Mortgage Overpayment

Mr_Curious

Hi Guys,

I have a question you guys may be able to help with.

I have just bought a property with my partner. We were luck enough to put down a far chunk of a deposit and that has helped with the payments. My questions is would it be better to regularly overpay on the mortgage or put the money into a regular savers and pay in a lump sum when the fixed term has ended? (Or upto the limit stated before being hit with fees with in the fixed period)

Mortgage rate is 2.8%
I currently hold a 1st Direct Reg Saver (6%) and TSB (5%).

Any advice welcome

Mr C

bowlhead99

The 5% regular savers will generate interest at net rates of 4% for low tax payer or 3% for high tax payer or under 3% for very high taxpayers.

However, the tax only comes into play after you have earned enough to cover the new annual tax free interest allowance that we all get from April. If the amounts are not large especially once split between two people, they may not exceed the allowance and attract any tax at all, and so the net interest income on every pound not spent on a mortgage overpayment would be at those high headline rates of 4%, 5%, 6% that you can find on various regular saver accounts.

If it were me I would not overpay a 2.8% mortgage if I could instead make more than 2.8% after tax: I'd be throwing away free money. To be honest even if I was only getting 2.5% after tax I would be quite happy to not overpay the mortgage because the difference is not great and as a homeowner relying on a salary to pay all my bills it is much more useful to have a massive stash of cash for emergencies rather than a lower debt and need to borrow more if you get into difficulties.

The exception would be if you are able to make sufficient payments on the mortgage (without attracting massively inefficient overpayment penalties) to get the mortgage balance down to a better loan-to-value rate and remortgage. In that case the saving from paying off £5k of principal is not just the interest saved on that £5k but also the interest saved on the entire rest of the loan as the rate drops from (e.g.) 2.8% to 2.3% or something.

Broken_Biscuits

Mathematically, as above, it should make more sense to save than overpay with interest rates as they are.


We can be strange creatures when it comes to debt and emotion though and you need to consider where your feelings lie with the sense of achievement you may feel from overpaying.

If you already have a cash buffer for emergencies, and you are the sort that would sleep easier knowing you owe a little less... The difference in interest from saving or overpaying is not going to be life changing.

I do a combination of save and overpay.
It's daft, I owe about 105k. Even if it doesn't change my circumstances, I'd rather owe 99.99k. The milestone being significant, not just the obvious fact that it is lower. So may overpay slightly more than first planned come march even though the purists will tell me the maths doesn't add up as I will invest slightly less as a result.


Your opening post suggests you put down the most money you had available to you which suggests you may be in the pay down the debt first camp.

It's smart to be here asking the right questions, but overpaying is fine if you get more of a sense of achievement from it.

You can't put a price on mental health!