgage due to a low tolerance for risk. I intended to knock time off by overpaying and so I sent £500 within a few months of moving in. It knocked something like 6 months off which was great but felt like a drop in the ocean. Sporadically we sent further £500 overpayments during the folling 2.5 years but it seemed like we were not really getting anywhere.

In Jan 2011 we sent £500 and managed to keep it going every month for that year, and did the same in 2012 even managing £1k in a couple of months. Managed to overpay about £8k last year and still going in '14.

For me though it just seems like we've come so far but got so far left. I just want it all to be done. Paid off half the house in 6 years (including deposit) but so far to go. Won't be happy until it's over. It's not a great feeling more like an obsession to invest so much money but have nothing to show for it.

Thrugelmir

Ronaldo_Mconaldo wrote: »

It's not a great feeling more like an obsession to invest so much money but have nothing to show for it.

There's an old fable of the Hare and the Tortoise. You can guess the outcome of who won the race between the two.