Overpaying mortgage now or later

Adam8008

Hi

I’m after a bit of mortgage advice.

I’ve recently taken out a new HSBC mortgage, which in summary is for approximately £173K over a 15 year term, with a fixed rate of 1.64 on a 3 year deal. (Monthly Payment £1100)

I have an annual overpayment rate of 10%, giving me an allowance in the first year of about £17K.

Due to unexpected circumstances since taking this mortgage out in May this year, I’m now in the position to make a one off overpayment of up to £14k.

I can confirm I have no other debts other than this mortgage.

My question is, would it make financial sense to pay this off now in one go as the sooner the lender receives this it will save us more on the overall interest  (I presume our monthly mortgage payments remain the same) .  Or if I keep this money aside for the remainder of the fixed term deal and then just reduce the amount we borrow next time by this £15k, will this save us the same interest.

Many thanks

Adam 

AnotherJoe

In the long term you are likely to be better off by putting some in your pension. I know that's not what you asked But thought I'd put it out there. 

If you do pay a lump sum off, then note that your monthly  direct debit  will drop (In order to keep the term the same length) So you should also then make additional overpayments to take care of that.so your presumption about monthky paymenst remain8ngbthe sake is likely to be wrong. 
( there was a poster recently who had been making overpayments for the past 15 or so years but hadn't noticed his dd's had reduced and so the end effect was he wasn't really overpaying. )

Thrugelmir

If the money is earmarked to pay down the mortgage. Overpay now rather than later to maximise the benefit. 

blue_max_3

The most you would save over the course of the year is £230. If you put it into a savings account, it would be less than half that (assuming rates don't go down). But if it were me, I'd keep access to that £14k. You don't know what's round the corner and you may wish you'd not been so hasty. Basically, you have a great rate, so why not use it!

Adam8008

blue_max_3 said:

The most you would save over the course of the year is £230. If you put it into a savings account, it would be less than half that (assuming rates don't go down). But if it were me, I'd keep access to that £14k. You don't know what's round the corner and you may wish you'd not been so hasty. Basically, you have a great rate, so why not use it!

thanks for this.

Would that be approx. £230 a year for each year of the mortgage? (15 years @ £230). As this seems decent for an overall saving.

shazmin1974

We have a 10 year fixed rate mortgage and last year were in a position to make overpayments to the mortgage, as the interest rate is higher than any of the savings accounts. We are restricted to a lump sum of 5% per annum, and every time we make a lump sum our DD reduces.
We contacted the bank and a lovely lady told us that the best way is to increase our monthly DD upto 3 times our normal monthly mortgage payment. This is not classed as a lump sum overpayment and therefore no fee is charged. The mortgage will be reviewed each year, and the bank will reduce the DD at the end of each year to reflect payments made - but then we can change the DD again (as long as it doesn't exceed 3 times the monthly amount they want). This way by the end of the 10 year mortgage contract, the mortgage should have reduced to a more reasonable amount and can be reviewed it full.

pjread

If you have an 'emergency pot' already and will just keep the cash on deposit to overpay, you may as well do it sooner rather than later. 

If you might need access to the cash (e.g. no emergency fund) then you probably should probably keep that aside and not overpay anyway.

If you're less risk averse, I suspect you'd do better investing it (ideally in a pension or ISA) and letting inflation keep eroding the real terms value of your mortgage debt.

cii4ps

Surprised at the type of responses you've got.
You've asked whether 'it makes financial sense'. That's more difficult to answer than you think and would require us to go into detail on what other investments you could make with that money or whether or not you need a safety net. Let's simplify this though, if your aim is to pay less overall interest, then do this:

• Keep saving your money in the highest interest bank account until the last month of your mortgage year
• Pay the lump sum in one go toward the principal amount in that last month

Why?

• Your money today is worth more than your money at the end of the year (that's because of inflation), by paying early, you're losing more purchase power
• By accumulating interest for a year, you gain more currency than you had (reaping the benefit of keeping the money in your possession)
• By putting it all toward the principal amount, you reduce the interest the bank can take from you (This reduces the overall length of the mortgage)
• By keeping the money until the end of the year, you have a safety net until the end of the year, you can keep saving every month to add to it, and together with the interest you're effectively saving for your next lumps sum payment (for the year afterward).
• Having done the above, you've effectively reduced your mortgage and taken a step closer to more financial stability and increased purchase power sooner in the future.

tigsly

AnotherJoe said:

If you do pay a lump sum off, then note that your monthly  direct debit  will drop (In order to keep the term the same length)

HSBC give you the choice of 'paying the same and shortening the term' .. or 'reducing your regular payments'.. you just have to tell them!

Thrugelmir

cii4ps said:

• Keep saving your money in the highest interest bank account until the last month of your mortgage year
• Pay the lump sum in one go toward the principal amount in that last month

Why?

• Your money today is worth more than your money at the end of the year (that's because of inflation), by paying early, you're losing more purchase power
• By accumulating interest for a year, you gain more currency than you had (reaping the benefit of keeping the money in your possession)
• By putting it all toward the principal amount, you reduce the interest the bank can take from you (This reduces the overall length of the mortgage)
• By keeping the money until the end of the year, you have a safety net until the end of the year, you can keep saving every month to add to it, and together with the interest you're effectively saving for your next lumps sum payment (for the year afterward).
• Having done the above, you've effectively reduced your mortgage and taken a step closer to more financial stability and increased purchase power sooner in the future.

Trouble is bank accounts pay a far lower rate of interest than is being incurred on the mortgage. 

That statement is complete twaddle. In terms of when to pay down the mortgage. 

You've made a very simple task extremely complex. 

grumiofoundation

cii4ps said:

Surprised at the type of responses you've got.
You've asked whether 'it makes financial sense'. That's more difficult to answer than you think and would require us to go into detail on what other investments you could make with that money or whether or not you need a safety net. Let's simplify this though, if your aim is to pay less overall interest, then do this:

• Keep saving your money in the highest interest bank account until the last month of your mortgage year
• Pay the lump sum in one go toward the principal amount in that last month

Why?

• Your money today is worth more than your money at the end of the year (that's because of inflation), by paying early, you're losing more purchase power
• By accumulating interest for a year, you gain more currency than you had (reaping the benefit of keeping the money in your possession)
• By putting it all toward the principal amount, you reduce the interest the bank can take from you (This reduces the overall length of the mortgage)
• By keeping the money until the end of the year, you have a safety net until the end of the year, you can keep saving every month to add to it, and together with the interest you're effectively saving for your next lumps sum payment (for the year afterward).
• Having done the above, you've effectively reduced your mortgage and taken a step closer to more financial stability and increased purchase power sooner in the future.

If the only aim is to pay less overall interest then inflation doesn't come into it.

There are a myriad of reasons whether you should overpay or not, and if you do when you should. However purely based on interest (which is what you said) it is pretty much all of nothing based on whether mortgage interest > bank interest or vice versa - you seem to have needlessly complicated things by talking about spending power and inflation.