Regular Overpayments vs One off payments

leegmac

Hi all, looking for some advice.

I owe £88k on my mortgage and 12years left, paying the variable rate of 2.5%. I'm paying £668 p/m and can overpay by £600 p/m. Using the calculator that will bring me to 6 years.

My question is, am I best to do that or to save the money and pay big one off payments. Maybe annually or even after 5 years?


My credit rating is only 'fair' due to some issues I had a few years ago now so I have not tried to change mortgage, I also want to make these overpayments without fees/fines.

Am I doing right, or should I be trying to get another mortgage?

Any help would be appreciated.

Lee

VDOT47

If you can save your £600 per month into regular savings account which are earning more than 2.5%, which should be easy to do (FD, Nationwide for example do regular savers at 5%, although you need a basic current account with them first) then I would save into those for a year and then pay the lump sum plus interest off the mortgage once a year.

leegmac

I'm not great with the maths but does that save the same amount off the mortgage (lets say I had a savings account with 2.5%, same as the mortgage). Does it make no difference when you make the payment, monthly or annually...you save the same amount of interest on your mortgage?

Youthgonewild

Hi Lee. have you tried playing around with the mse overpayment calculator? You can see what the difference is between making a one-off payment vs making regular occurring overpayments. For example, what difference does paying £1200 make in the first year vs paying off £100pm for 12 months.

It also depends when interest is calculated I think. If your interest rate is calculated daily, it probably makes more sense to pay off a large lump sum. Someone may want to come along and correct me on that though.

VDOT47

On your example, on a mortgage of £88,000 over 25 years @2.5% if you saved up £600 pcm into a savings account then paid off the full £7200 in 1 year's time, your balance then would be £78,234. You would also have the interest earned in the regular savers (at 5-6%, perhaps £180-200) to overpay as well. So your balance would be approximately £78,035 - £78,050.


If you overpaid the £600 each month as you went along your balance would be £78,151.


So by my maths (using the overpayment calculator on this site), at the end of year 1 you'd be better off by about £100 by using the regular savers.

beefturnmail

Think of it like this: At the end of each month, do you have somewhere to put the spare £600 which earns more than 2.5% interest? If the answer is yes, you are better off doing that, if no, better off paying off the mortgage. The difference is simply the difference in interest e.g. if you put it in a 5% regular saver, you are better off by £15 p.a. for each chunk of £600. When the Regular saver matures ask yourself the same question on the whole amount e.g. do I have anywhere to put this (say) £3k which earns more than 2.5%. Also factor in that once you pay of the mortgage you lose access to the cash i.e. you can't use the money to pay for something unexpected (a new boiler, major car work etc), like you could with savings. IMHO this means it's worth keeping some in savings even if it earns slightly under your mortgage rate.

VDOT47

PS - redone the maths for a 12 year term (missed this on a first read through!) and the figures are still that you are about £100 better off using the regular savers than the monthly overpayments.

leegmac

Thanks folks, really helpful.

I think I will look for the best saving account I can find. I suppose as long as my savings are above the mortgage rate then I'm doing right!


So, taking that advice, I should try to find a fixed term deal and pay less which means more for the savings. I should always fall out into the variable rate again which means I can then overpay when I have a big chunk to pay.


Thanks again.

beanielou

Can you trust yourself not to touch the money in the regular saver?
If in any doubt pay off the mortgage.