Mortgage overpayments

mrclean

Hi I want to make overpayments, I can o/p 10% a year. The mortgage rate is 1.74% fixed - am I better paying o/p yearly or monthly. If I do yearly i am planning on saving the money in a monthly saving account currently paying 2.5%. The mortgage is £30000 over 7 years fixed for 5 if that makes any difference? Thanks

kuratowski

If your savings rate is 2.5% and your mortgage rate is 1.74% then, all else being equal, you'd be better off not overpaying at all, and just keeping the money in savings.  However, I am not sure where you are getting a savings rate of 2.5%?  Is it a variable rate, if so it might be reduced very soon?  Is it a regular saver, in which case you need to move the money elsewhere after it matures?

Things might also get more complicated depending on your tax situation.  If you started to pay 40% tax on some of your savings interest (assuming you pay at least some higher rate tax, given the size of your mortgage) then overpaying the mortgage would give a better return than the post-tax savings interest.

Once you have decided it makes you better off overpaying the mortgage, then the earlier you do the better, as you'll save more interest.

onlyfoolsandparking

I don't think it makes a lot of difference whether you overpay yearly or monthly apart from if you do it yearly you can as you say make a little bit of interest in the savings account. You do need to check what early repayment charges there are during the fix as this could potentially wipe out some of the benefit of overpayment, also make sure you don't go over the 10% a year o/p allowance, in effect year 1 could overpay just under £3000, year 2 £2700, year 3 £2400 and so on. My figures aren't 100% accurate but I'm sure you get the picture. 

mrclean

Thanks both kuratowski said:

If your savings rate is 2.5% and your mortgage rate is 1.74% then, all else being equal, you'd be better off not overpaying at all, and just keeping the money in savings.  However, I am not sure where you are getting a savings rate of 2.5%?  Is it a variable rate, if so it might be reduced very soon?  Is it a regular saver, in which case you need to move the money elsewhere after it matures?

Things might also get more complicated depending on your tax situation.  If you started to pay 40% tax on some of your savings interest (assuming you pay at least some higher rate tax, given the size of your mortgage) then overpaying the mortgage would give a better return than the post-tax savings interest.

Once you have decided it makes you better off overpaying the mortgage, then the earlier you do the better, as you'll save more interest.

Yes it's a regular monthly saver which ends after a year. I am a standard rate tax payer

robatwork

You're actually talking about around £20 difference in saving £3000 and paying £3000 off your mortgage over the year.
And pennies in the difference in paying monthly to yearly.

[Deleted User]

Depending on who you are with the 10% allowance to overpay is 10% of the original fixed deal amount currently in play rather than the reducing balance 
Its certainly that case with Nationwide 

geocatwest

mrclean said:

Hi I want to make overpayments, I can o/p 10% a year. The mortgage rate is 1.74% fixed - am I better paying o/p yearly or monthly. If I do yearly i am planning on saving the money in a monthly saving account currently paying 2.5%. The mortgage is £30000 over 7 years fixed for 5 if that makes any difference? Thanks

I have a question about overpayments. 
It states I have a early repayment charge of over £3000. Are they referring to this annually for the duration of my fixed term mortgage? (3 years).So £3000 per year or £3000 for the entire duration?

Socajam

Personally, I would not be overpaying a mortgage during the corona crisis until we are out of the woods and can see what the post corona virus situation is.
Right now cash is king and those who have ready cash to tie them over are in a better position than those who do not.
I know some people are not prepared, but I can see us being in this position in August. 
There are too many obstacles in our way that need to be resolved before people can return to work.  The biggest obstacle to returning to work is 100% testing and all of us are fully aware how that is panning out.
Are we going to be working a shift system or 2 days one week and 3 days the other so that offices are not as congested as before?
How are they going to deal with the schools?  This is going to be very difficult with young children who are going to be so excited  to finally see their friends. 

onlyfoolsandparking

Socajam said:

Personally, I would not be overpaying a mortgage during the corona crisis until we are out of the woods and can see what the post corona virus situation is.
Right now cash is king and those who have ready cash to tie them over are in a better position than those who do not.
I know some people are not prepared, but I can see us being in this position in August. 
There are too many obstacles in our way that need to be resolved before people can return to work.  The biggest obstacle to returning to work is 100% testing and all of us are fully aware how that is panning out.
Are we going to be working a shift system or 2 days one week and 3 days the other so that offices are not as congested as before?
How are they going to deal with the schools?  This is going to be very difficult with young children who are going to be so excited  to finally see their friends. 

I agree and definitely your quote of 'cash is king' 
Personally I can ride this pandemic out till maybe October/November if I'm careful but I too am wondering how exactly we are going to safely return to work???

Socajam

Thanks
It's really frightening and if one thinks about it too much you can drive yourself mad.
I listen to some of the news, then I turn the TV off.  I read The Guardian online and The Washington Post to see what's going on over the the other side of the world.
What is really frightening to me is the second wave that the experts seem to think will be coming in the fall. It's bad coping with this, but the second wave could be far worse.
I try not to become too anxious, exercise every other day and look out my window at the birds.
I think that all we can do it be careful and try to live one day at a time because we have no other choice - we are dealing with an invisible enemy, whose timescale is completely different to ours.

Sistergold

We are truly in difficult times and more difficult times ahead. I am making small overpayment per month (£277) just to keep up with the spirit of overpayment. This small overpayment is helping me to keep a positive mental attitude but I know I need to keep cash so I will be putting away about £500 per month into savings account which I will let accumulate for some months and then decide when to make overpayment when this virus issue is finally over! I already have emergency pot, and other savings but I had allocated £777 for overpayments but will not overpay all of it for now. Yes less problems if you have cash at hand. CASH IS KING !