is it worth overpaying a mortgage

sunrise27_2

we have five years left on our mortgage, amount outstanding is £34000
we are hoping to take out a fixed rate with the Abbey which is 1.89% for two years , my only concern is that after the two years interest rates will probably have gone up and so will the monthly payment
I'm not sure how over paying works ?
I can probably overpay for the two years that its fixed £100 per month or should I save that and then have a lump sum which will help us with the monthly payments if they go up in the three years after the fixed rate ends ?
if we over pay what happens in two years time when we come to take out a new deal ?

dano17439

Overpay monthly as the likelihood is that interest is calculated daily. You can either adjust your direct debit, or make one off payments from your current account to your mortgage account

sunrise27_2

ok thank you x but how does that affect us at the end of the two year fixed rate as we'll still have three years to go , I'm assuming when we approach the lender to sort out a new deal we'll owe less and then our monthly payments will be sorted out accordingly , part of me likes the idea of having the money to fall back on if the monthly payment rise after the two years but the common sense part of me tells me its better to over pay while we're on the two year fixed ??

ViolaLass

The earlier you overpay, the more you save in the long run.

sunrise27_2

but does it mean after the two year fixed rate we will owe less and the monthly calculations on the remaining amount will be worked out on the new figure ?

ViolaLass

sunrise27 wrote: »

but does it mean after the two year fixed rate we will owe less and the monthly calculations on the remaining amount will be worked out on the new figure ?

Well, yes.

getmore4less

Learn to do the numbers

http://www.whatsthecost.com/mortgage.aspx

£34000 1.89% 5 years £595 £53 is interest the first month.
(£34000 @ 0% is £567 any way)

In 2 years you owe £20767

overpay £100pm in 2 years you owe £18323

you save £44 in interest.

if rates go up to 5% then your new payment will be.

£623 or if you overpay £549
first month interest is £87 or £77

The different in interest paid over the 3 years will be £193

Beckyy

Interest is usually calculated daily so the more you OP the less interest you will be charged.

If you were to let the mortgage run you would simply pay it off sooner, at the end of your fix your mortgage rate would switch to whatever and payments would likely drop to reflect your OPs or they wouldn't and you'd pay it off earlier.

IMO it is very much better to OP providing you have an emergency fund to fall back on, and your money will not earn more than your current interest rate in savings.

You will need to look into how much you are allowed to overpay with that product, there is usually a limit in the fixed period. Often 10%, but this varies.

ViolaLass

Looking at the numbers again, the amount you'd save is pretty minimal AND you could earn more by putting the money in a savings/current account - you could get up to 5%. You could do that to start with and then use it to overpay at the end of your fix if mortgage rates have shot up above savings rates.