New Mortgage - Overpayment Help

Rom

Hi

So we just bought our first house end of last year. I want to start overpaying, but after speaking with Santander, im a bit confused.

After the calculator on here, i assumed i knew what id save roughly, over how long etc. But Santander need me to choose if i want to reduce the monthly payment, or reduce the term.
I guess the term is the way to go, but even then, its more complicated.
Each overpayment, would need to at least cover 1 months capital. Any more or less would default to reducing the monthly payment.
This capital amount also changes each month.

Some figures to give you the full picture.

Mortgage is £185,250. Fixed 2 years @ 3.79%
Monthly payment is £797
This months capital would be £212.65

Id be looking at paying the same as our old rent, £900. With potential for more depending on renovation costs etc.

We will be putting around £500 a month into savings, that will be used for repairs and renovations as and when needed. Its a fixer upper! Though once done, we would have this towards mortgage.

We had to get a 95%, which is less than ideal. The hope being we can get it down to a 90% after the fixed rate expires, and get a better deal. Not sure if thats feasible , in my head, we just need at least £10k equity, to match the £10k deposit. Giving us essentially £20k? Lowering to LTV to 90%.

Ive read early on, you pay mainly interest. Should i Save the money, until after we remortgage? Or best to start asap clearing money off? Not sure how remortgaging will effect this.
To reduce the term, id pay bi monthly, saving the £103 a month towards it i guess. Unless Santander calculate interest yearly, in which case i guess saving it up, and paying a lump sum would be the better choice.

Just after some more experienced opinions on what route to take. Now we have a house, we have a lot more spare income. Saving the deposit while renting was hard, with rising prices, we decided to go now, at the cost of a 95%, rather than wait for the extra deposit, when we may not afford much in the area.
There is no other debt to consider, just the mortgage, and average bills etc.

Thanks a lot for your time

AnotherJoe

As long as you keep overpaying ( and if the monthly payment diminishes raise your overpayment to compensate) , it doesn't matter.

When you come to buy your next house or remortage the amount you owe will have dropped by what you paid and the interest you saved. Each pound you overpay is the equivalent of [STRIKE]2.79%[/STRIKE] 3.79% tax free interest which you'd do very well to match by saving, so the only benefit of saving is the flexibility it gives you, in that usually the money overpaid into a mortgage isnt recoverable until you remortage.

lopsyfa

Even though what you read about mainly paying interest early on is correct, every single penny of any over-payment you make goes towards reducing your mortgage/capital and not interest.

I put your figures in a small program I quickly wrote with the following assumptions:
1. You are making the payments every 30 days
2. Your mortgage start on 1st of this year (your mentioned end of last year)
3. The value of your house is still 195000 at end of year 2 (you mentioned 95% mortgage at 185250, therefore house value on purchase = 185250/.95 = 195000). Correct me if I am wrong.
4. Interest is compounded daily

Even with these assumptions (apart from the value of your house after 2 years), the value should still be fairly correct. With this I run two cases for you.

Case 1: Continue to pay £797 for two years
Balance: £180540
LTV: 92.6%

Case 2: Pay £900 for two years
Balance: £178080
LTV: 91.32%

Not much difference as far as LTV is concerned but better by paying more. I also calculate that paying approximately £1008 monthly will give you the 90% LTV at the end of the two years.

Please note that this depends on the value of your house being approximately £195000 after two years. If the house value falls (new build or a Brexit/Trump recession), your LTV will be worse (higher) than above but if the house price rises your LTV will be better (lower).

All other things being equal and if new build, after 2 years the house price should be about the same as the purchase price - drop in value due to the loss of newness and seller incentives on moving into the house compensated for by house value inflation within the two years hence my assumption.

Rom

Thanks for the replies.

So reducing the monthly (paying more each month) vs reducing term (paying a small lump bi monthly) has no difference in cost / savings to me ?
I get id pay the same amount in total, regardless of how its applied. Just thought id read on here somewhere, they make more money if you reduce the monthly.

Its an old 1930s house. With other similar ones on the same road, but in much better state of repair, for sale around £220k when we bought. So based on the above, as long as my house goes up by 2% ish, I should make the 90% LTV after the 2 year fixed.

TheShape

AnotherJoe wrote: »

Each pound you overpay is the equivalent of 2.79% tax free interest which you'd do very well to match by saving, so the only benefit of saving is the flexibility it gives you, in that usually the money overpaid into a mortage isnt recoverable until you remortage.

Unless the OP and their partner have exhausted their Personal Savings Allowance they could very easily earn 3%+ interest on 'saving'.

OP, if you decide to save rather than overpay each month see:
http://www.moneysavingexpert.com/savings/savings-accounts-best-interest

You could make use of Nationwide and Tesco accounts while building up enough money to get your LTV down to 90%.

OP, if you go the monthly overpayment route and your mortgage interest is calculated daily, the sooner you overpay the better.

Going the savings route gives you greater flexibility and if you don't already have an emergency fund of 3-6 months outgoings (plus your money for renovations) would be my recommendation.

Rom

I used some savings accounts last year, after ditching my isa. So dont think ill be able to use Nationwide or TSB again. Still with halifax for current, though looking at a Santander 123 Lite for the bill and mortgage cashback.

Ill need another account to put the £400 ish a month towards renovations, will look for one soon. As current ones run end of Jan. Most i can currently find, seem to offer 3% max. I think id still choose overpayment, as its only a 0.11% difference, and i know its being put to good use. Savings, theres always the risk they could be used for something else, though i try to be sensible!

Im struggling to find any information online, stating if the Santander 2 year fixed is calculated daily or not.

lopsyfa

TheShape wrote: »

Unless the OP and their partner have exhausted their Personal Savings Allowance they could very easily earn 3%+ interest on 'saving'.

OP, if you decide to save rather than overpay each month see:
moneysavingexpert.com/savings/savings-accounts-best-interes

You could make use of Nationwide and Tesco accounts while building up enough money to get your LTV down to 90%.

OP, if you go the monthly overpayment route and your mortgage interest is calculated daily, the sooner you overpay the better.

Going the savings route gives you greater flexibility and if you don't already have an emergency fund of 3-6 months outgoings (plus your money for renovations) would be my recommendation.

It is a different debate whether over-payment is the best option for the OP. Even if the OP is able to earn 3%, the difference may not be that much (2.79% compounded daily=2.83% APR). So the difference is 0.17%. If they get a 4%, difference really is 1.17% but they need to be more disciplined to actually save the money and not use it for something "essential" whereas by overpaying they won't be tempted to spend it. Savings too have the advantage in that if they genuinely need the money, the money is readily available.

Also the OP did mention about putting £500 aside in savings which they can earn interest on.

But maybe the best option is an hybrid approach where the OP makes a little over-payment and saves the rest in an high interest account which I think the OP is already doing. But the BEST options depends on the individual circumstances.

lopsyfa

Rom wrote: »

Thanks for the replies.

So reducing the monthly (paying more each month) vs reducing term (paying a small lump bi monthly) has no difference in cost / savings to me ?
I get id pay the same amount in total, regardless of how its applied. Just thought id read on here somewhere, they make more money if you reduce the monthly.

Its an old 1930s house. With other similar ones on the same road, but in much better state of repair, for sale around £220k when we bought. So based on the above, as long as my house goes up by 2% ish, I should make the 90% LTV after the 2 year fixed.

As earlier stated by TheShape, the earlier you make the payment the better. So if you can make the lump sum payment, make it as soon as possible UNLESS if the lump sum is built up in an account that pays more than 2.83% APR. Then you can save it monthly in that account and once you have enough lump sum, you can pay towards your mortgage.

If your house is valued at 220k, then paying £797 monthly will leave you with approximately 82% (after 2 years)which is even better than your target and no need for any over-payment to achieve the 90% LTV.

TheShape

OP and all posters please note:

Having gone back to OP's original post, it appears that the mortgage interest rate is 3.79% (no one, including the OP corrected the error? from AnotherJoe's post) .

If this is the case, then over-payments to the mortgage would clearly be better than saving at 3% (subject to at least having an emergency fund).

Rom

I did spot that, but thought maybe it wasnt a mistake, but rather some mortgage calculation i didnt understand.

I think with overpayment, and hopefully a little value increase we should see the 90% ltv.
I just found it confusing, how the MSE calculator makes it look, compared to how Santander explained it to me.
I didnt want to make the wrong choice, and find out later, id wasted time or money with a sub optimal route.

Thanks a lot for all the input and help.

AnotherJoe

TheShape wrote: »

OP and all posters please note:

Having gone back to OP's original post, it appears that the mortgage interest rate is 3.79% (no one, including the OP corrected the error? from AnotherJoe's post) .

If this is the case, then over-payments to the mortgage would clearly be better than saving at 3% (subject to at least having an emergency fund).

Good spot. Not sure if it was a typo or I misread. I'll fix it.