Mortgage overpayments...in the short term

Mortgagequeries_2

Hi All

I saw the recent episode of money saving all about mortgages and overpayments - I've done my calculations and looked everything up, and could save a considerable amount of interest, and time off my mortgage (hooray!)

HOWEVER

I just wondered how this works if I didn't play to stay in this house, with this mortgage for the full term?

I.e. We are in our first house, and plan to be here for the next 4-5 years, before selling and hopefully moving up the ladder. We are currently saving towards our next deposit, and obviously the idea is we'd switch to overpaying instead to reduce our mortgage, but will this still have the same positive effects over say 4-5 years, as it would when looking at the full mortgage term?

So in 4 years, would I still be quite a bit better off having made overpayments for those 4 years??

Any thoughts most welcome!
Thanks

amnblog

Not sure what you are asking?


4-5 years overpayment reduces your interest over the total mortgage term.


Continued over payment over the total mortgage term reduces your interest further.

MFW_ASAP

The logical approach would be to compare your mortgage rate against your savings rate (less tax) and pay your money into the one with the higher interest rate. So if your mortgage is 3.5% and the best tax free saving rate is 1.2%, then you should pay onto the mortgage. If you have a super low tracker on your mortgage at 1.3% and you can get savings rates at 4% then put your cash into savings.

However, with interest rates so low for both mortgages and savings accounts and with you saving over such a relatively short period (5 years), the difference between the two methods would probably be small. Almost all of your savings will therefore be comprised of the actual money you have put to one side, so why not take a more pragmatic view and decide which approach is going to motivate you to save the most?

Will you be more enthusiastic at seeing a positive bank balance increase each month as you save up, or will you be more motivated by seeing a large debt reduce each month as you make overpayments?

Bear in mind that it's usually easier to get at your money in a savings account than to get your overpayments back, which may or may not be a good thing, depending on your circumstances and strength of will!

Thrugelmir

What rate of interest are you currently paying?

Mortgagequeries_2

Hi All, thanks for the speedy replies...to add some more context:

Current mortgage - 3.79%, post tax savings - 1.55%. We're talking about c.£200 a month going to one or the other over 4-5 years

Thanks

amnblog

If you are talking about one of the other as options, remember we all need readily available cash.

Mortgagequeries_2

Thanks, it's a good point, we do have some cash already in savings which we'd leave where it is, just whether it was worth continuing to build these for 4 years, or overpay for 4 years

Thanks for the replies

MFW_ASAP

Mortgagequeries wrote: »

Hi All, thanks for the speedy replies...to add some more context:

Current mortgage - 3.79%, post tax savings - 1.55%. We're talking about c.£200 a month going to one or the other over 4-5 years

Thanks

From a pure moneysaving standpoint, you'd be better off paying extra cash onto your mortgage, provided you are allowed to make overpayments without penalties, they reduce the term of the mortgage rather than the monthly payments in line with your overpayments and you already have 'emergency' savings put by for a rainy day.

pathtofreedom

I think what you're saying as well is, is it worth paying extra if you're going to move anyway. When you move you'll still need a new mortgage I'm assuming, so as long as you're not in negative equity those OP will be helping to reduce your current or furture ltv by increasing your current equity. So say your current place is worth 100k, and you op enough to get it down to 60% ltv but your new house costs more, with the extra equity though you'd have saved money in interest payments, and have less to save towards a new deposit to be back in the 75% ltv or lower range, which is where the lower interest deals are.

Mortgagequeries_2

Yes that's true - would that additional equity i'd raised be available to go towards the deposit on a new house, in order to help reduce the LTV for the new place?

pinkteapot

When you move, the money you have towards the next house will be made up of:

1) Savings you want to put down on the house, AND
2) Equity (price you sell for minus mortgage balance) in your current house

The higher that sum, the lower your LTV.

So, it makes no difference whether you save or overpay. Well, except that you will need some funds in cash savings rather than equity to pay certain fees during the buying/selling process (not strictly necessary I don't think but makes life a lot easier).

We owned our last house for three years and it went like this:

Bought for £230k with a £130k deposit and a £100k mortgage.

Overpaid about £60k during the next three years, so we only owed £35k on the mortgage when we sold (had also paid off about £5k just from normal monthly repayments).

Sold for £250k, mortgage was paid off, leaving £215k. Used that plus £10k from savings to buy a £470k house with a £245k mortgage.

Had we put our £60k of overpayments into savings instead, the above sentence would have read:

Sold for £250k, mortgage was paid off, leaving £155k. Used that plus £70k from savings to buy a £470k house with a £245k mortgage.

Ultimately, it made no difference.

Overpay if the rate you're paying on your mortgage is higher than the rate you're getting on savings. Save if that rate's higher, or you want the flexibility of being able to get the money back if you need it.