Calculating reduced monthly payment after overpayment - is this correct?

ruperts

Hi all

Conventional advice says that if you can save (or invest) at a higher rate than the interest on your mortgage, then you're better off not overpaying.

I always assumed that if I overpaid say £10,000 on a mortgage with an interest rate of 3% I would save £300, ie the 3%.

However, I used an online calculator (NatWest in this case) and selected the option to reduce monthly payments (as that's the only option my provider offers), it says that if I overpay for example £10,000, on a mortgage of £150,000 with 20 years to run, my payments would reduce by £55 per month so £660 per year, or 6.6% on the £10,000 overpayment.

Therefore the figure that you would need to beat in order for savings or investments to beat overpaying is actually 6.6% rather than 3%. Is this right or am I missing something?

Thanks

[Deleted User]

You're the missing the fact that the £55 a month isn't either interest or a saving It's delaying those payments until later in the term.

To gain the 3% benefit, you need to maintain your payments.

ruperts

Deleted_User wrote: »

You're the missing the fact that the £55 a month isn't either interest or a saving It's delaying those payments until later in the term.

To gain the 3% benefit, you need to maintain your payments.

Hi, thanks for replying, but unfortunately I still don't get it.

If I 'invest' the £10k to make my mortgage payments go down by £660 per year, how is that not effectively a 6.6% return?

By the looks of it the mortgage repayments would stay at the reduced amount for the length of the term? Therefore I would be saving £660 every year.

getmore4less

Your payment saving also include a lower capital payment so you are not saving that money it is just not coming off the mortgage.

If your interest rate was zero your payment still goes down if you overpay.

Simple way to think of it is a 1 year mortgage

£10k 1 year 5% £856.07pm. interest paid £272.90

overpay £10,000 payment now zero,
you are not saving £856.07 * 12 a year using your logic.

what you save is the interest.

[Deleted User]

ruperts wrote: »

By the looks of it the mortgage repayments would stay at the reduced amount for the length of the term? Therefore I would be saving £660 every year.

You're not saving £660 every year. You're just delaying paying that off.