Overpaying mortgage

Cam93

I know this has been done to death but wanted some clarification.
The general advice is if your mortgage intrest rate is higher than saving account then you should OP.

But when dealing with large sums are you not better over paying regardless?

Example. I have 152k mortgage at 1.59% meaning every year I pay 2416.80 per year in intrest (this obviously reduces with capital, but stay with me here...)

Let's assume i have 40k in 1.59% savings account (i don't, as intrest rates as we all know are poor at the moment). This would gain 636.00 per year in intrest gains.

So surkey even though the ibtrest rates are the same, your always better off to over pay the mortgage as your reducing the sum of money your paying intrest on?

FWIW I'm looking at putting 20k down on the mortgage at 1.59% (for future LTV reasons rather than saving reasons) but 20k essentially removes 9 years worth of intrest on the mortgage ?

Also fir what its worth - I already put X amount pcm into a S&S ISA however I'm trying to break into a lower LTV to reduce monthly outgoings abd therefore put more into a SS ISA in the longer term

grumiofoundation

The 20/40k still gets interest in the bank, compounded this is the same effect as the mortgage.

Example. I have 152k mortgage at 1.59% meaning every year I pay 2416.80 per year in intrest (this obviously reduces with capital, but stay with me here...)

Let's assume i have 40k in 1.59% savings account (i don't, as intrest rates as we all know are poor at the moment). This would gain 636.00 per year in intrest gains.

So surkey even though the ibtrest rates are the same, your always better off to over pay the mortgage as your reducing the sum of money your paying intrest on?

152k at 1.59% = 2417
40k in bank = 636 interest
2417 - 636 = 1781

112k at 1.59% = 1781

ZeroSum

If you're trying to reduce LTV to get a better rate then it makes sense to overpay

Cam93

grumiofoundation said:

The 20/40k still gets interest in the bank, compounded this is the same effect as the mortgage.

Example. I have 152k mortgage at 1.59% meaning every year I pay 2416.80 per year in intrest (this obviously reduces with capital, but stay with me here...)

Let's assume i have 40k in 1.59% savings account (i don't, as intrest rates as we all know are poor at the moment). This would gain 636.00 per year in intrest gains.

So surkey even though the ibtrest rates are the same, your always better off to over pay the mortgage as your reducing the sum of money your paying intrest on?

152k at 1.59% = 2417
40k in bank = 636 interest
2417 - 636 = 1781

112k at 1.59% = 1781

Exactly- so with the mortgage sum of money being 3-4x larger than the savings sum of money, would you not be better off OP the mortgage regardless as your reducing the compounding effect on a larger sum of money quicker.

E.g 500 OP pcm is not only avoiding intrest completely but also reducing the amount of intrest paid annually overall 

500pcm into a savings will also compound but the difference in the two annually is still approx 1500 per year, so until the savings are equal or greater than the mortgage sum its better to OP?

I'm not sure if I'm just not grasping this or if I'm logic is there or there abouts?

Aceace

Cam93 said:

grumiofoundation said:

The 20/40k still gets interest in the bank, compounded this is the same effect as the mortgage.

Example. I have 152k mortgage at 1.59% meaning every year I pay 2416.80 per year in intrest (this obviously reduces with capital, but stay with me here...)

Let's assume i have 40k in 1.59% savings account (i don't, as intrest rates as we all know are poor at the moment). This would gain 636.00 per year in intrest gains.

So surkey even though the ibtrest rates are the same, your always better off to over pay the mortgage as your reducing the sum of money your paying intrest on?

152k at 1.59% = 2417
40k in bank = 636 interest
2417 - 636 = 1781

112k at 1.59% = 1781

Exactly- so with the mortgage sum of money being 3-4x larger than the savings sum of money, would you not be better off OP the mortgage regardless as your reducing the compounding effect on a larger sum of money quicker.

E.g 500 OP pcm is not only avoiding intrest completely but also reducing the amount of intrest paid annually overall 

500pcm into a savings will also compound but the difference in the two annually is still approx 1500 per year, so until the savings are equal or greater than the mortgage sum its better to OP?

I'm not sure if I'm just not grasping this or if I'm logic is there or there abouts?

To use your phrase, you're just not getting it 

If the interest rates are the same then it makes no difference whether you overpay or save. Obviously, if overpaying reduces the rate due to a reduced LTV then that's a different matter. 

DireEmblem

Is there not an MSE article on this?  In my view, if you have a sufficient emergency fund, and are not comfortable investing any spare funds long term (10+ years), then you put any additional cash you can afford to save into the higher of the best interest rate account, or overpaying your mortgage if your mortgage rate is higher.  There is another option - depending how much of your mortgage you have paid off, you could overpay so that next time you come to remortgage, you can negotiate a lower interest rate.

In general, I think even today, there are options for regular savers that would still likely return a higher rate of interest than what you would be charged on a mortgage, and what I've just said pretty much agrees I think with what Aceace quoted above.

surreysaver

There are other things to take into account, such as whether you'd pay tax on your savings, or whether you might need to use the cash that you now haven't got access to because you've paid it into your mortgage 

DiggerUK

Scrabbling about for a penny or two advantage between overpaying mortgage and saving to stooze is a fools errand. At the end of the day it's a debt you have to pay off come what may. 

I'm firmly in the don't fanny about clear the mortgage school..._

Albermarle

Although a popular topic on this forum , it is usually couched in terms of overpaying mortgage , or investing more in pension/S&S ISA. In which case there is definitely a good case for both options depending on your personality and job security . Most posters who ask the question usually seem to come to the conclusion to do both at the same time .
However when it comes to comparing overpaying mortgage compared to a savings account , then it swings in favour of overpaying the mortgage . Not on the bare figures which seem about equal, but from a emotional comfort point if view.

NottinghamKnight

DiggerUK said:

Scrabbling about for a penny or two advantage between overpaying mortgage and saving to stooze is a fools errand. At the end of the day it's a debt you have to pay off come what may. 

I'm firmly in the don't fanny about clear the mortgage school..._

You should spend more time on the debt boards....

grumiofoundation

Cam93 said:

grumiofoundation said:

The 20/40k still gets interest in the bank, compounded this is the same effect as the mortgage.

Example. I have 152k mortgage at 1.59% meaning every year I pay 2416.80 per year in intrest (this obviously reduces with capital, but stay with me here...)

Let's assume i have 40k in 1.59% savings account (i don't, as intrest rates as we all know are poor at the moment). This would gain 636.00 per year in intrest gains.

So surkey even though the ibtrest rates are the same, your always better off to over pay the mortgage as your reducing the sum of money your paying intrest on?

152k at 1.59% = 2417
40k in bank = 636 interest
2417 - 636 = 1781

112k at 1.59% = 1781

Exactly- so with the mortgage sum of money being 3-4x larger than the savings sum of money, would you not be better off OP the mortgage regardless as your reducing the compounding effect on a larger sum of money quicker. Not exactly - you aren't only saving the interest on the bit you overpay.

E.g 500 OP pcm is not only avoiding intrest completely but also reducing the amount of intrest paid annually overall This implies you think you are saving the interest twice?

500pcm into a savings will also compound but the difference in the two annually is still approx 1500 per year, so until the savings are equal or greater than the mortgage sum its better to OP? Not it's the same

I'm not sure if I'm just not grasping this or if I'm logic is there or there abouts?

You logic seems off - I think maybe you are counting the interest saved from overpaying twice?

A mortgage is just a loan, theres nothing 'special' about a mortgage.