Mortgage Overpayments (Sub-Accounts)

Complex

Hello,

I've been searching the internet for an answer to my question and I can't seem to find an answer, or at least not one that asks the question in the way I'm trying to understand it - so hopefully someone can help!? - For the purpose of the question I will use made up values;

Sub-Account 1 - 3.89% Interest - £60k (30 year term)
Sub-Account 2 - 2.06% Interest - £120k (30 year term)

If I am able to overpay £250, how should it be overpaid?

Most people suggest pay the higher rate first, which I agree with but only to a point - due to compound interest surely you reach an equilibrium where it then becomes more beneficial to pay off the lower interest rate on a higher value of money. When using an overpayment calculator the below is the results;

Sub-Account 1 - 3.89% Interest - £60k (Overpayment - Interest Saved)
£50 - £11,436 - (+£11,436)
£100 - £17,825 - (+£6,389)
£150 - £21,945 - (+£4,120)
£200 - £24,833 - (+£2,888)
£250 - £26,975 - (+£2,142)

Sub-Account 2 - 2.06% Interest - £120k (Overpayment - Interest Saved)
£50 - £5,888 - (+£5,888)
£100 - £10,277 - (+£4,389)
£150 - £13,679 - (+£3,402)
£200 - £16,394 - (+£2,715)
£250 - £18,613 - (+£2,219)

Therefore, the highlighted red would be the best overpayments e.g. £150 SA1 and £100 SA2? Obviously it could be more accurate to the £ but much easier to split into £50's - then you would overpay £150 on SA1 and setup a monthly standing order for the remaining £100 to SA2.

Any help or advice would be greatly appreciated - sorry for the long winded post.

Thanks!

[Deleted User]

Complex wrote: »

Most people suggest pay the higher rate first, which I agree with but only to a point - due to compound interest surely you reach an equilibrium where it then becomes more beneficial to pay off the lower interest rate on a higher value of money.

No, never.

It is always most beneficial to overpay the highest rate.

The outstanding balance has no bearing on it.

Complex

Thanks for the quick response!

Is there a simple reason why the overpayment calculators would show a bigger saving over the term and perhaps suggest differently?

TrickyDicky101

Because the balance is higher at the start so takes longer to pay off with a fixed overpayment - it just means in your second example the loan remains in place for longer so more interest is charged on it.

As zx81 says, ALWAYS pay down against the balance with the higher rate (all other things being equal).

Complex

Understood, so the interest saving is deceiving as ultimately it is based upon a debt value that is twice the amount of sub account 1?

AnotherJoe

What you are saving when you make the overpayment is interest solely on the amount you overpay. The rest is unaffected and irrelevant.

If you owe a million at 1% and a thousand at 10%, by paying off the whole thousand you save 10% = £100 ongoing.

If you paid it off the million, you'd save 1% of £1,000 = £10 ongoing. You dont save anything off the £999,000 thats still there.



So as said, you always pay off the highest rate.
(Though almost certainly you'd get a much bigger benefit if you put the money in your pension.But whatever)