Is it worth overpaying a fixed rate mortgage?

marmitequeen

Hi, we are in the process of moving onto a new fixed rate mortgage and will shove in all the savings we have made before the new one starts. My question is this:

How is the fixed rate calculated? Is it better to keep putting in overpayments whenever I can or is it better to save those in an ISA/similar and put them in the mortgage when the fixed rate term is over?

If the amount I owe is 'fixed' for the tie-in period, does overpayment make a difference?

I think I've done too much reading and have mixed my brain up well and proper so thanks in advance for your advice on this one.
MQ x

TrickyDicky101

The amount you pay each month is usually fixed (and the rate of interest you are charged) but each payment you make will pay down a proportion of capital thus meaning you have a smaller balance on which you will be charged interest next month.

Hence it is worthwhile overpaying when on a fix.

This does assume that the mortgage rate you are being charged exceeds your after tax rate on any investments you can make (eg cash ISA, current account interest etc).

Dird

Hi,

Check out this calculator for an awesome example of payments/rates: https://www.drcalculator.com/mortgage/uk/
It shows monthly/annual payments and how quick/slowly you are paying it off.
If you're taking a 20 year mortgage with 10 year fixed then you only need to pay attention to the first 10 years really (similar for 2/3/5 stints).

My plan is to overpay as much as I can without causing charges (10%). My Lloyds ISA seems to pay me 1% annually; the mortgage interest is 2%+ so it makes sense for me to pay if/when I can...not sure if your ISA rate is better

Overpayment means your interest the following months will be slightly lower as the mortgage is smaller

marmitequeen

Thank you both so much. I had got myself confused about the fixed nature of it all - if it's fixed then the payments are fixed but I didn't know the capital calculations were redone each month rather than just at the end of the fix. Gosh, how often can I use the verb 'fix'?

Anyway, many thanks.

MQ x

PixelPound

marmitequeen wrote: »

Thank you both so much. I had got myself confused about the fixed nature of it all - if it's fixed then the payments are fixed but I didn't know the capital calculations were redone each month rather than just at the end of the fix. Gosh, how often can I use the verb 'fix'?

Anyway, many thanks.

MQ x

Payments are fixed because the rate is, you could be on Standard Variable Rate and your payments wouldn't change as long as the rate didn't. Interest is paid on whatever you owe so if you pay off more then after you will pay less interest. The reason people talk of overpayment as good is because a lot of your early payments are for the interest, overpayments are purely capital.

Dird

nic_c wrote: »

overpayments are purely capital.

Wow, didn't realise this but then if some of it went towards interest payments then there would be no incentive for the overpayments =]

PixelPound

Dird wrote: »

Wow, didn't realise this but then if some of it went towards interest payments then there would be no incentive for the overpayments =]

A lot of people find it confusing that at the start most of your payments are interest and near they end its mostly capital. Easiest way to think about it is, each month you get charged interest on what capital you owe, just like credit cards, so more capital you owe the higher amount will the interest be (its a percentage of what you owe). So for fixed payments you pay off the interest first and the rest goes to paying the debt. If you pay more, there isn't more interest to pay.