Put extra money needed towards deposit on the mortgage?

double_chocolate

Hi all, 
So my question is around extra money needed towards a 15% deposit towards a mortgage for a house purchase.
As an example let's say we have 214000 left on our current mortgage. We sell this house for 280000. This means we have 66000 in equity. So far so good. 

Now let's imagine we would like a 15% deposit for our mortgage towards our next house but we are currently 4000 short of that in house equity so we need to top up this equity with 4000 savings. 
Is it better to put that 4000 as an over payment on our current mortgage so that we have the full 70000 in house equity rather than as a top up. 

I'm thinking of this from a point of view that the more I pay off the current mortgage now the better rather than having the money go straight towards the payment of the next house because the extra borrowing needed won't be effected by whether this deposit comes from pure equity or a top up

Grabs39

whether your deposit for your next house comes from cash savings or equity won’t make much of a difference.

What will make a difference is that you won’t earn much interest keeping the cash in the bank, but you would save interest on the mortgage.  Say you can get 0.5% interest on your savings but your mortgage is 2.5%, you’d be 2% per year better off by overpaying.

A couple of things to check are that your current lender are happy to take overpayments without penalties (often you can overpay 10% a year so no problems with your £4000 in that case).  Also you may need an amount of cash for the move upfront, to pay disbursements and removals for example.

double_chocolate

Thanks for the reply, yeah that's where my thinking was going towards and just wanted to make sure my thinking was correct in the sense that its more beneficial in the long run paying that 4000 off the mortgage now as essentially that's 4000 less to have compound interest built up on over the the remaining term of the mortgage. Which over 27 years for instance I imagine could save a fair amount right? 

grumiofoundation

Since the £4000 will be used towards next deposit anyway, whether kept in cash or overpaid. 

You won’t save ‘27 years of interest’ by overpaying £4000 now. You will only save  the few months (or however long it will be) of interest before you buy the new house. 

Thrugelmir

double_chocolate said:

Thanks for the reply, yeah that's where my thinking was going towards and just wanted to make sure my thinking was correct in the sense that its more beneficial in the long run paying that 4000 off the mortgage now as essentially that's 4000 less to have compound interest built up on over the the remaining term of the mortgage. Which over 27 years for instance I imagine could save a fair amount right? 

What you will also benefit from is getting your mortgage into the next LTV band. Might only shave a few points off the rate but it all helps. The less interest you pay the quicker you can pay down the debt. 

seanm89

grumiofoundation said:

Since the £4000 will be used towards next deposit anyway, whether kept in cash or overpaid. 

You won’t save ‘27 years of interest’ by overpaying £4000 now. You will only save  the few months (or however long it will be) of interest before you buy the new house. 

are you sure about this? if i use the details here on MSE overpayment calculator, over 27 years you would save 3000 in interest alone and finish the mortgage 8 months earlier
I would link it but im not allowed but a simple google for it will bring it up

bradders1983

seanm89 said:

grumiofoundation said:

Since the £4000 will be used towards next deposit anyway, whether kept in cash or overpaid. 

You won’t save ‘27 years of interest’ by overpaying £4000 now. You will only save  the few months (or however long it will be) of interest before you buy the new house. 

are you sure about this? if i use the details here on MSE overpayment calculator, over 27 years you would save 3000 in interest alone and finish the mortgage 8 months earlier
I would link it but im not allowed but a simple google for it will bring it up

But you are redeeming that mortgage upon completion of your new house. Takes you back to square one with a new mortgage and a new balance. You wont save £3k just by paying it off your existing mortgage now rather than paying £4k to your solicitor in a few weeks or months time when completion day comes. A few quid, yes.

Grabs39

double_chocolate said:

Thanks for the reply, yeah that's where my thinking was going towards and just wanted to make sure my thinking was correct in the sense that its more beneficial in the long run paying that 4000 off the mortgage now as essentially that's 4000 less to have compound interest built up on over the the remaining term of the mortgage. Which over 27 years for instance I imagine could save a fair amount right? 

Not really, as others have said you'll only make the saving until you move.  If we stick to my 2% guesstimation that means you'd save around £40 if you move in six months or £80 if you move in one year.

Once you move house it won't matter if that £4k comes from equity or cash savings.

grumiofoundation

seanm89 said:

grumiofoundation said:

Since the £4000 will be used towards next deposit anyway, whether kept in cash or overpaid. 

You won’t save ‘27 years of interest’ by overpaying £4000 now. You will only save  the few months (or however long it will be) of interest before you buy the new house. 

are you sure about this? if i use the details here on MSE overpayment calculator, over 27 years you would save 3000 in interest alone and finish the mortgage 8 months earlier
I would link it but im not allowed but a simple google for it will bring it up

As 2 replies above explain the benefit from this overpayment now (as opposed to when move to new property) would not be 27 years worth of interest savings.