Calculating a mortgage stooze

TP78

Morning all, newbie here hoping to shake the shackles of a mortgage that is north of 300k at the moment. My maths is pretty good and I'm relatively disciplined on spending (having been burned in the past) but I can't work out the following:

How can I calculate the (potential) benefit of a lump sum overpayment on my mortgage? Other than reducing the capital which is obvious, how do I work out what the overall interest saving is? Any help would be greatly appreciated.

Regards

TP

helibob

Try this http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

JimmyTheWig

The most accurate way would be to put the numbers in a mortgage overpayments calculator. There's one on this site.

Otherwise as a rule of thumb just multiply the amount you are paying off by the interest rate you are paying on your mortgage and by the number of years left on the mortgage.
E.g. if you have 20 years left on your mortgage, you are currently paying 3.0% interest (and assume you will be doing so for the next 20 years) and you pay off £10,000 then you'd do
10,000 x 0.03 x 20 = 6000
So you'd save yourself £6,000 in interest.

However, the real saving will be less than this because you would earn interest on that money if you didn't pay it off the mortgage. Say you receive 1.8% net interest on your savings (e.g. Santander 123 account for 40% tax payer) you should use 3.0% - 1.8% = 1.2% in the above calculation which shows that you'd be £2,400 up on the deal.

[I'm slightly confused by your use of the word "stooz" here. Does this mean that it won't be a permanent mortgage reduction? If so, the calculations are different, but we'd need more details.]

Monkeychops16

JimmyTheWig wrote: »

The most accurate way would be to put the numbers in a mortgage overpayments calculator. There's one on this site.

Otherwise as a rule of thumb just multiply the amount you are paying off by the interest rate you are paying on your mortgage and by the number of years left on the mortgage.
E.g. if you have 20 years left on your mortgage, you are currently paying 3.0% interest (and assume you will be doing so for the next 20 years) and you pay off £10,000 then you'd do
10,000 x 0.03 x 20 = 6000
So you'd save yourself £6,000 in interest.

QUOTE]

Thannk you I've been looking for this sum for ages! Is this right for me please? 4.95% interest rate, 16 years left-if I paidf £100 overpayment do I save £79.20 in interest? Thanks in advance x

getmore4less

There are problems with the MSE calculator so I don't trust it.

Much easier to use a simple calculator and do the calcs yourself with a before and after.

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

Not much you can't do with that with a few calcs for the more complicated stuff.

getmore4less

JimmyTheWig wrote: »

The most accurate way would be to put the numbers in a mortgage overpayments calculator. There's one on this site.

Otherwise as a rule of thumb just multiply the amount you are paying off by the interest rate you are paying on your mortgage and by the number of years left on the mortgage.
E.g. if you have 20 years left on your mortgage, you are currently paying 3.0% interest (and assume you will be doing so for the next 20 years) and you pay off £10,000 then you'd do
10,000 x 0.03 x 20 = 6000
So you'd save yourself £6,000 in interest.

However, the real saving will be less than this because you would earn interest on that money if you didn't pay it off the mortgage. Say you receive 1.8% net interest on your savings (e.g. Santander 123 account for 40% tax payer) you should use 3.0% - 1.8% = 1.2% in the above calculation which shows that you'd be £2,400 up on the deal.

[I'm slightly confused by your use of the word "stooz" here. Does this mean that it won't be a permanent mortgage reduction? If so, the calculations are different, but we'd need more details.]

There are more savings from keeping the payment the same.
eg £100k mortgage over 20years @ 3% £555pm

make that a £90k mortgage paying the same

Total saving £7500 and paid off in 17y 5m.

TP78

Thanks All

When I referred to the 'stooze' it is on the basis of looking at the cost to borrow through stoozing an amount of cash and using it to make a lump sum overpayment. I was just trying to work out the overall gain by making a lump payment rather than paying the same amount over the life of the 0% deal. The difference on calculation is negligible, but does still make an impact.

Thanks again

TP

JimmyTheWig

getmore4less wrote: »

There are more savings from keeping the payment the same.
eg £100k mortgage over 20years @ 3% £555pm

make that a £90k mortgage paying the same

Total saving £7500 and paid off in 17y 5m.

I agree. My calculation doesn't include compound interest. Even leaving the term the same, you'd save more than my calculation shows.
It's a simple rule of thumb.

JimmyTheWig

Monkeychops16 wrote: »

Thannk you I've been looking for this sum for ages! Is this right for me please? 4.95% interest rate, 16 years left-if I paidf £100 overpayment do I save £79.20 in interest? Thanks in advance x

Yes, that's right by my rule of thumb.
As I say further down in my post, you really ought to adjust the 4.95% in the calculation for the interest that you would earn on the money if you didn't pay it off the mortgage.
And as per my conversation with getmore4less, it's only a rule of thumb.

JimmyTheWig

TP78 wrote: »

Thanks All

When I referred to the 'stooze' it is on the basis of looking at the cost to borrow through stoozing an amount of cash and using it to make a lump sum overpayment. I was just trying to work out the overall gain by making a lump payment rather than paying the same amount over the life of the 0% deal. The difference on calculation is negligible, but does still make an impact.

Sounds like something I do.
The rule of thumb (and probably anything you can get from an online calculator) won't really help you here.

For example, you have £100 a month free to pay off the mortgage.

Option 1. Don't involve credit card.
Pay £100 a month off the mortgage for the next two years.
Over that two year period, your mortgage balance will be on average £1200 lower because of this. [I.e. to start with it will be £0 lower, to end with it will be £2400 lower.]
Interest saved = £1200 x 0.0495 x 2 = £118.80
[The x2 at the end of the calculation is because you are doing this for two years.]

Option 2. Borrow £2400 on credit card at 0% interest.
Pay £2400 off the mortgage on day 1. Pay £100 a month off the credit card for the next two years.
Over that two year period, your mortgage balance will be on average £2400 lower because of this. [I.e. it will always be £2400 lower.]
Interest saved = £2400 x 0.0495 x 2 = £237.60

I.e. with option 2 you save twice as much. Assuming that there is no Balance Transfer fee involved.

pollyanna24

JimmyTheWig wrote: »

Sounds like something I do.
The rule of thumb (and probably anything you can get from an online calculator) won't really help you here.

For example, you have £100 a month free to pay off the mortgage.

Option 1. Don't involve credit card.
Pay £100 a month off the mortgage for the next two years.
Over that two year period, your mortgage balance will be on average £1200 lower because of this. [I.e. to start with it will be £0 lower, to end with it will be £2400 lower.]
Interest saved = £1200 x 0.0495 x 2 = £118.80
[The x2 at the end of the calculation is because you are doing this for two years.]

Option 2. Borrow £2400 on credit card at 0% interest.
Pay £2400 off the mortgage on day 1. Pay £100 a month off the credit card for the next two years.
Over that two year period, your mortgage balance will be on average £2400 lower because of this. [I.e. it will always be £2400 lower.]
Interest saved = £2400 x 0.0495 x 2 = £237.60

I.e. with option 2 you save twice as much. Assuming that there is no Balance Transfer fee involved.

Loving this formula. Thanks!