Am I better off overpaying both mortgages or all on the smaller one?

jodles16

Lokolo wrote: »

No that is wrong.

If I have £100 to spare. My mortgage is 3%. My savings rate is 5% after tax.

Putting the £100 into my mortgage would reduce the interest by £3 a year.
Putting the £100 into savings, would return me £5.

I can either have -£103 in mortgage, or +£105 in savings. So therefore savings would be the way to go.

Perhaps I wasnt clear, I meant savings in interest overall, not compartively with a savings account against a mortgage, OP made no mention of savings account? Perhaps I am confused!

BigJohn3

jamesd wrote: »

From a purely financial point of view it makes no difference which you you pay into since doing it to either makes you worse off than you could be, given the low 2.5% interest rate. At that rate it's not worth doing any overpaying because you can make more money by saving or investing the money instead.

There are:

1. Regular saver accounts paying 6% taxable.
2. Current accounts paying 5, 4 and 3% with various limits and conditions.
3. Peer to peer lending at 10%+ or lower from a range of providers, with some risk to capital and term lockins.
4. Conventional investing, with the long term UK stock market return being about 5% plus inflation.

The big thing you were missing was looking at only half of the picture: the interest you could save, instead of comparing that to the interest or investment returns you could make and picking the one that gains you most.

Thanks for your responses James. I appreciate the other side of the coin is savings but we have adequate savings to get throug a period of unemployment, illness etc. I also understand that the overall interest on an combined lump sum is the same. What my thinking was is that whilst the interest rates are so low we have the opportunity to invest some "spare" cash into paying off the mortgage. When the rates inevitably go up then our ability to do that will be eroded as we will be paying a higher monthly basic rate so would prefer to lower the mortgage now whilst we can.

Also your example of the 3 different splits of the same lump sum at the same interest rate doesn't actually take into account my initial question. I know we pay the same if we cut the overall debt any which way but what I am trying to ascertain is whether paying more off the smaller mortgage value will make a quicker impact on the underlying borrowed sum rather than being wasted on interest as your simple simple doesn't take into account the more complicated manner in which mortgages are calculated. My thinking is that it will lower the borrowed amount more quickly, thus meaning less interest is paid per month/year and therefore when the interest rates go up significantly then we will have a lower sum for that to be applied to which equates to less years left on the mortgage as we will keep the payment levels the same (if possible) and the years left is the key point I am looking at.

I've run the figures through the calculator for paying the extra money against the smaller, bigger and total amount and in 5 years I was a bit surprised to see that the amount owed on all of them will be around £21k lower than by not overpaying at all. What is different though is that the larger mortgage will have reduced by 5 years to leave 12 years and then £227 the next year whilst the lower mortgage will have reduced by 8 years and 9 months and only have 9 years 3 months left to run.

Is this just a psychological difference or is it better to have one with a much shorter term left? I realise this is a different kind of question than most people have as the majority only have a single sum mortgage so don't know if it lends itself to slightly different thinking.

ViolaLass

BigJohn3 wrote: »

Thanks for your responses James. I appreciate the other side of the coin is savings but we have adequate savings to get throug a period of unemployment, illness etc. I also understand that the overall interest on an combined lump sum is the same. What my thinking was is that whilst the interest rates are so low we have the opportunity to invest some "spare" cash into paying off the mortgage. When the rates inevitably go up then our ability to do that will be eroded as we will be paying a higher monthly basic rate so would prefer to lower the mortgage now whilst we can.

Although saving the money now would give you an even bigger lump sum to pay off when rates go up

Also your example of the 3 different splits of the same lump sum at the same interest rate doesn't actually take into account my initial question. I know we pay the same if we cut the overall debt any which way but what I am trying to ascertain is whether paying more off the smaller mortgage value will make a quicker impact on the underlying borrowed sum rather than being wasted on interest as your simple simple doesn't take into account the more complicated manner in which mortgages are calculated. Nope, no difference. You'll pay the same amount on interest regardless of which mortgage you put the money towards. My thinking is that it will lower the borrowed amount more quickly but only on one, thus meaning less interest is paid per month/year on one, not on the otherand therefore when the interest rates go up significantly then we will have a lower sum for that to be applied to which equates to less years left on the mortgage as we will keep the payment levels the same (if possible) and the years left is the key point I am looking at.overall or for one of the mortgages?

I've run the figures through the calculator for paying the extra money against the smaller, bigger and total amount and in 5 years I was a bit surprised to see that the amount owed on all of them will be around £21k lower than by not overpaying at all. What is different though is that the larger mortgage will have reduced by 5 years to leave 12 years and then £227 the next year whilst the lower mortgage will have reduced by 8 years and 9 months and only have 9 years 3 months left to run. well yes, it's a smaller amount so the same overpayments will bring the term down more

Is this just a psychological difference or is it better to have one with a much shorter term left? I realise this is a different kind of question than most people have as the majority only have a single sum mortgage so don't know if it lends itself to slightly different thinking.

Shorter term means you're tied into the payments, no flexibility. Up to you to decide whether you're bothered by this.

jamesd

If you use the savings options they increase the amount you can pay off the mortgage. Instead of just saving the 2.5% mortgage interest rate by overpaying you make 6% less tax and you can use the extra to pay money off the mortgage later. Overpaying on a mortgage when you can make more than you save is just throwing away potential mortgage overpayment money. If mortgage rates go up you just compare those to the new savings rates and pick whichever is higher then, maybe ending up using the savings to overpay.

Nothing in the way that mortgages work affects the examples I gave. Paying more off a smaller mortgage makes no difference at all to the overall debt level. It's all about interest rates. Every Pound you overpay to make one smaller is a Pound that you didn't pay to make the other one smaller. You don't gain from picking one over the other. if one has less capital owed so its interest bill is lower, you paid for that by having a bigger balance on the other one leaving it with a higher interest bill.

Having a shorter term left is good psychologically for some people but that's all it is. Other people just like to see a smaller number of total debts, so would prefer clearing one mortgage so that there's only one left. Even though that makes no difference at all to the amounts owed or interest paid compared to doing them in the other order or at the same time.

Some people can't psychologically deal with seeing money in a savings pot and money owed on a mortgage and realise that the two combined mean they owe less money. Those people can prefer overpaying even if savings rates are higher. It's throwing away money but if it makes them happy enough to overpay it's better than just spending the money, even though saving then overpaying would clear more of the mortgage.

jamesd

ViolaLass wrote: »

Shorter term means you're tied into the payments, no flexibility. Up to you to decide whether you're bothered by this.

In this case it's the overpaying which creates the shorter term. The mortgages themselves have the same end date. Part of the question is whether overpaying on one saves more money than on the other or on both because it makes one have a shorter term than the same overpayment would if it was made on the other or split between both. It doesn't.

ViolaLass

jamesd wrote: »

In this case it's the overpaying which creates the shorter term. The mortgages themselves have the same end date. Part of the question is whether overpaying on one saves more money than on the other or on both because it makes one have a shorter term than the same overpayment would if it was made on the other or split between both. It doesn't.

I agree and said as much - I replied within the quoted post as well as after it.

BigJohn3

jamesd wrote: »

If you use the savings options they increase the amount you can pay off the mortgage. Instead of just saving the 2.5% mortgage interest rate by overpaying you make 6% less tax and you can use the extra to pay money off the mortgage later. Overpaying on a mortgage when you can make more than you save is just throwing away potential mortgage overpayment money. If mortgage rates go up you just compare those to the new savings rates and pick whichever is higher then, maybe ending up using the savings to overpay.

Nothing in the way that mortgages work affects the examples I gave. Paying more off a smaller mortgage makes no difference at all to the overall debt level. It's all about interest rates. Every Pound you overpay to make one smaller is a Pound that you didn't pay to make the other one smaller. You don't gain from picking one over the other. if one has less capital owed so its interest bill is lower, you paid for that by having a bigger balance on the other one leaving it with a higher interest bill.

Having a shorter term left is good psychologically for some people but that's all it is. Other people just like to see a smaller number of total debts, so would prefer clearing one mortgage so that there's only one left. Even though that makes no difference at all to the amounts owed or interest paid compared to doing them in the other order or at the same time.

Some people can't psychologically deal with seeing money in a savings pot and money owed on a mortgage and realise that the two combined mean they owe less money. Those people can prefer overpaying even if savings rates are higher. It's throwing away money but if it makes them happy enough to overpay it's better than just spending the money, even though saving then overpaying would clear more of the mortgage.

This is all very useful and interesting information from everyone who has replied so thank you. I am no expert as I mentioned at the start so am happy to hear all points of view.

My thinking was that as a lot of the monthly payments are "wasted" on paying off the interest element of the loan and not lowering the overall capital, it would be good to maximize the amount of money hitting the smaller mortgage to compensate for that and the extra £328 would come straight off the capital, meaning that the interest due on the next months bill would be lower. I take your point that by concentrating on one you are neglecting the other and the calculator seems to back that up despite it still not being right in my head

The other thing that is still boggling my mind is whether it is as simple as comparing the interest rates on the mortgage and savings accounts. I will get whatever interest rate applied to my £328 per month but would overpaying the mortgage not benefit more by reducing the capital value as explained above? Actually now I have typed it out and processed it then I realise I haven't allowed for the cumulative interest on the previous payments into the savings account and was only considering them individually. As such you will get interest paid on your savings plus the previous interest paid in. Makes more sense.

There is the problem you outline that if you have money in savings then it always seems to get diverted into other emergencies, like the opening scenes of UP the movie! If it is already committed to the mortgage there is no possibility of that. I'll have to speak to the wife to see how realisitic a proposition it is to have ringfenced savings as so far with 2 kids, 2 cats and a dog it hasn't worked so well.

I need to go off now and see what thing of interest rates I can get on a monthly payment of £328 and do the sums.

jamesd

Well, not diverting savings is a matter of self-control. Unless it really is an emergency, then at least you have the money available instead of tied up in the mortgage and not accessible any more.

If the money does just end up getting spent on things that wouldn't have been bought if it wasn't in savings then overpaying would be the way to go. Just individual psychology, some people are able to ring fence better than others. Overpaying may not strictly be best but it beats unnecessary spending if that's the alternative.

BigJohn3

jamesd wrote: »

Well, not diverting savings is a matter of self-control. Unless it really is an emergency, then at least you have the money available instead of tied up in the mortgage and not accessible any more.

If the money does just end up getting spent on things that wouldn't have been bought if it wasn't in savings then overpaying would be the way to go. Just individual psychology, some people are able to ring fence better than others. Overpaying may not strictly be best but it beats unnecessary spending if that's the alternative.

Exactly James. We never set out to fritter it away but life has a habit of throwing curveballs.

I am looking at different saving options on this site and currently am not seeing anything along the 5-6% rates and the 4% I've seen needs a £50k deposit which wouldn't happen so need to keep searching. Potentially something like an ISA would be ideal as it is ring fenced off and not easily accessible but can be retrieved if we decide to overpay.

Thanks to you and everyone else who has commented on this thread and hopefully it might have enlighted some other readers at the same time.

jamesd

Two 6% deals are in the regular saver article I linked to: First Direct and M&S.

If you want some degree of locking in you might consider the Ablrate peer to peer lending platform. You can get around 10% taxable there and it's lending to others so you normally get the money back as they repay, though there is a market where you can sell existing loans if you want or need to. The loans are secured like a mortgage on aircraft or physical plant and machinery.