It feels pointless to pay more than I need to on mortgage

leftism

I'm buying a house now and I've got 25k aside for home improvements.
Out of interest, I put it in the calculator to see how much it would knock off my mortgage payments if I just added the 25k to my deposit instead. That seemed like a more sensible option maybe. 
But I couldn't believe how little difference it makes to my monthly payments (about 150 quid p/m cheaper). Why would anyone ever do it? Am I missing something?
Surely it makes more sense to stretch it out. After all, ten years from now, assuming inflation continues, money will be worth less, so the mortgage payments will effectively be a smaller proportion. 
Or have I got that wrong?

MaryNB

The quicker you pay off your mortgage the less you pay in interest over the life of the mortgage.
I've just applied for a mortgage. I am planning to get a lodger so I can overpay on a regular basis and reduce the length of my mortgage when I get to the end of my fixed term. Check with your lender to see if overpayments reduce the monthly amount or the term. Also make sure the overpayment doesn't trigger fees.
Best to pay it off now while interest rates are so low. You never know how high they'll be in 20 years or so.

See how much interest you could save:
https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Thrugelmir

leftism said:

But I couldn't believe how little difference it makes to my monthly payments (about 150 quid p/m cheaper).

How many years is left on the mortgage term?

AskAsk

we are in an environment of low interest rate so this is why you see very little reduction.  if interest rates start to climb, you will see a much bigger reduction.  at the moment it is very cheap to borrow.

people like to pay as much off the mortgage as they can for security as they don't know where things are going to be in the future.  you could lose your job, have to get a lower paid job, have more expenses like children.  if you don't pay off your mortgage then you are more likely to spend the money and if you end up with less disposable income in the future and interest rates are high, you would have a bigger burden.

small mortgage or no mortgage is desirable for the 'peace of mind' assurance that whatever happens, you will never lose your home.

Petriix

£150 per month for 25 years is £45k. You have to decide whether your home improvements are worth it.

There's an argument for borrowing as much as you can right now and using that money to make your living arrangements as good as possible. However you'll have to keep earning for a long period to pay it off.

Personally I prefer to spend less and work less. I overpay my mortgage regularly and will have it paid off 17 years before the original redemption date. I like having the security of an overpayment reserve which would allow me to stop paying the mortgage for over 4 years if necessary; as well as the enormous amount of interest that I will avoid.

leftism

Wow, these are all very helpful answers. Thanks guys!

But is my second point valid?

Say, for instance, my mortgage is 1k a month for 20 years, in ten years time, 1k will be worth less, so so much easier to pay. (and home improvements will also cost a lot more)

But I suppose interest rates could go up and I'd be paying more wouldn't I? I don;t really know what I'm talking about! haha. 

AskAsk

leftism said:

Wow, these are all very helpful answers. Thanks guys!

But is my second point valid?

Say, for instance, my mortgage is 1k a month for 20 years, in ten years time, 1k will be worth less, so so much easier to pay. (and home improvements will also cost a lot more)

But I suppose interest rates could go up and I'd be paying more wouldn't I? I don;t really know what I'm talking about! haha. 

yes you do have a point.  my husband thinks like you do.  he likes the idea of interest only mortgage because like you, he says that the mortgage capital is small when you get to the point of selling the property so there is no point in paying it off.  and that he is better off using that money to do other things, like spend it or invest it.

i, on the other hand, think very differently.  i want to be debt free as soon as possible so i don't have to worry about a mortgage at all.  so i just want to pay off the mortgage as fast as i can.

it does depend on how you view things and not just the financial figures.  some people would prefer to have a life and spend the money while they are still young and enjoy themselves rather than focus on paying off the mortgage.

getmore4less

Keep the money and invest elsewhere while debt gets inflated away. 

Pension can be a good option. 

Even when rates were high inflation was also high, it cost more but inflated away faster.

I got 3 inflation pay rises in a single year dring those heady days of 12%+ rates. 

The inflation effect is lower these days but alternative investment will do better long term. 

steampowered

You are correct. Interest rates are at record lows right now so overpaying the mortgage is not always a wise choice.

The vast majority of people should top up their pension or save into a stocks & shares ISA, rather than overpaying the mortgage. After all, we all need to save for retirement - stock market investments generate 6-7% a year on average; it's super easy to make diversified investments now by simply buying into an investment fund; with a pension you get a big chunk of tax relief added on top.

AnotherJoe

leftism said:

Wow, these are all very helpful answers. Thanks guys!

But is my second point valid?

Say, for instance, my mortgage is 1k a month for 20 years, in ten years time, 1k will be worth less, so so much easier to pay. (and home improvements will also cost a lot more)

But I suppose interest rates could go up and I'd be paying more wouldn't I? I don;t really know what I'm talking about! haha. 

OP you are absolutely correct and you do know what you are talking about
The pound you pay off in 25 years time will probably be worth 50p or less in today's money. However I wouldn't just drag out paying it off , that £150 a month in you pension becomes closer to £200 in a pension and then grows at maybe 3-4% long term after inflation, Or for a high rate taxpayer, more than £200.  (Or in an ISA for flexibilty at £150, still grows at that sort of rate) . The mortgage free wannabes in that forum are collectively burning millions of pounds in lost opportunity cost and lost tax relief. 

As for "interest rates might rise" well yeh they might in which case at that time you can adjust and pay more and almost certainly you'll still be better off. It's not as if they will suddenly jump from 1.5% to 5% overnight and you'll be caught unawares.
The only upside is the psychological and perhaps practical benefit of owning your own house a few years earlier but at that time unless you went "all in" on an IO mortgage the amount still owing will be smaller both in numeric amount and also inflation adjusted. Eg maybe you still owe £20k while they paid the last installment but by then £20k is actually worth, in today's terms,Say  £10k.  And the person who paid it off earlier will have a smaller pension or savings.

This is something I didn't realise myself until much closer to paying off my mortgage, probably lost several 10's of thousands overall in a smaller pension. As you say, Why pay off a Pound on your mortgage now with one pound rather than 30p In 25 years time ?

Tiglet2

leftism said:

Wow, these are all very helpful answers. Thanks guys!

But is my second point valid?

Say, for instance, my mortgage is 1k a month for 20 years, in ten years time, 1k will be worth less, so so much easier to pay. (and home improvements will also cost a lot more)

But I suppose interest rates could go up and I'd be paying more wouldn't I? I don;t really know what I'm talking about! haha. 

Yes, hopefully in ten years time your £1000 mortgage will be easier to manage because you'll have had pay rises and the cost of the mortgage compared to income will be a much smaller percentage of your outgoings.  However, think for a moment about the what if's.  An accident or serious illness could hinder your work ambitions and salary aspirations.  What if you are made redundant when you are 50 and struggle to get another job on a similar salary?

I do think that you should probably keep your £25k for home improvements, particularly while interest rates are low, but with a mind to make overpayments regularly in the future when you can to reduce the term.  As others have said, diversifying your savings into your pension fund, Stocks & Shares ISA, as well as reducing the mortgage term will all help you to have a comfortable retirement when the time comes.