At what point do you think overpaying is no longer worth it?

Planet_Switzerland

I overpay the mortgage every month, more often than not my overpayments are more than my standard payments. I see the benefit, I've knocked 20% off my mortgage term and the overall interest I'm going to pay as things stand is 46% less than what I was originally going to pay.


I know purely from a financial perspective the more you overpay the more you'll save on interest and that's still true till the end of the mortgage.


However, in the final year of my mortgage the interest will be just short of £300 and in my mind it's not worth paying double what you need to just to save less than £300.


I'm not planning on stopping or cutting back on overpayments for some time yet, but I'm interested to know if other people reached a point in their mortgage where they thought the money they stand to save isn't enough to warrant overpaying anymore or if you just carry on overpaying until the end.

SunnyCat

I'm quite interested in people's opinions on this. We're only in the process of buying our first property, but have been thinking on this for a little while.

On one hand, as you say, overpaying reduces interest, but on the other hand the mortgage is probably the cheapest (%wise) loan you'll ever have.

So maybe there are better things to do with your cash, for example like investing in your pension?

Or if you do overpay, is it best to save the money first, grow some interest (at a rate better than the mortgage rate) and then pay off a chunk in one go just before remortgaging to get better LTV? (If your mortgage terms allow it).

jimbog

You would be hard pushed to get a low risk savings rate lower than your mortgage rate.

What is true, however, is to pay any other debts you might have first

SunnyCat

jimbog wrote: »

You would be hard pushed to get a low risk savings rate lower than your mortgage rate.

There is a good selection of savings accounts that exceed the mortgage rate, but they are usually limited in the amount you can save in them. However, that means they could be great for putting your overpayment in.

For example, First Direct offers 1 year 5% fixed saver for amount up to £300 a month. If my husband and I have one each, that's probably pretty close to an amount we'd be wanting to overpay on the mortgage, which is 2.39%

AnotherJoe

Planet_Switzerland wrote: »

I'm not planning on stopping or cutting back on overpayments for some time yet, but I'm interested to know if other people reached a point in their mortgage where they thought the money they stand to save isn't enough to warrant overpaying anymore or if you just carry on overpaying until the end.

At the point where there are better uses for the money, which most likely, for most people, is their pension. A pension, though people generally think of it as saving, is in effect a debt to your future self that you also need to pay off .

So you can either overpay a mortgage at what is generally around the inflation rate these days or even less, or overpay the pension, which will likely be growing 2x-3x inflation rate.
If you wait to put money in your pension until the mortgage is done, you've missed out on years of higher rate pension growth and instead paid off a mortgage that may even be at less than the inflation rate in which case paying it off as quick as you can makes no financial sense.

steampowered

It depends what else you'd be doing with the money.

If you'd just be wasting it because you lack self control, then you should overpay.

If you have a better use for the money, then you should do that instead.

Paying money into a pension or using the money to invest through a stocks & shares ISA are often far far better uses of money than overpaying the mortgage.

Stultus

There’s a little tool halfway down this that tells you the rate at which it’s more sensible to save than overpay: moneysavingexpert.com/mortgages/mortgages-vs-savings/#overpayingvsaving

Though it’s not exactly nuanced as the poster above mentions, things like pensions can be more important to save into.

jimbog

All good points.

But is there a 'value' in knowing that your mortgage is paid off, you owe every brick, and that you are no longer beholden to anyone?

letitbe90

This is my personal opinion (I am a qualified financial advisor but now work in tech if that makes any difference) I prefer investing to overpaying.

Now it won’t be worth investing in guaranteed fixed rate accounts as you’ll pay more interest on your mortgage than you’ll gain. However, with mortgages lasting decades potentially, you can invest quite comfortable in stocks and shares via a platform such as Vanguard/Fidelity or DIY depending on your financial savviness and your average return will almost surely be more than what you’d pay in interest. The downsides of investing in stocks (fluctuated up and down) is mitigated by duration of investment.

The net result is

1) As money is invested, should an emergency arise where you need access to cash, you won’t have to take expensive loans or credit cards up.

2) You will actually likely pay off your property years earlier with the investment model, than if you overpay monthly.

There are some scenarios where it might be better to overpay the mortgage, but not many and it doesn’t apply to most people (generally with respect to shared/joint ownerships and lender restrictions).

I think people are naturally worried of investing in stocks - but remember it’s not about timing the market, it’s all about tome in market.

dimbo61

You need to look at the BIG picture !
We overpaid big style for over 8 years and reduced our mortgage term from 22 years down to a little over 8 years so mortgage free before I turned 53.
My original term would have meant I had a mortgage till I was 67.
We saved over £50,000 in interest.
Now I had a good Works pension.
Not happy with Stocks and Shares as the brokers seem to do very well but not the small investor.
We had no other expensive debts and blitzed the mortgage instead.
Offset mortgage popular with the Mortgage free gang and I agree.
You can't have it all !

kerri_gt

I'm not sure there's a magic number but for us the important thing is reducing the current mortgage term while rates are relatively low. Esp as OH is a few years older than me, he wants to know / it be likely to be mortgage free sooner than 70-odd which will hopefully enable more options later in life regarding retirement vs having to work to pay a mortgage still.