The Mortgage Free in Three - Take 5 challenge (MFiT-T5)

Suffolk_lass

It is the compound interest I am focusing on - so the total you pay off your mortgage is reduced by the subtraction of the interest on interest if you like to think of it that way - you are actually paying out that interest to your mortgage provider. In my case I am saving that interest over 42 remaining months of my mortgage, so my payments since February are saving me £1964 over the life of the mortgage. Each time I make an OP I get a letter with my new interest rate on it - that is the interest evened out over the remaining life of the mortgage. So the amount I am able to save increases as the interest decreases. Conversely, the amount I can save does not increase if I have not paid down my mortgage, because I do not have a higher proportion of disposable income because I am still paying it in interest on my debt at the original rate.

So while I can have enough in savings to generate interest earned to offset the interest I am paying, this means my savings are only actually earning the other bit on top of that, if you see what I mean.

julicorn

But you get the same compound interest in savings accounts or investments, so you'll be in the same overall position if the interest rates are identical.

Suffolk_lass

It is complicated and the rate is the same. But the amount it is applied against is not.

If I make my £10k OP on 1st January in your 1.5% £150 interest saving example and keep my monthly payments as the original schedule sets out, I am additionally paying down my mortgage slightly faster than the scheduled calculations. So not only have I paid off the £10k, I have reduced my interest and overpaid that £150 per annum, for each year on, by making that one lump sum payment.

If it is in a savings account instead, I am paying more to my mortgage provider in interest, and I have not increased my disposable income in order to increase my savings - I will get £150 interest and it will compound, but the capital debt will not be being nibbled away at by the payments I make every month being a higher proportion of the capital vs interest.

It is the same as the annual calculation statements for a repayment mortgage which show an increased capital repayment each year as the interest on the capital reduces and the capital repaid increases. The lump sum OP reductions make this happen faster.

At the end of the day, both work. My approach reflects a book called "Get Out of Debt, and Prosper" that sets out a ten point plan focussed on paying off debt first. I think he (the author) explained it with worked examples, and I don't have it to hand but essentially servicing the debt at the same rate means your interest earned has less impact than interest paid because the former does not free up disposable income and the latter does (albeit within the mortgage, in this example).

julicorn

Suffolk_lass wrote: »

If it is in a savings account instead, I am paying more to my mortgage provider in interest, and I have not increased my disposable income in order to increase my savings - I will get £150 interest and it will compound, but the capital debt will not be being nibbled away at by the payments I make every month being a higher proportion of the capital vs interest.

But it's not about the proportion of capital, you're only saving interest on the money you have overpaid (as well as the resulting compound interest saving). Mathematically, at the same interest rate, both scenarios will work out entirely the same - there's no magical advantage to the mortgage interest saved compared to the money you make through a savings account. Even if you throw half at the mortgage and half at your savings account, your overall net worth will be the same, and whether you then just transfer the saved money to your mortgage at the end of 5 years or just pay it as you go along would make no difference.
I'm not trying to stretch this out to far, and for the 'same interest rate' example it doesn't make a difference, but I think it's worth pointing out that mathematically, you'd be better off putting money into a 2% savings account and then paying off a lump sum at the end of your 1.5% mortgage fixed rate than paying the mortgage off as you go. There's psychological advantages to overpaying your mortgage, for sure (and a a behavioural psychologist I fully utilise that for myself, rather than always making the financially best decision), but in terms of pure numbers, there's no difference to the best of my understanding. It even says it in the MSE article: https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

"If you can get a higher rate on your savings than you pay on your mortgage, saving wins. But if your mortgage rate is more than your savings rate, then it makes sense to overpay."

Maybe someone else can chip in and clarify?

Edited to add: This is all based on using savings accounts you're not paying tax on as well, e.g. ISAs or staying under the allowance.

DiscountDuck

Julicorn that is so helpful, thanks very much. I had got in such a muddle that the first lovely simplified explanation is exactly what I needed. Thanks for taking the time to help me out.

julicorn

JEdwards wrote: »

Julicorn that is so helpful, thanks very much. I had got in such a muddle that the first lovely simplified explanation is exactly what I needed. Thanks for taking the time to help me out.

No worries at all, I'm glad it was helpful :j

julicorn

It's not time for another update yet, but I've been reviewing our payments so far, and this challenge has motivated us to overpay by more than we initially thought. I've just sent through a form update with an increased goal - reduce our mortgage balance by £100k over the three years.

Lomcevak

All done with OP's for this month, so #6 reporting in with a mortgage now down to just £4,466, which is a reduction of £14,342 since the last update, and £45,441 since the start of MFiT-T5


I have an early repayment charge in place until June, so frustratingly can't be finally MF until then. However, February and March will sees the last 'normal' OPs, taking me down to about £1k, after which it's a case of letting the standard April, May, and June monthly payments go out, followed by the final (over!) payment of a hundred quid or so mid-June to close it out. Exciting :j

trix-a-belle

Thats amazing news Lomcevak well done!
Time is flying by! Chart 4 soon, thanks for the updates already submitted
MFiT-T5 Form

longway2go

Hi,

Form for chart 4 has been submitted.

Balance now 152120.12

Thank you