Lump sum annual overpayment vs. regular overpayments on daily interest mortgage

neo2020

Hi there,

Can anyone help me find a calculator or just help me to work out the following?

We have a £171,000 mortgage @ 2.84% which allows up to 10% annual overpayment.

The mortgage is for a 30 year term and the monthly payment is therefore £706.

The interest on the mortgage is calculated daily.

I would like to make overpayments that take the monthly payment to £1000, i.e. £294 per month. However, if I can hold on to this cash throughout the year and pay it as a lump sum of around £3,500 at the end of the year, that would be better in terms of security for unexpected costs etc.

How much will I lose out on by making the overpayments lump sum vs. on a monthly basis?

Thank you.

getmore4less

just use any regular calculator like

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

stick the numbers in for both options and you get your answer.

then add on the interest you get from the savings

amnblog

Under £100

£3,500 today saves 2.84% X £3,500 against £3,500 in 12 months.

AnotherJoe

What happens at the start of the year that means you dont need the buffer for unexpected costs then
????

neo2020

amnblog wrote: »

Under £100

£3,500 today saves 2.84% X £3,500 against £3,500 in 12 months.

Brilliant, thank you!

neo2020

AnotherJoe wrote: »

What happens at the start of the year that means you dont need the buffer for unexpected costs then
????

At the end of the year, I know I didn't need that £3,500 for other things during the past year.

I obviously have other contingency funds set aside.

getmore4less

amnblog wrote: »

Under £100

£3,500 today saves 2.84% X £3,500 against £3,500 in 12 months.

that's not what they asked

it was £294pm or £3500 at the end.

That's closer to (£294*12/2)* 0.0284 £50.10

+ any interest on the savings.

AnotherJoe

neo2020 wrote: »

At the end of the year, I know I didn't need that £3,500 for other things during the past year.

I obviously have other contingency funds set aside.

Yes but at any given moment, it's always the end of " the past year".

Whatever that contingency was, let's say new boiler, major roof repairs, etc, that could happen at any time. If you have other contingency funds it makes no sense to act as if there is something special about one date that means when that date has passed, you are OK. What if boiler breaks on Jan 4th? If you are covered then anyway, then why did you hang on until Dec 31 before transferring the money,

The only thing that would make sense was, the money was Ina high interest acciunt with a limit which was filled up. Even then, once it's filled up you should divert any new savings to the mortgage.

FWIW if you do this constantly it's not just £100, it's £100 every year. Overa 20 year term left that's £1000+ and equal to say finishing your mortgage one or two months earlier.

neo2020

AnotherJoe wrote: »

Yes but at any given moment, it's always the end of " the past year".

Whatever that contingency was, let's say new boiler, major roof repairs, etc, that could happen at any time. If you have other contingency funds it makes no sense to act as if there is something special about one date that means when that date has passed, you are OK. What if boiler breaks on Jan 4th? If you are covered then anyway, then why did you hang on until Dec 31 before transferring the money,

The only thing that would make sense was, the money was Ina high interest acciunt with a limit which was filled up. Even then, once it's filled up you should divert any new savings to the mortgage.

FWIW if you do this constantly it's not just £100, it's £100 every year. Overa 20 year term left that's £1000+ and equal to say finishing your mortgage one or two months earlier.

There is something special about one date - you can only overpay 10% a year, therefore you have to make the overpayment within that year. In the first few years that won't matter too much as we won't be overpaying anything close to the 10% figure, but as the mortgage gets smaller, that may become an issue.

You're ignoring the fact that if there is a contingency during the year, I am able to use funds that are sitting in the account towards that if I feel I need to. If overpaying monthly, that extra cushion is taken away. It's pretty obvious stuff.

Both of us are self employed with variable incomes, it's our first house purchase and there are other factors that make things quite difficult to predict. £1000 over 20 years is a tiny price to pay for the extra security - we will probably spend a similar amount on toilet paper during this time!

Thank you everyone for the help.

amnblog

getmore4less wrote: »

that's not what they asked

it was £294pm or £3500 at the end.

That's closer to (£294*12/2)* 0.0284 £50.10

+ any interest on the savings.

We are wondering whether to keep £3,500 in the bank for 12 months, not launching a Space Shuttle.

drsquirrel

neo2020 wrote: »

There is something special about one date - you can only overpay 10% a year, therefore you have to make the overpayment within that year. In the first few years that won't matter too much as we won't be overpaying anything close to the 10% figure, but as the mortgage gets smaller, that may become an issue.

You're ignoring the fact that if there is a contingency during the year, I am able to use funds that are sitting in the account towards that if I feel I need to. If overpaying monthly, that extra cushion is taken away. It's pretty obvious stuff.

Both of us are self employed with variable incomes, it's our first house purchase and there are other factors that make things quite difficult to predict. £1000 over 20 years is a tiny price to pay for the extra security - we will probably spend a similar amount on toilet paper during this time!

Thank you everyone for the help.

As the mortgage gets smaller, the % interest costs you less, so overpaying has less power as it goes.

Also, you may find it easy to get a mortgage with a new lender, a good LTV gives lots of choices and often no fees either, just then focus on ones with higher overpayment limits. Add to this, paying a one off 2% on your overpayment is still better than 2% compound...

Depending on how your mortgage is setup on the overpayments, these can be kept in a balance somewhere which can be used to pay you mortgage in the event you cannot pay etc (what you can and cannot do with this varies).