Should I overpay on my Mortgage?

YoungDumbNBroke

I posted this in MFW however didn't get many responses or much help! I hope I can get some guidance here!

I just turned 23 and am now getting serious about trying to clear this mortgage faster. Current situation is that my partner and I took out a mortgage for a flat about 16 months ago (May 2017). We had it fixed for 5 years given economic uncertainty of brexit etc. and managed to get 2.88% interest (with a 15% deposit). This initially put our mortgage at a pot of roughly £114k. As far as I am aware we have about £106k left (Paying £500 a month).

I (not my partner) am at the stage where I am now expecting a pay bonus of ~£100 p/m, and also am getting rid of a PCP car that is worth £250 a month for me to lease, and then insure/tax/service, which is costly due to the sportiness of the car. I'm swapping it for a car worth roughly £2,000 that I will own outright.

Currently I am saving £200 a month, and will obviously see this go up by £350 a month (giving me £550 a month to save). Come March/April we will also have cleared out some other debts that will give me the ability to then save an additional £300 a month, however that is in the future.

So my query is this. It has always been my partner and I's plan to try to maintain the flat (we did extensive renovations and invested ~£25k into it, plus a £22k deposit), and use it as a cash cow for renting in the far and distant future, hopefully letting us both retire comfortably! This puts us in the predicament of having to save up another deposit/legal fees/storage fees/moving fees etc., and we would hope for our next property to be in the ~£350k mark.

So, the money that I now (will) have the ability to save - will this be better off overpaying as much as I can on the mortgage and then releasing equity when we come to buy the next property (I expect we have roughly 60k worth of equity in the property currently, as it was revalued at ~£170k). Or do I invest it better elsewhere? I know banks are giving low interest at the moment, however I have dabbled in Peer-to-Peer lending before and found the interest rates to be reliable at roughly 3-3.5%. I wouldn't really consider a lifetime ISA (or any bank/building society ISA for that matter) as I want my money to be accessible.

Any help/advice/experiences would be much appreciated! Cheers.

Tl;dr: Deciding whether to overpay on mortgage or save money to put towards a new house and which will gain better interest.

I pay into my pension already and don't have any dependents.

kuratowski

First, save sufficient cash for the purchase costs and deposit. I don't know what you mean about bank/building society ISAs not being accessible, there are plenty of instant access ISAs, just avoid the restricted ones.

Then, I think it depends on the timeframe for buying a new house. If you plan to buy another property in less than 5 years' time, then it makes sense to use any leftover cash to overpay the mortgage and improve affordability, as the (risk-free) return you make on the mortgage will be higher than any savings interest. However, if your time horizon is longer than 5 years and you are prepared to take the risk, then I would consider stocks and shares ISA are likely to provide a better return than any of cash savings, mortgage overpayments or peer-to-peer lending, but of course this is not guaranteed and you could make capital losses.

YorkshireBoy

kuratowski wrote: »

If you plan to buy another property in less than 5 years' time, then it makes sense to use any leftover cash to overpay the mortgage and improve affordability, as the (risk-free) return you make on the mortgage will be higher than any savings interest.

Interesting statement. The OP has a choice. They can overpay the mortgage each month and save 2.88% APR on the amount overpaid. Or they can open a couple of regular savers and make 5% AER, ie getting on for twice the return on their "leftover cash".

Alexland

As above but remember if you have been paying £500 per month most of it in the early years will be covering the interest so it's unlikely to have cleared £8k off the balance in 16 months - unless you mean overpaying by £500 per month?

Overpaying the mortgage will probably generate a greater advantage than most cash savings (and it will improve your LTV next time you change your deal) however the mortgage product may not allow you to get the money back if you are considering a second purchase.

Also are you paying enough into your pensions to get maximum employer matched contributions?

Alex

DiggerUK

If you don't use the extra to pay off the mortgage, you are taking risks. Doesn't matter if those risks are in cash savings due to inflation, or equity risks with the economy changing against you.

If you overpay, then your outgoings on the mortgage reduce the outgoings even further, and increase the ability to further overpay. If you buy more of the equity in you home, it's yours, at an ever reducing risk of losing it. It gives you added wiggle room if your work circumstances go south. It will make it easier to move on, because the amount of deposit you make on the next property works towards getting better deals the higher your LTV is.

There are so many benefits to overpaying, but I'll leave it there..._

YoungDumbNBroke

Alexland wrote: »

As above but remember if you have been paying £500 per month most of it in the early years will be covering the interest so it's unlikely to have cleared £8k off the balance in 16 months - unless you mean overpaying by £500 per month?

Overpaying the mortgage will probably generate a greater advantage than most cash savings (and it will improve your LTV next time you change your deal) however the mortgage product may not allow you to get the money back if you are considering a second purchase.

Also are you paying enough into your pensions to get maximum employer matched contributions?

Alex

My employer recently re-hashed the employer contributions so I upped mine to match their maximum (I think they double up to 4% and then add 1% per 1% that I add until 10% is reached - so I contribute 6% and they contribute 10%).

I understand that £106k is left on the repayment and interest balance, not just the repayment aspect (we started initially with a mortgage of £112k).

It is interesting that you note about the mortgage may not let me to access equity that I have in it (we have about £70k equity in the flat with our own investment and deposit/inflation). How much of this would I be entitled to? Any proceeds from sale and then port the remaining amount and remortgage on another property? (ie meaning only my investment and inflation would be what I am entitled to, according to property price at the time).

Sorry as you can tell I am still fairly young and possibly a bit naive about this! I have no idea on the realities of having a mortgage and what happens when I decide to move house/sell on.

Not sure on the best way to approach this.

YoungDumbNBroke

DiggerUK wrote: »

If you don't use the extra to pay off the mortgage, you are taking risks. Doesn't matter if those risks are in cash savings due to inflation, or equity risks with the economy changing against you.

If you overpay, then your outgoings on the mortgage reduce the outgoings even further, and increase the ability to further overpay. If you buy more of the equity in you home, it's yours, at an ever reducing risk of losing it. It gives you added wiggle room if your work circumstances go south. It will make it easier to move on, because the amount of deposit you make on the next property works towards getting better deals the higher your LTV is.

There are so many benefits to overpaying, but I'll leave it there..._

This was my understanding however I know that the property market can be a bit of a warzone at times. Thankfully we did buy in a nice area that we are familiar with, and don't anticipate running into any issues with re-selling (minus the normal waiting times and the right buyer to come across etc.). There's also plenty left on the lease.

I did run it through a online calculator even if I were to only overpay by £300 a month it would bring my term down by ~12 years and reduce interest costs by £18kish. Forgive me if this is wrong, but surely that's a saving of £1,300 per annum in interest, of which I would have to have over £75k cash in the best performing savings accounts to generate roughly the same, and it would only be tax free on the first £1,000.

Surely it makes financial sense to pump it to the house and release equity to a 75%LTV to enable me to rent it out and buy the next house? Using the released equity as a deposit/solicitors fees/moving fees for said next house.

chockydavid1983

DiggerUK wrote: »

If you don't use the extra to pay off the mortgage, you are taking risks. Doesn't matter if those risks are in cash savings due to inflation, or equity risks with the economy changing against you.

The choice between overpaying mortgage vs cash savings comes down to savings rate and flexibility. If you can get a higher rate on savings than the mortgage rate, that is better- when you come to buy the next property, the cash is still there to put into it in the same way as it would be with the mortgage overpayments. With the cash not tied up, you also have extra flexibility if plans change.

Reed_Richards

YorkshireBoy wrote: »

The OP has a choice. They can overpay the mortgage each month and save 2.88% APR on the amount overpaid. Or they can open a couple of regular savers and make 5% AER, ie getting on for twice the return on their "leftover cash".

These regular save accounts typically only last a year so at the end of the year when the interest rate drops you could use the lump sum to pay-off the mortgage in one big payment, assuming that is allowed.

atush

Hve you taken into account the fact that BTL is highly taxed on both gains and income? Whereas a pension/S&S isa isnt?

Have you taken into account the new charges you will face (higher stamp duty in your new home) and the fact that things you could once deduct from your income is no longer possible?

Sell yoru place when you buy a new one. And slam money into s&S isas and pensions.

kidmugsy

atush wrote: »

BTL is highly taxed on both gains and income? Whereas a pension/S&S isa isnt?

Have you taken into account the new charges you will face (higher stamp duty in your new home) and the fact that things you could once deduct from your income is no longer possible?

Sell yoru place when you buy a new one. And slam money into s&S isas and pensions.

He's probably doing as much pension saving as makes sense for a basic rate taxpayer who wants to buy a more expensive house in a few years.

He's only 23: some day he might be a higher rate taxpayer. Then letting a house on which he has a mortgage might well be a pretty lousy business proposition. Particularly if a government has decided to confiscate property rights from landlords and give them to tenants.