FinancialBliss: My mortgage free journey…

financialbliss

Please bear with me while I try and explain myself. I had serious concerns / doubts over the weekend…

There are many questions asked about overpaying on your mortgage compared with savings elsewhere at a better rate. The stock answer appears to be to save if you can get a better rate after tax than your mortgage rate.

I know there’s other issues such as offsetting, overpayment charges, how and when interest is calculated on your mortgage etc, but I’ve been trying to compare overpaying and saving and the trouble is that I’m not 100% convinced that I’m doing it correctly.

Here’s where I am at the moment…

I’ve attempted to base my analysis on 1 year, so I’m looking forward to 2009.


I’ve estimated that my mortgage balance on 31/12/08 may be 59,494.28 (sorry – I know I say estimate, but as I’m using a spreadsheet, it’s estimating to two decimal places ). Mortgage “fund” of 1,200 per month or 14,400 for the year.

Overpay:
If I pay 1,200 a month directly to the mortgage (payments and overpayments), I estimate that the year end balance may be 47,685.54. Net mortgage reduction is 11,808.74 and mortgage interest charged is 2,591.26 – two values sum back to 14,400. Simple scenario - I can get my head around that.

Save:
This is the one I’m not quite sure I’m doing correctly! If I pay the minimum required to service the mortgage, about 430 a month, then I estimate that the 2009 year end balance may be 57,132.10. Net mortgage reduction is 2,362.18 and mortgage interest charged is more at 2,797.82.

If I then use the remainder of the 1,200 per month, (1,200 - 430), ie 770 and save this for a year, say at 6.0% and no tax (thanks mrs bliss), then I get 9,240 capital accumulated after 12 months and 297.63 credit interest from the capital, total of 9,537.63

If I compare this against the net reduction in the overpayment scenario of 11,808.74 I come up with:

Net mortgage reduction + savings capital and interest, ie 2,362.18 + 9537.63, ie 11,899.81

So in the two scenarios, I get:
Overpayment: 11,808.74 (mortgage reduction)
Saving: 11,899.91 (mortgage reduction plus savings)

Saving wins - a difference of 91.07 over 12 months or 7.59 a month.


Is there more to the calculations than this? Yes, I fully appreciate that savings is a winner over overpaying in the limited snapshot that I’ve done, but it hardly seems worth the effort? Perhaps my calculations are wrong?

I appreciate that there are also compound interest issues, both for the mortgage and savings, but for now I can only see savings rates dropping, thus it becoming more difficult to get good rates on savings.

I’m sure a long list of it’s better to overpay / it’s better to save pointers could be made, but I do prefer overpaying despite the fact that my calculations above suggest I may be slightly worse off by doing so.

I’m much more driven by seeing a debt reduce than a savings balance increase.

Overpay or save – what’s your view on the matter?

Financial Bliss.

StuartGMC

FB
I think my signature gives away my view on OP and offset.... but you've seen my thread and know we also "invest" (if you can call the Stocks & Shares loss of 43% at the moment an investment!).

I think based on hard facts alone it is quite straight-forward to show the result as you have done based on the interest rates and tax (where payable) are considered, and offsetting of course further influences the result if you later choose this arrangement.

So in your case there is virtually nothing in it cash-wise.

Then we move to the subjective, and here I am in agreement with you. Where you know you can OP then you are reducing a debt which means if things change in future you have less to address. If however you pay the required minimum mortgage repayment and save the balance, your "net" position hasn't really changed much (as shown by your calculations) but you have assets which may be open to consideration if you needed to think of any income support (e.g. disabling injury etc which results in a long-term change in income) above I think £16k?

Also, you cannot suddenly pay in the savings if an event like redundancy occurred as you would be deliberating reducing your funds which would bar you from many support routes. Would this also incur a significant OP penalty from the lender, which wouldn't have occurred if it was drip fed as an OP?

In such a case you may be "forced" to draw down on the savings for general expenditure until they reduce to a level that support kicks in?

So, you are I think weighing up the likelihood and consequences (risk is the product of the two) for a range of events against the OP situation and that for significant savings in-hand.

For peace of mind and accelerating the date to be clear of the debt, I would OP and if moving mortgages later, consider offset and OP, but I admit I'm biased which probably results from the last recession and seeing what it did to people.

I'll watch with interest (pun only partially intended )

Lunar_Eclipse

Ah, I'm really interested in this OP vs save debate too.

The general 'rule' seems to be ISA first, overpay mortgage second, save third. Possibly with pensions savings added before 'save' too.

We however like to swim against the tide. So we decided this year to attack the mortgage with a vengeance, purely to open up opportunities/choices later.

We have been overpaying on the mortgage and not saving/investing elsewhere. (But we can pull it all back if we need/want to.) And we have done brilliantly (see sig)! Like you FB, the snowball effect has been very motivating. Yet as we approach the 100k mark, I'm beginning to think about changing strategy. Not so much towards ISAs (unmotivating rates IMO even if they are tax free), but from an investing for early retirement point of view. That is our ultimate goal.

So I'm now wondering about splitting our 'savings' into mortgage overpayments and investing in shares/index funds. Probably 50:50, but am struggling with changing course since the current one has been very fruitful. However am also thinking now might be a good time (if there ever is one) to start putting money into the stock market again. But it's such a risk. Whilst time is (sort of) on our side, I just don't like the thought of losing money whilst we have mortgage debt. But then who does?

And I'm a firm believer in fortune favouring the bold.

ETA: I have read that interest rates are expected to come down again. Possibly this week and continuing next year. So if we get anywhere close to a 3% base rate which appears possible, I think that facilitates an excellent environment for overpaying. And I suspect we'll really 'go for it' with the mortgage. So ultimately I will be flexible in my approach to our financial goals next year. Incidentally, we are coming off a fixed rate (offset) later this month and will be reverting to SVR, currently 5.5%.

gallygirl

FB I believe you have a fixed rate mortgage - and there is a 0.5% cut expected on Thursday. Maybe you should revisit then?

You are obviously very sensible with money & could resist the temptation to spend savings so it really does come down to a £ savings & convenience equation. Others need to take the easy access into equation to ensure it is not dipped into. Taking money out of offset is psychologically different to taking out of savings and that extra barrier is needed by some.

I also note Stuart's point re savings v OP's when benefits are assessed - we never know what is coming next and OP's are 'safer' in this respect.

Wll be watching this space with interest

StuartGMC

Lunar_Eclipse wrote: »

Ah, I'm really interested in this OP vs save debate too.

The general 'rule' seems to be ISA first, overpay mortgage second, save third. Possibly with pensions savings added before 'save' too.

We however like to swim against the tide. So we decided this year to attack the mortgage with a vengeance, purely to open up opportunities/choices later.

LunarEclipse, we've also been "non-conformists" in the context of OP, offset and investments. We don't have Cash ISAs yet, as detailed in my thread, we can hit them full whack once mortgage is cleared 9yrs early (but no where near the rate you are doing so!).

So I'm now wondering about splitting our 'savings' into mortgage overpayments and investing in shares/index funds. Probably 50:50, but am struggling with changing course since the current one has been very fruitful. However am also thinking now might be a good time (if there ever is one) to start putting money into the stock market again. But it's such a risk. Whilst time is (sort of) on our side, I just don't like the thought of losing money whilst we have mortgage debt. But then who does?

And I'm a firm believer in fortune favouring the bold.

Our investments are down a lot (just waiting for ft.com to update the funds in Russia, Latin America and UK) but mainly because these were invested in the last 9-24 months. Still putting some cash in each month, but have decided to clear the mortgage by increasing OP for the next 16 months, then we'll be MF. As you note, it is hard to put cash in and see it drop in value, but, Warren is telling us now is the time to be greedy.... so I've decided we'll eat at the buffet but not stuff ourselves!

Markets seem likely to be flat in 2009, so pound averaging will assist us a little in that time, then we'll boost in 2010. My thread gives more details on our plans/reasoning, but I think if you are looking at 5-7yr returns then now is definitely the time to wade in. Whether you choose individual equities or funds of course is a whole different thread....

financialbliss

Hi all,:hello:

Some excellent comments so far regarding overpaying v savings.

A bit more about our mortgage. We’re currently 2 years in to a 5 year fix @ 4.79% with Nationwide. Despite this being a fixed rate product, we can overpay by up to £500 per month.

Nationwide also allow you to alter your term (longer or shorter) at no cost, even with it being a fixed rate product – we should be paying about 427 each month to the mortgage – we slashed the term from January 2008 and this ramped up the payments to 898.03 a month. We can still OP by up to £500, so we can effectively pay between 898.03 and 1,398.03 per month to the mortgage until the fix ends in March 2011. More than enough for our needs.

On top of that, the overpayments are shown separately as “Overpayment reserve” on the annual mortgage statements. To quote directly from my last mortgage statement:

“This is how much you’ve overpaid your mortgage by and has already been taken off the balance. If all or part of this is refunded back to you, your balance will increase and interest will be charged on this higher balance”.

Our overpayments currently stand at around 19k – effectively we’re offsetting in a standard fixed rate product. We can get our overpayments back says Nationwide in a few days. Basically, I’m trying to make the very best use of the mortgage product we have!

Current BoE rate?
If one thing is certain, this is going downwards. BoE rate setting committee meet on Wednesday – announcement at noon on Thursday 6th. 0.5% reduction seems certain, 0.75% or even 1% could be on the cards, but who knows , so as Lunar Eclipse says, this could be the turning point to overpay rather than save?

Similarly, we’re trying to manage our existing savings as best we can – we have a 10% regular saver for example, but we’re consciously not growing the savings – just managing them and OPing on the mortgage.

Other worries?
I’m on two months notice at work. We’re already short staffed, so I’ve currently got no worries there. I’m also financially disciplined enough to not to rush out and blow 1k or more on a flash flat screen high definition TV. Obviously, "small change" items such as Playstation 3's I've issues with - blew that no problem, but yes, generally we're both sensible :rotfl:

My earlier “worry” was that I was throwing thousands away by overpaying rather than saving – it’s getting into the mindset of the mortgage being the debt it really is rather than a thing you pay month after month for 25 years.

I still think that overpaying (at least for us) is the right thing to do. I feel comfortable with it, I can see real results month on month and it has brought our completion date forwards from March 2029 to (currently) September 2015.

I’ve today signed up for the 2009 overpayment challenge – modest OP of 3,800 but combined with standard monthly payments, takes us to 14,400 to pay against the mortgage in 2009.

Thanks for reading – keep those replies coming.

Financial Bliss.

Lunar_Eclipse

StuartGMC wrote: »

LunarEclipse, we've also been "non-conformists" in the context of OP, offset and investments. We don't have Cash ISAs yet, as detailed in my thread, we can hit them full whack once mortgage is cleared 9yrs early (but no where near the rate you are doing so!).

We have massively front-loaded our overpayments this year, so cannot continue at anything like this rate fyi!;) The first target is 100k reduction this year (97 so far) and ultimately '40 by 40', which is fairly self explanatory I think. No huge desire to set a goal for the whole hog, possibly because I cope better with shorter term goals.

Incidentally, we have had (PEPs &) ISAs before, years ago pre-children, but used them when we bought our current house.

And yes, my timescale for the stock market investment is longer term. If we could retire at 50 that would be superb. But at 37 and 37 tomorrow, we're starting very late, hence needing to take some risk in the hope that it pays off. And if it doesn't, I'll rationalise it by thinking it was a longshot desire and at least we tried (not that I've started)! Work pensions are dire.

setmefree2

financialbliss wrote: »

I'm quite shocked by our gas usage for October.

I started an energy use thread on the Green board that has become quite popular but the thing that shocked me and everyone else so much is how many KWHs gas uses:eek: It's quite scary. In the summer most people use hardly any gas and then suddenly it shoots up when the CH goes on....still I don't believe in being cold either...:D

All the Best

financialbliss

Hi,

November standard and overpayment has now cleared. Signature updated.

Other interesting facts?

Mortgage today is 60,114.84 - just a mere 114 quid over 60k. December will see us drop to 59-odd k. Always nice to see a leading digit change
Just got 49 months remaining - 4 years and 1 month, or 1,499 days remaining :j

Have reduced the mortgage by 9,538 this year. December will see the reduction top 10k.

Off to update post #1 and graph.

Financial Bliss.

StuartGMC

Lunar_Eclipse wrote: »

No huge desire to set a goal for the whole hog, possibly because I cope better with shorter term goals.

Incidentally, we have had (PEPs &) ISAs before, years ago pre-children, but used them when we bought our current house.

And yes, my timescale for the stock market investment is longer term. If we could retire at 50 that would be superb. But at 37 and 37 tomorrow, we're starting very late, hence needing to take some risk in the hope that it pays off. And if it doesn't, I'll rationalise it by thinking it was a longshot desire and at least we tried (not that I've started)! Work pensions are dire.

HAPPY BIRTHDAY for tomorrow :beer:

How about a thread for us to see your progress? Our pensions are ok as they are final salary (local government for OH which isn't great, and mine is sort of ok at 60ths per year) but I think generally retirement before 60 is now going to be a rarity (we're 44 next year) as reductions are so steep going early. Our plans (see my thread) augment the pensions so hope we can counter the reductions and thus afford to retire early, then keep busy with voluntary and similar things. We don't include any potential inheritances, and I think this is true of everyone here.

I don't think 37 is too late, we've only really been able to gear up in recent years ourselves (although overpaying since we were 29) and you can certainly consider the 10 yr period for risk/growth then should be able to transition out to lower risk bonds etc when the market is good. Hope it even works for you to be there by 50.