Is it really worth while overpaying my mortgage?

elliebee

I have tried to work this out numerous times and am sure I'm doing it wrong! LOL

I want to make a regular overpayment to my mortgage

I currently pay £352 per month and have 266 months left. Total to pay, £93632.

I want to overpay £148 per month taking my monthly payment to £500

The mortgage calculator says this will reduce my mortgage term to 170 months.


170 months x £500 = £85000


So I save £8632. Which sounds great.

Until I work out that paying an extra £148 per month, for 170 months will cost me £25,160


Am I missing something very obvious?

[Deleted User]

You just need to compare your mortgage rate with your savings rate. If the mortgage is higher, then overpay.

OXFORD_SMOGGY

Why though? Say I had £10,000 in 5% savings account that would net me £500 a year, but if I paid £10,000 off my mortgage it would save a lot more wouldn't it?

[Deleted User]

As I say, it depends on your rates.

OXFORD_SMOGGY

Ok all savings at 5% my mortgage is at 1.44%, still better to pay off mortgage isnt it, £10,000 saves much more in interest than £10,000 would accrue in interest in the bank.

[Deleted User]

No. Keep it in your savings, as you will be earning three times more than the interest you're paying on the mortgage.

OXFORD_SMOGGY

What about house value, not as simple as that, as you will have more equity in rising house prices

£10,000 equity in my house now could be worth £10,000 in 10 years time plus interest saved on mortgage.

In comparison to £500 interest in savings over ten years that would be £5,000

ViolaLass

If you didn't make the overpayment (148 x 170) then after the 170 months, you would have approx £25k extra in the bank but you would still owe 96 x 352 = 33792 i.e. £8k MORE than the overpayments. That's where your saving is.

However, as zx81 says, with a rate of 1.41%, there's no way you should be overpaying.

SalsaDanca

You are counting the costs of the overpayments twice. The cost of making the overpayments is already included in the saving of £8,632, so you don't need to subtract the cost of the overpayments again.

ViolaLass

OXFORD_SMOGGY wrote: »

What about house value, not as simple as that, as you will have more equity in rising house prices

The house value will rise or fall regardless of how much you have left on the mortgage. The price you paid is locked in when you pay it, not when you repay the mortgage.

PinkPig

As others have said, if the interest rate is higher in your savings then you are better to save than overpay.

But before you commit to doing that, two things to bear in mind are:
- compare with your actual effective savings rate. If you wouldn't bother to find the best paying current accounts that (maybe) earn 4-5% and actually end up in a rock-bottom savings account paying 0.5% then that changes the calculation dramatically
- consider your self-discipline. If you saved and had £10k in the bank after 5 years, would you feel rich & be tempted to spend the money on luxuries? If you struggle with self-control then paying off the mortgage might still be the sensible option.