Unsure if I have my sums right, any second opinions greatly appreciated.

Hello all, I am having major issues trying to work out if it makes sense for me to over pay 10% on my mortgage on the 1st January or to keep it in the bank to earn tax-free interest. If anyone can explain it to a financial moron then I would be most thankful.

I will have (give or take a £1), £57500 left on my mortgage which has an APR of 2.34% with another year to run before remortgage. I am allowed to repay 10% a year.

I have £20000 saved in a Santander account earning 3% and the rest about to slowly go in to an ISA (but this is only up to 0.58p so far).

If I keep my money in the bank I work it out that the £5750 I save will earn £172.50 interest. After this I think I worked out that the interest paid on £57500 would be £1345.50 but the interest paid on £51750 would be £1210.95. If I have used all my fingers and toes correctly, I worked out that I would therefore save £134.55 by overpaying which would not be as much as I would earn by leaving it in the bank. I would not pay tax on the first £1000 and I am not a higher rate tax payer.


Could someone confirm I am right? Someone here in the office tried to explain it but they are Rain Man like clever when it comes to maths and confused me so much I had to go and get a strong cup of tea to recover.

Thanks for any help :)

Steve

Replies

  • edited 19 July 2016 at 1:30PM
    edinburgheredinburgher Forumite
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    edited 19 July 2016 at 1:30PM
    Aren't you overthinking this? 3% is bigger than 2.34% and you won't pay tax on the savings.

    Surely the sum to consider is (£5,750 * 3%) - (£5,750 * 2.34%) = something like £40 better off over the year with the money in savings?
  • MallyGirlMallyGirl Forumite, Board Guide
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    given that there is so little difference, I would be tempted to overpay. OK at the moment you are making 0.66% more interest in Santander but what rate will you get in a year's time when you remortgage? If it is likely to be more than 3% then I would get as much overpayed as I could before that remortgage
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  • User1489User1489 Forumite
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    Agree with Edinburgher. Slight gain to be had by keeping it in savings.

    I would overpay to the max 10% this year - sometimes the intangible good feeling is worth more than the slight gain in cash...

    Also consider if having a higher LTV ratio would benefit you for the remortgage, but it sounds like you're probably under 60% anyway at this point - depends on property valuation.

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  • Hello, thanks for all your replies. I think it has swayed me to overpay, as you dont know what is around the corner :)

    thanks again.
    Steve
  • lulabelle1lulabelle1 Forumite
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    Hello, thanks for all your replies. I think it has swayed me to overpay, as you dont know what is around the corner :)

    thanks again.
    Steve

    If you're worried about what may be around the corner, I'd suggest keeping the money in savings.. not only would you earn more interest, but it would be easy access just incase.... you can always just keep saving until you're in a position to clear the o/s mortgage?
  • edinburgheredinburgher Forumite
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    lulabelle1 wrote: »
    If you're worried about what may be around the corner, I'd suggest keeping the money in savings.. not only would you earn more interest, but it would be easy access just incase.... you can always just keep saving until you're in a position to clear the o/s mortgage?

    Hi Lula! :j

    I thought exactly the same thing, even with 'fully flexible' OPs, banks can move the goalposts to stop people withdrawing OPed monies etc.
  • Making overpayments on your mortgage is effectively like earning simple interest, whereas the money invested at the bank attracts compound interest which will grow far quicker than the effective rate you would achieve by making overpayments. Overpayments are a great idea in a higher rate environment where it is less likely you can achieve a risk-free rate of return by alternative means (Cash ISA's etc).

    I'd suggest keeping the money invested, watch it compound and you always have access to it should times become harder - once you overpay its typically lost in the house albeit some lenders allow you to reclaim a proportion
  • ViolaLassViolaLass Forumite
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    MallyGirl wrote: »
    given that there is so little difference, I would be tempted to overpay. OK at the moment you are making 0.66% more interest in Santander but what rate will you get in a year's time when you remortgage? If it is likely to be more than 3% then I would get as much overpayed as I could before that remortgage

    Then overpay when remortgaging and no earlier (no benefit from doing it earlier).
  • ViolaLassViolaLass Forumite
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    daxter2244 wrote: »
    Making overpayments on your mortgage is effectively like earning simple interest, whereas the money invested at the bank attracts compound interest which will grow far quicker than the effective rate you would achieve by making overpayments.

    Not true.

    (more characters needed)
  • edinburgheredinburgher Forumite
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    ViolaLass wrote: »
    Not true.

    (more characters needed)

    Indeed. Because by OPing, you avoid future compound interest on the debt, so you keep saving. That's why £1 OPed on my mortgage saves £3 or so (as opposed to a few pennies, which would be the saving if 'simple interest' as it was put) applied.
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