Overpayments- Lump Sum vs Regular to Save Interest

SallyAnneBooth

Hi All,

I am planning to overpay on my mortgage by about £600/month.

As Santander re-calculate their interest rates daily i've been told that it is better to overpay monthly/weekly rather than a lump sum at the end of the year. I'm told that this reduces the overall interest I will pay compared to the lump sum method.

Can anyone give a numerical example of how this works please?

Thanks in advance!

Nathan_Hughes

Halifax have an excellent mortgage overpayments calculator. It will allow you to enter your regular overpayment amount and display the gain in the form of a useful graph.

SallyAnneBooth

Hi Nathan,


Option A:

Mortgage Amount £350,000, Regular Monthly Overpayment: £600

After 5 years my balance will be £266,801 and Halifax say I will have saved £44,018 in interest.

Option B:

Mortgage Amount: £350,000, Monthly Overpayment: £0, Lump Sum: £36000 (£600*60 months).

After 5 Years my balance will be £265,023 and I will have saved £25,028 in interest.

These seems like a huge saving when paying monthly. Am I using this correct?

[Deleted User]

I think you've done Option B wrong - it assumes that you're doing the whole overpayment right at the start when you do a lump sum.

For a demonstration of the power, take the no-overpayment balance at year 5 and subtract the £36000 from that.

Option A (Monthly Overpayment) - Balance after 5 years £266,801
Option B2 (Lump at End Overpay) - Balance after 5 years £268,526

Of course, doing yearly is somewhere in between these two.