Why do you overpay?

GwylimT

We over pay ours, it does make things quite tight, however we are going to be mortgage free quicker and pay less off compared to if we didn't over pay. We would rather be a little more hard up now, and have more financial freedom later on, especially during retirement.

Thrugelmir

Interest rates are only ever going to rise. So overpaying now will make a huge difference in the future.

Your sister will be envious when you are mortgage free !

sampa99978

Thanks everyone, it just seemed such a sensible thing to do that I was a bit flustered to hear someone say it was a waste of time!

I like the idea of having some figures in my head in case it comes up again, just so that I won't doubt myself too quickly. Hopefully will be adding my MFW diary soon, am finding all of yours very useful.

Hurdler

I had the mother of all debates (read war of words) with one of my friends who ironically has now also gone freelance and she is very much of the "you're being stupid" argument given the low rates. I have long since learned to keep my mouth shut and not offer the obvious argument of "it's my money and I will do what I like with it" not to mention the obvious - I have cleared over 100k off my mortgage since I bought the house in 2008. I am still overpaying now since changing my career and now bringing in less than half of what I was earning but I still manage to go out with friends and enjoy life.

It's a little like my approach to getting fit and losing a few (weight) pounds - discipline of exercise and eating right gets results every time, not fads.

Same for overpaying. Discipline of knowing where your money is going and making informed choices when it comes to spending means a healthier attitude to the biggest debt you will ever have in your life.

comeandgo

I put half my spare money into mortgage and half into stocks and shares ISA. Been doing that for eight years. The ISA has been the better investment by far and it will be cashed at some point to pay off the remaining mortgage.

chucknorris

I don't overpay, my net mortgage rate is only 0.7% I would rather invest in the ftse and my pension than pay off a 0.7% mortgage. In fact I am happy that my mortgages are interest only, there isn't any capital being paid off.

getmore4less

A mortgage it the rent of money to provide a place to live that you would otherwise have to pay rent for.

Part of the retirement planning is paying of the mortgage debt so you live rent free in the future.

To retire you have to replace earned income with other sources.

By not having rent to pay because you bought somewhere you need less other income.

The amount you need to save to pay rent in the future is in most cases a lot more than amount you need to pay(including the interest) on debt to live rent free in the future.

Have a retirement plan that includes your housing.

For some as jamesd often points out especially if you are a 40% taxpayer you are often better to save the money in a pension wrapper and use the tax free lump sum to pay off the debt in the future rather than overpay now.

Overpaying is a form of saving(debt reduction) and net wealth creation, there are other options that may be better at creating the wealth.

The secondary issue is that debt also create a need to earn to service it so you have to factor that in as well especially if you use a plan that is not overpaying you need to have the funds available to service the debt should the income fail.

As has been pointed out in the simple case if the debt is on a good rate then simple savings can be the better option and it is easy to switch if the rates move against you.

Even if your plan says you want to be debt free by a date say 50, you could have the debt on a schedule to 60 that reduces the contractual payment and then use overpayments to manage that back to 50 with the choice to return to the lower payment should income become an issue.

For the ultimate flexibility an offset mortgage my suit as you can move the money in and out of the mortgage as investment strategy changes.

SuperSecretSquirrel

I overpay as the security of being mortgage free appeals. The sooner we get there the better. In the meantime we have cash savings and multiple income streams that should help shield us from the "usual" personal disasters that might come our way (redundancy and babies, we got it covered, nuclear war and zombies, not so much).

Overpaying is the best risk free return we can get right now, so we're taking the direct approach of overpaying. If we could get a better return on cash savings, we'd save, then when the situation normalised and the mortgage rate outstripped savings we'd be in a position to pay down a lump sum.

I do dabble a little in riskier investments, making use of pension and isa wrappers. We also save in cash. For as long as there is debt though, the number one aim is paying it off, so the mortgage is the main focus. This might not be the optimal route to financial freedom, only time will tell, but I am not willing to leverage my mortgage to play with riskier investments. Good luck to those that do, but it's not for me. Once the mortgage is cleared (or totally offset in cash savings), I can play a lot more with investments, all from a position of absolute security, knowing our home is totally ours. Paying off the mortgage is just one aspect of the bigger picture aim of financial freedom, it just happens to be an ideal place for us to start.

There are a couple of psychological benefits I've noticed when overpaying. First is the short term good feeling when making an overpayment, I guess it's not a million miles removed from the rush a shopoholic has when spending, or a gambler has when placing a bet. It just feels good (and more so than shifting that money into savings). The more lasting psychological benefit is the feeling of empowerment. Every OP is money locked into the "FU Fund". Of course this also applies to cash savings and investments to an extent, the more solid your overall financial situation the less chance there is of you becoming a wage slave. Being in a position of strength gives you the option to walk away if ever you feel the need to. Somewhat counter intuitively, the more secure we are financially, the more I enjoy working. I realise that I very much enjoy what I do, and am doing it because I want to not because there is no other choice, that feeling is amazing.

Is this hurting our current lifestyle? I guess the answer is both yes and no. It clearly has an impact on our "potential" lifestyle. If we weren't overpaying, saving, and investing, we'd have a lot of extra money sloshing around that could be spent on "stuff". We don't really care about "stuff" though. We have a pretty good lifestyle as things stand, so don't feel like we're missing out on anything. We're not a very flash couple, and that suits us fine

In the coming years we might consider reduced working hours. That is the kind of lifestyle benefit overpaying, saving, and investing brings. By overpaying I think I'm doing our lifestyle a massive favour both for now and the future. End of the day I want to spend time with my family and friends, not buy tat. It all depends on what you value most really. I'm glad I don't need to be buying shiny new tat all the time to bring short term happiness, but realise the whole system collapses without those people, so rather selfishly am quite happy for the majority to think that what we are doing is weird when we could be spend-spend-spending

Right now I feel that life is good, and I'm enjoying all aspects of it, including what many feel is a necessary evil of work. I feel this way while overpaying, saving, and investing. A sunny outlook and enjoying life is near priceless, a lot of big spenders have the "you only live once" mentality to help justify huge spending and debts, but since "you only live once" I want to enjoy it as much as possible, and for me the enjoyment isn't rooted in consumption.

Busymumofthreeplusdog

I am loving these answers as it's a dilemma I'm struggling with currently. We have a lump sum coming soon and it was always ear marked to pay off a considerable amount of the mortgage. However we were recently advised by an independent financial advisor not to pay off any of the mortgage but to invest the whole lump sum. Cue many many debates/discussions between OH and I as what to do.

I think gradually we are coming around to the idea of half going to mortgage and half to investment and see what the next year brings. Our mortgage could then be significantly reduced in either years or current monthly payment.

Not a done deal yet though, discussion continues........

icontinuetodream

Security....because I was once in a situation where I was 24hrs away from losing my home!! Fortunately, things changed financially and I managed to avoid it .....as soon as it did, I changed my lifestyle and started making op's.....

I was made redundant in Nov 13 - still not employed....has my lifestyle changed? No, not at all...the only thing that is different now is that my op's aren't as large and won't be until I am back in work - but that's not a problem as I am so far ahead of my mortgage (knocked 4 years off it last year alone!!).

Frankly, the lack of financial meltdown with our income halving was priceless! No 'stuff' will ever be better than that!!