Overpayments

elle_fashionista

First of all ignore the username - last time I logged in was 14 years ago, as a teenager. (Eeep!)

My plan is to utilise my mortgage provider's overpayment facility of 10% per year and to be mortgage free in the next 8 years, God willing.

In the past year I've been paying £150 extra and in the last month, before the start of the new mortgage year, I paid a lump sum to equate the remainder of the o/p allowance.

Are you better off paying a lump sum at the end of the year rather than paying bit by bit or spreading the o/p across the year?

Looking at my mortgage statement I've been left a bit confused...

It seems as though a significantly greater % of my final, large payment went towards the actual mortgage compared to the monthly overpayments.

Hope that made sense.

Any advice would be appreciated. Thanks

A_Frayed_Knot

No, sorry not making sense to me.

First of all, normally the 10% allowance in the year means 1st Jan to 31st Dec, but you would
need to check with your mortgage provider, if this is your case.

Then the 10% starts again on the 1st Jan, unless your deal finishes mid year, then before starting
a new deal you can then o/p as much as you like because there is no limit on o/payments when
you are out of a deal.

Then you need to check if interest is being added daily to your mortgage, if so, then o/p asap,
don't wait till end of month or later when you feel like it.

You are actually better off paying a lump sum asap if interest is added daily (that is if you can
afford to). You could use some savings, I used to use about 3 months of savings in advance, then instead of o/p mortgage would replenish my savings, then repeat.

Only way to reduce monthly payments would be to enter a new deal, but would advise (if affordable,
to actually increase monthly payments and lower term time.

It is a fine balance act and I hope I have not confused you now :rotfl::rotfl:

Good Luck.

getmore4less

Are you better off paying a lump sum at the end of the year rather than paying bit by bit or spreading the o/p across the year?

No.

Sooner is better.

Check that saving is not better.

What rate is the mortgage?

Cornish_mum

I suspect that you are being charged interest daily or monthly and that your payments at the end of the year are paying off a bigger % of your capital because your interest to capital ratio drops over the year. The earlier you overpay the faster the the ratio drops. The lower the ratio the more of what you pay goes to reduce your original loan. Hope that makes some sense.

So earlier is better.

elle_fashionista

My mortgage term runs from 1st Oct - 30 Sept - so new allowance starts every October.

I'm currently in the 2nd year of a 5 year fix @ 2.54%.

Thanks for info re overpaying when out of deal, I didn't know.

Don't really have much savings to fall back on so not possible (or else I would def have chucked a lump a sum in.) I paid the lump sum as a result of saving throughout the year.

elle_fashionista

Don't have lump sum to put in right now. but saving up for one!

elle_fashionista

I should have also mentioned in my original post, I referred to my mortgage statements (for payments in and mortgage amount remaining) with my experian report to calculate how much % of my payment went towards paying off actual mortgage.

pjcox2005

I know it's a personal prefernece, but I'd make sure you have sufficient pension contributions first (will be more tax efficient, potential employer matching and likely higher returns). I'd also consider investing if you have a low mortgage interest rate before overpaying but accept risk is involved there.


It's better than not doing anything, just don't assume overpaying is the best approach.

elle_fashionista

pjcox2005 wrote: »

I know it's a personal prefernece, but I'd make sure you have sufficient pension contributions first (will be more tax efficient, potential employer matching and likely higher returns). I'd also consider investing if you have a low mortgage interest rate before overpaying but accept risk is involved there.


It's better than not doing anything, just don't assume overpaying is the best approach.

I am employed by the NHS and therefore have a pension with them - they are supposedly generous re: pensions.

Surely overpaying is investing in an asset?

Why don't you think overpaying isn't the best approach? Thanks

Zola.

The argument is that you could earn significantly more than 2.54% via long term investing in global index funds. The caveat is that its long term and subject to swings, but it will march onwards and upwards if you give it enough time.

Overpaying gets you to the mortgage finish line quicker, which is great, but you could potentially get there even quicker by investing.

i.e. having built up enough cash by investing to pay off the balance of your mortgage after X number of years.

I do both personally.. in an overpay and invest ratio of about 1:4.

elle_fashionista

Ngl I don't know much about global index funds....if anything. Sounds risky?
How do they work? What is the interest rate? What is the minimum investment?

I presume you'll be using funds from that to pay off your mortgage...

If I were to do both, I know I wouldn't have enough £ to fully utilise the 10% overpayment facility (every year.)

Zola. wrote: »

The argument is that you could earn significantly more than 2.54% via long term investing in global index funds. The caveat is that its long term and subject to swings, but it will march onwards and upwards if you give it enough time.

Overpaying gets you to the mortgage finish line quicker, which is great, but you could potentially get there even quicker by investing.

i.e. having built up enough cash by investing to pay off the balance of your mortgage after X number of years.

I do both personally.. in an overpay and invest ratio of about 1:4.