Plan to Overpay mortgage - and advice

md87

I am just wondering what people think of this 5 year plan basically, and would like to ask some advice on some points. The position is that I am moving house for the first time, scheduled to complete in a few months when my new build house is complete.

So, I am buying a new build at 170k. Here comes the first problem. I decided to pay an early repayment charge to get out of my ongoing fixed mortgage which was at a terrible rate just over 5%. Worked out cheaper to pay the ERC and get a lower rate, over the course of 5 year fix. So my deposit is 50k and 120k mortgage, fixed for 5 years at 2.89%. Monthly re-payments come in at just under £500 per month.

My plan was to try, try being the key word, to overpay £300 on my mortgage every month for the next 5 years. I worked out the difference this would make. The mortgage allows overpayment of 20% of yearly balance without penalty. I think we can afford to do this, although it will be tight obviously.

Calculation 1 - no overpayment for 5 years. If I just paid the mortgage for the next 5 years and made no overpayment, my mortgage balance after the 5yr fix would still be 106k approx.

Calculation 2 - Overpayment of £300 every month for 5 years. My mortgage balance at the end of the fix would be around 87/88k.

So what do you think, a good 5 year plan? I would say if I can have my mortgage balance below 90k in 5 years then I should be in a good position to re-mortgage etc. Just trying to do the best going forward as I have a term of 30 years which I obviously need to reduce.

On a side note I wondered what your opinions are on the following. Mortgage valuation came back at 10k under the agreed price. Obviously no one wants to overpay and I have tried to re-negotiate to no avail. We definitely want the move though because we feel we have got top price for our property which we have sold. If I am honest I would say my new build house is worth somewhere between 160-175k and I thought 170k was ok. The situation is we are not planning to sell for at least 15-20 years and therefore surely by the time we do come to sell, it will be worth more? So even if we move in and the property is initially only worth 160k, it does not matter so much. I had the same issue with mortgage valuation before on my first house, again they said it was worth less than the agreed price. But then 4-5 years later I sold at a profit of 20k, so I tend to take mortgage valuations with a pinch of salt. In my view they will always go in at the lower end of the bracket, as they can be sued and they are simply covering their own back. In addition there is not really any comparable properties as others on the site are semi's (this is detached).

Thanks for reading and for any input. :beer:

Spangled

"overpay £300 on my mortgage every month for the next 5 years ... The mortgage allows overpayment of 20% of yearly balance without penalty."

First up - surely you can overpay only £200/month (£2,400/year) without penalty - 20% of £120k is £2,400? A £300/month (£3,600/year) overpayment would incur an ERC, yes?

Also, whatever you overpay, your outstanding mortgage balance will then be less than £120k after year 1. So the amount you'll be able to overpay per month without penalty will be reduced in year 2. And that effect is compounded over the five years of the fix.

I'm sure there must be a clever spreadsheet around that enables you to calculate exactly how much you can repay without penalty.

Cheers.

jamesd

If you have a very low risk tolerance then the plan doesn't look unreasonable.

It's far from obvious that it's a good idea to reduce the mortgage term, since the main effect of that is to increase your financial risk level because you'll be committed to higher payments even if unemployed. It's more likely to make you worse off than to help you. that's particularly true if you are currently older than 30 so you would be 55-60 with access to pension funds before the mortgage term end, allowing you to use tax relief on pension contributions to clear some of the mortgage.

The MSE mortgage calculator shows that with no overpayment your mortgage balance would be £106,472 after five years. With £300 a month overpayment it says that the balance would be £87,085. Your gain from overpaying is the difference between the two, £19,387.

If you were instead to invest at the historic UK stock market returns of about 8% you'd have £22,043 to use to reduce the balance, an improvement over your plan but with less certainty. there are currently peer to peer investments that pay 10% or more, those would potentially get you to £23,231, a larger gain with less variation in value along the way. the investment difference compounds over time so it gradually grows to become a lot more significant than over just five years.

lee111s

Spangled wrote: »

"overpay £300 on my mortgage every month for the next 5 years ... The mortgage allows overpayment of 20% of yearly balance without penalty."

First up - surely you can overpay only £200/month (£2,400/year) without penalty - 20% of £120k is £2,400? A £300/month (£3,600/year) overpayment would incur an ERC, yes?

Also, whatever you overpay, your outstanding mortgage balance will then be less than £120k after year 1. So the amount you'll be able to overpay per month without penalty will be reduced in year 2. And that effect is compounded over the five years of the fix.

I'm sure there must be a clever spreadsheet around that enables you to calculate exactly how much you can repay without penalty.

Cheers.

Your maths is a bit off

20% of £120,000 is £24,000 not £2400. The OP will come nowhere close to breaching the overpayments limit.

One thing I will add OP - check to see what your mortgage provider specifies as the 20%. Some allow the overpayment percentage based on the initial loan amount each year, some base it on the outstanding balance on the anniversary of taking out the mortgage.

Spangled

lee111s wrote: »

Your maths is a bit off

20% of £120,000 is £24,000 not £2400. The OP will come nowhere close to breaching the overpayments limit.

Ha! You're quite right. But hey, what's a decimal point between friends?

OP - ignore my post!

md87

No worries thanks for the input people, I am age 27 btw. Yea no chance of breaching the ERC in the early years...