Mortgage overpayments not reducing term!

Nebulous2

Zero_Sum wrote: »

With Nationwide, if you make an overpayment of £500 or more, they recalculate your monthly payment.

You can also change your settings so that the term reduces instead.

Or you can ask them to do neither.

Ryhs_Moggy

Whilst I take onboard the points above regarding interest rate on my mortgage being lower than one could achieve in a savings account, surely you are missing the point? The interest on my mortgage is a low rate but it's based on £70k of o/s mortgage that I must repay. The ammount I would be paying off would only be circa £5000. Plus, I want to end my mortgage/s early so as to free up extra disposable monthly income. Based on this can anyone please suggest why NOT overpaying is sensible?

Typhoon2000

There is nothing wrong with paying your mortgage off early.
Paying extra into a pension is not always worth it either, as you may have to pay the same tax saving or more when your pension pays out, if you continue to work or have other income.

getmore4less

Ryhs_Moggy wrote: »

Whilst I take onboard the points above regarding interest rate on my mortgage being lower than one could achieve in a savings account, surely you are missing the point? The interest on my mortgage is a low rate but it's based on £70k of o/s mortgage that I must repay. The ammount I would be paying off would only be circa £5000. Plus, I want to end my mortgage/s early so as to free up extra disposable monthly income. Based on this can anyone please suggest why NOT overpaying is sensible?

BY putting the £5000 in savings and getting more interest than you are paying you save(create) more money than using the cash to pay off the mortgage.

The size of the mortgage is not relevant.

SouthLondonUser

OP,

maybe you might understand better what getmore says with an example. The numbers are not realistic, it's just for an easy example.

Let's say you have a £100k mortgage at a 1% interest rate. You have £10k which you can use to either pay down the mortgage or you can put in a saving account at 1.5%.

Let's assume for simplicity that the mortgage is interest only.

Over one year, if you use the 10k to repay the mortgage, you will pay 90k x 1% = 900 of interest and not receive any interest income.

If you put that money in a saving account, you will pay 1000 of interest, but receive 150 of interest, so the net interest payment will be 850 which is < 900. This assumes you don't pay taxes on interest income.

Ryhs_Moggy

I'm still confused but thanks for the assitance everyone. I'm off for a pint.

Sea_Shell

We paid our mortgage off before the current pension freedoms came into effect.

If we had our time again, with the help of this forum, we probably wouldn't have paid it off early.

Make each £ work as hard as it can for you.

It really is worth getting your head around the maths at play.

Ryhs_Moggy

No-one is discussing the elephant in the room. By clearing the mortgages early I get an extra £1100 in my pocket each month from no longer paying it! Both mortgages will be clear (based on my current monthly overpayments) when I am aged 53, around 5 years from now.

I thank you all for the excellent replies so far. I need to go and check the best savings accounts!

Sea_Shell

Ryhs_Moggy wrote: »

No-one is discussing the elephant in the room. By clearing the mortgages early I get an extra £1100 in my pocket each month from no longer paying it! Both mortgages will be clear (based on my current monthly overpayments) when I am aged 53, around 5 years from now.

I thank you all for the excellent replies so far. I need to go and check the best savings accounts!

Think of it this way...

Instead of overpaying the mortgage directly, you effectively pay YOURSELF the ££££ overpayment per month, for the 5 year period, and you squirrel that amount away in an account paying HIGHER interest, than that which you are being charged on the mortgage. At the same time, reducing your actual payments to the contractual minimum.

You then repay the whole amount, as and when it works best for you, within the rules of the mortgage. or when it's due to end. You then have your "spare" payments to do with as you wish.

Obviously, this ONLY works if you are disciplined enough to NOT dip into those savings for ANYTHING else, regardless of any emergency, as you have to treat that money as SPENT.

Maybe keep a spreadsheet of the NET balance on your mortgage during this time.

Zero_Sum

Ryhs_Moggy wrote: »

No-one is discussing the elephant in the room. By clearing the mortgages early I get an extra £1100 in my pocket each month from no longer paying it! Both mortgages will be clear (based on my current monthly overpayments) when I am aged 53, around 5 years from now.

I thank you all for the excellent replies so far. I need to go and check the best savings accounts!

As sea shell says, its not what the mortgage is, more your net position then its just a matter of shuffling money between accounts.

For example lets say you have a £50k mortgage & have £50k in cash.
Your mortgage is 0.92% so you are being charged £460 a year in interest.
But the instant access savings rate is 1.45% so you're earning £725 in interest.
Now obviously you can get better rates tying money up for longer & with it being a mortgage you're only drip feeding so can put a chunk of that in staggered bonds on 1,2,3 etc years.

The other thing worth mentioning is that paying off mortgage can actually have a negative effect on your credit rating if you have no debts. I paid off my last one & couldnt get a decent credit card for love nor money. New house & new mortgage ive now got several 0% ones for stoozing. Im now mortgage neutral & have no intention of paying it all off. Might drop it to £25k or something when my deal ends.