Is it worth making an overpayment more than 10%?

getmore4less

halifaxmortgage wrote: »

Thanks everyone for your help. I'm not a high rate taxpayer. The 3% drops to 2% in 2020. Doesn't overpaying bring down the daily interest more quickly?

with a mortgage of 2.3% you pay £2.30/12 per month per £100 =~19p

You pay 3% £3 fee up front so to get the £3 back you need £3.00/19p = 15.8 months.

You don't start saving money till Jan 2020.

end of 2020 is say 16+12=28 months (300/28) * 12 =~ £1.29 per year

2.3%-1.29% = 1.1%

if you can find savings of 1.1% you cover yourself to the end of 2020.

Plenty of saver over that

AnotherJoe

halifaxmortgage wrote: »

@ OnlyGuy - Not sure about the BTLs due to the toughening of rules for landlords, but my aim is to bring down the mortgage as quickly as possible. The way I see it is that I'm taking a small penalty hit per annum, but I'm making a big dent in the amount of debt I owe. At this rate I should hopefully be debt-free within 10yrs, rather than 25yrs.

There are two debts here. One is the mortgage debt. The other debt is your pension debt to your older self.

The mortgage debt is being whittled away by inflation anyway. If you pay £1 off your mortgage today, that costs you £1. If you pay it off in 25 years time, its probably going to cost your about 50p in terms of todays money.

The pension debt isn't being improved if you put off saving for it. If you use investments then with a modest growth, lets say only 3 % above inflation, thats 25 years of growth you are losing out on. Roughly thats going to double your investments (because not all of them will benefit from a full 25 years investment. The first year will, the second year only 24 years, the third 23 years etc.
So, by focussing on the mortgage you are minimising the damage that inflation does to it (damage that's good for you) and minimising the growth you'll get in your pension.
You'll also still have a debt when the mortgage is cleared, that debt will be your pension debt to your older self, which will be harder to reduce (eg by building up a pension. A pension is just a debt in reverse.)

halifaxmortgage wrote: »

@ AnotherJoe - The question is though, even though the daily interest comes down slowly, is it enough to counter the penalty loss occurred? Also what savings account can you recommend? Is there a max limit on how much I can save and will I be taxed on it?

Someone else did the sums already about saving vs paying off. There isn't a maximum amount you can save except that limited by your spare money, and whilst if the amounts you could save each month were large there would be a fair amount of hassle in splitting across multiple accounts, for your purposes saving £4k/year thats only £333/month which is either two high interest savings accounts (usual max for those is £250, just look around the info on MSE above) or just one and then put the £83 into something like Marcus at 1.5%. Or if you cant be bothered just put it all in Marcus. Simple and still beats paying the 3% penalty and after 1 year take what you've saved monthy and put it in a 1 year account at around 2% interest.

You will pay tax on it if you earn more than £1,000 a year in interest. You cannot have anywhere near that amount in cash to earn that much interest because if you had you'd be asking about paying off your mortgage rather than remortgaging.

enthusiasticsaver

No don't pay more than the 10% you are allowed. Regular savers, high interest current accounts and then when the next year starts do the 10% overpayment at the beginning of the year and continue with the savings until the next year. When the mortgage deal is next up in 2021 make a large lump sum repayment from savings and continue as before.

Lotak

halifaxmortgage wrote: »

Thanks everyone for your help. I'm not a high rate taxpayer. The 3% drops to 2% in 2020. Doesn't overpaying bring down the daily interest more quickly?

My reasons for making the over payment was firstly that I don't end up wasting the money and secondly to quickly bring the mortgage down to avoid a sudden shock of higher interest rates, when the 5yr fix comes to an end in 2021...does that make sense?

If I didn't go over the 10%, what do you recommend I should do with the extra money?

Then you need to be disciplined with your money.
So long as you are disciplined, it doesn't matter what happens to rates between now and 2020. Rates could sky rocket, but your position will be better than if you were to overpay and pay a penalty, simply because on the day you remortgage (or product transfer), you use the savings that you didn't use to overpay in order to reduce your mortgage.

You may have paid interest on that amount you didn't pay, but
1) you will have saved 3% ERC
2) you will have generated interest either at the rate (if within an ISA / Personal Savings Allowance) or at 80% of the rate (since you're a basic rate payer).

It doesn't make financial sense to pay the penalty in order to try and save interest down the line given your conditions.

Your best bet, since you've got another 2 and a bit years is to find the highest interest savings account that you pay monthly into (currently 5%) and, instead of putting £100 into your mortgage, put £100 into that account.

halifaxmortgage

Apologies for the late reply. Also sorry to ViolaLass for not seeing your post earlier.

Thanks for the advice.

I rarely have savings every month. It's just as a one-off job, I might gain a lump sum.

I think my fixed rate expires in Feb 2021, so what savings account names can you recommend where I can place a lump-sum into?