Mortgage OPs vs Investments - counterintuitive finding 22 January 2017 at 10:49PM edited 30 November -1 at 1:00AM in Mortgage-Free Wannabe 2 replies 853 views

expl0rer

I read somewhere some time ago that you're better off overpaying on your mortgage when your mortgage interest rate is higher than your savings interest rate. Otherwise, it's better to put the spare money in your savings account / investments.

That intuitively made sense.

I had spare cash and as my mortgage rate was 1.44%, I decided to invest it in P2P lending, which tempted me with a rate of 12% and thus seemed to be a much better option (7 times better).

Now after seeing the numbers I'm surprised. Making a overpayment of £1000 to my mortgage reduces my monthly payments by £4.22. Putting the £1000 in P2P gives me £10 monthly. So only a bit more than twice as much.
If the lending rate was 5%, it would yield £4.17 a month, so I'd be better off overpaying on my 1.44% mortgage.

This is not intuitive at first, but come to think of it, the smaller the principal owed, the more each £1000 overpayment reduces my monthly payments, so with time, overpaying becomes increasingly rewarding.

The bottomline is always do the math and see what works best in your case.

Seeing how good overpayments turn out for me, and considering the risk of P2P lending (and, in fact, the fact that MG OPs increase my security, the opposite of P2P lending) I'm now keener on overpaying

jayII

Are you talking about the reduction in interest you pay, or the reduced mortgage payment, whilst keeping the mortgage term the same? They are not the same thing.

The £10 P2P interest is almost entirely profit, whilst the reduction in your mortgage payment is due to you owing less to the bank--basically what would be due if you remortgaged, today, at your current rate and outstanding mortgage term.

expl0rer

When I make an overpayment, my monthly payments decrease and the mortgage term remains the same (that's the option I have chosen with my lender Nationwide).

Thanks for pointing out what the profit is in both cases, I didn't think of it that way. So the £10 P2P interest is pure profit (I'm still within the £1000 allowance so don't pay income tax on it). Owing less to the bank, on the other hand, means I pay both less interest and less principal monthly, with the latter being the larger contributor to the reduction. My actual profit is only the reduction in interest, which is not that significant. So, P2P is *much better* in terms of profit.