Loan for Mortgage Overpayment

JimmyTheWig

Pipz wrote: »

I plan to take an evening job in addition to the main occupation to help overpay the loan (if I take it) and then save the equivalent overpayment amount by Dec 15.

I.e. by Dec 2015 you will have paid off this year's overpayment loan and next year's overpayment.

My gut instinct is to not take the loan.
Pay off what you can before the end of December. Lets assume that this isn't much.
Then pay off what you can, when you can, through 2015. Once you've reached the limit, put the money into savings.
By the end of 2015 you'll have paid off that year's 10% overpayment and have another 10% sitting in savings.
Pay that off the mortgage on 1st January (or whenever the bank opens!) 2016.
Save through 2016 and make an overpayment January 2017, etc.

Alternatively (and I know a recent blog of Martin's has warned against doing this without good reason) see if you can shorten the term of your mortgage. Then you'd be paying more each month and have less need to make such large overpayments.

I find it difficult to articulate, and I realise taking on an additional obligation is not ideal but I'm trying to assess what the financial impact of not making this £6.2K overpayment is over the mortgage term.

It's not just a question of not making the overpayment, it's a question of what you would do if you didn't make the overpayment.


Presumably you are aware that you can make overpayments of less than the 10% maximum?
Presumably you are aware that you can make multiple overpayments each year?
Presumably you are aware that the earlier in the year you make those overpayments the more interest you'll save?

TriathNanEilean

Pipz, most importantly: well done for plans to save and repay a mortgage that is costing you interest!

I suspect you are looking for hard figures but I'm not the responder for those, sorry.

If, as you say in your last post, you can pay off these loans much faster than 60 months then that is great. That will have the effect of reducing the relative costs of Plan A (get a loan) and Plan B (save up then repay). I strongly suspect that the costs will never cross, however, so that A is cost effective (unless some weird offer on the mortgage distorted things).

Apples2

We're all about stability and order in our finances on here. We don't know what tomorrow will bring so lets gets ready for the worst.

You paid your old loan at a smidge over £1k per month so why now do you not have £10k now?

I would ignore the potential for saving a couple of quid over 20 odd years for stability now.
Take a year off and save the £1k per month and do it all next year, in cash you have saved, with no risk and an emergency pot if you need it.

Pipz

Apples2 wrote: »

We're all about stability and order in our finances on here. We don't know what tomorrow will bring so lets gets ready for the worst.

You paid your old loan at a smidge over £1k per month so why now do you not have £10k now?

I would ignore the potential for saving a couple of quid over 20 odd years for stability now.
Take a year off and save the £1k per month and do it all next year, in cash you have saved, with no risk and an emergency pot if you need it.

Thanks to all for your input and the above especially.

I'll take a less risky approach and revert to letting this overpayment slide, build more of a cushion with what's left of the year and then overpay in 2015.

Pipz

JimmyTheWig wrote: »

Presumably you are aware that you can make overpayments of less than the 10% maximum?
Presumably you are aware that you can make multiple overpayments each year?
Presumably you are aware that the earlier in the year you make those overpayments the more interest you'll save?

Yes indeed, when I was overpaying the mortgage in the first year I would normally pay £500 a month, if I had had more at my disposal in that year I would have paid more earlier.

The general strategy has been to make 10% overpayment as early as possible and keep any amounts over this in savings. As they say this has been the plan rather than the reality but hopefully I'll get closer to it in 2015.

ricky_v

Forget overpayment and loans. Save the money the old fashioned way in 5% gross accounts. Assuming you're a basic rate tax payer the cash in these accounts will earn more interest than what you save in interest if you overpay on the debt. Only when your cash cannot earn more than 3.49% net in interest do you use the cash to pay off the debt.

For example if you have £6500 in a 4% net account you get £260 a year. A £6500 debt at 3.49% costs £226.85 a year. Use the current market to arbridge and make money. To pay off a debt which has a lower rate than credit accounts is madness.

JimmyTheWig

TriathNanEilean wrote: »

I strongly suspect that the costs will never cross, however, so that A is cost effective (unless some weird offer on the mortgage distorted things).

I think it would be more likely to happen were the OP in an unusual position.
For example, what if the OP had a policy maturing in January that was 20% of his mortgage balance? And that after then he had the ability to save up 10% of the mortgage balance by the next January each year.
Taking a loan in December (and paying it off the mortgage) and repaying it in January would probably be worthwhile (*) as the alternative would be to wait until the end of the fixed rate to pay it off.

But in the real circumstances the OP (a) doesn't have the funds to pay off the loan so quickly and (b) isn't necessarily going to be maxing out his overpayments so no real need to "use it or lose it".

(*) Would only be worthwhile if he couldn't get a better return on his savings than he is paying on his mortgage, as ricky_v points out.