Mortgage overpayment question

jumperabv3

In March 2020 I took out a mortgage for £250,000.
Today, March 2021, the balance is around £190,000-ish after the interest rate for 1 year was charged.
The original direct debit was £1250 for 20 years, now it's less than £1,000 because of the overpayments me and my wife made.

We can make 10% overpayments every year in addition to the direct debits, but that means this year we can make £19,000 overpayment free of charge, and anything above that amount would be charged with 4% so if we pay in £59,000 this year then £40,000 would be charged with a penalty of £1,600.

Initially we did expect the mortgage to take longer but thankfully we're doing better than expected last year and we were hoping to even pay £10,000 per month so in 19-20 months maybe even get rid of the mortgage completely - the question is if there is a way to do that without paying the 4% penalty? (a year from now it would be 3% and so on) - it's fixed 1.7% for 5 years, started a year ago.

jumperabv3

You can also use this old thread to refer to the mortgage:
https://forums.moneysavingexpert.com/discussion/6176946/mortgage-overpayment-question-strategy

Thrugelmir

jumperabv3 said:

In March 2020 I took out a mortgage for £250,000.
Today, March 2021, the balance is around £190,000-ish after the interest rate for 1 year was charged.

Surprised that you haven't been hit with an ERC. Given a reduction of around £60k in the past 12 months. 

The penalty is unavoidable for future years.

What's the current interest rate on your mortgage? . 

MFWannabe

jumperabv3 said:

In March 2020 I took out a mortgage for £250,000.
Today, March 2021, the balance is around £190,000-ish after the interest rate for 1 year was charged.
The original direct debit was £1250 for 20 years, now it's less than £1,000 because of the overpayments me and my wife made.

We can make 10% overpayments every year in addition to the direct debits, but that means this year we can make £19,000 overpayment free of charge, and anything above that amount would be charged with 4% so if we pay in £59,000 this year then £40,000 would be charged with a penalty of £1,600.

Initially we did expect the mortgage to take longer but thankfully we're doing better than expected last year and we were hoping to even pay £10,000 per month so in 19-20 months maybe even get rid of the mortgage completely - the question is if there is a way to do that without paying the 4% penalty? (a year from now it would be 3% and so on) - it's fixed 1.7% for 5 years, started a year ago.

You’re in a 5 year fix so there’s no way of avoiding penalties or ERC if you overpay more than the 10% allowed 
So you either stick to the current 5 year fix and make the allowed overpayments, setting aside any other monies to pay the mortgage off when 5yr fix ends OR You take a hit with an ERC and come out of the 5 year fix and go on to a tracker or similar where you can make as much overpayments as you like 

getmore4less

This is pretty much the same question you asked in Aug.
I will expand this time to give some context.

Going back to basics first check the numbers
For £250k over 20 years 5y fix  I get for the 5years  

amount	rate	payment	owing	interest
£250,000.00	1.73%	£1,232.99	£195,355.68	£19,335.06

did you round your payment to £1250?

Then for £190k over 24years 4y left on the fix

amount	rate	payment	owing	interest
£190,000.00	1.73%	£978.38	£155,014.60	£11,976.67

A little under £1k, the most you can save is ~£12k

if you really can generate £10k  for the foreseeable then there may be options.

The first is 1.73% is a decent rate so have all other avenues of saving/investing been utilised

Pensions is the obvious one  that level of fee cashflow if derived from taxable income will probably have some at 40%

ISA allowance utilized for longer term tax free savings income.

But if looking at the overpayments there is some optimisation you can do rather than just throw everything at the mortgage.

Many make the mistake of thinking if I overpay now with 4 years to go I save 1.73% for 4 years(6.92%) for the cost of 4%

At the reset time where the new 10% kicks in and the ERC drops by 1% you can work out the cost/savings against just waiting

An ERC chargeable overpayment today that attracts a 1% premium(over waiting a year) and will will cost 1.7%.in interest for the year

The longer in this year you leave it the lower the interest saved so there is a cut off where you save nothing and better to leave it to next year when the ERC is 1% less

eg. for £1000  you will pay £40 leave it a year you pay £30
The interest saved per month is (1.73%/12)  ~£1.44 goes down the longer 
start month amount saved(calendar month for your mortgage)
0 £17.30 March
1 £15.86 April
2 £14.42 May
3 £12.97 June
4 £11.53 July
5 £10.09 August
6 £8.65 Sept
11 £1.44 Feb
repeat that each year remember you pay £10 extra in ERC once you get to August no point in overpaying with ERC there is no saving,  ERC cost more than the interest paid,  just wait till the next reset in March

Did you make any ERC chargeable over payments after your last thread in August?

The interest needed each month to match the saving goes down from 0.73% to 0.009% so it is probably better to stop overpaying even earlier.

Looking at the MSE guide there are accounts paying 0.4 instant access and a bit higher with notice(60-120 days)  
Looks to me that ERC overpayments are probably only worth it in the first 2 months after reset after that save.

If you can find a net savings rate over 0.73% just save.

Will the lender allow you to reduce the term and keep the deal?
If they let you drop to a 4 year term

amount	rate	payment	owing	interest
£190,000.00	1.73%	£4,099.72	£0.00	£6,786.68

Thats where you can make a significant savings(and with overpayments save even more
 

jumperabv3

getmore4less said:

Many make the mistake of thinking if I overpay now with 4 years to go I save 1.73% for 4 years(6.92%) for the cost of 4%

Hi GM4L. Thanks for the detailed explanation. It's all very clear and I think I understand better where you're taking it. Savings rates are not that great but we definitely invest in other avenues that I wrote in the forum earlier such as 8% fixed rate on some of our deposits, the thing is it's US based and not GBP based but we'll take that risk for now, even though I still believe Brexit will help the GBP gain more.

Regarding the quoted message - why 4% is bad in comparison to 6.92%? 4% is less than 6.92% so why is it a mistake?

jumperabv3

getmore4less said:

did you round your payment to £1250?
Did you make any ERC chargeable over payments after your last thread in August?

Yes, I did round it, take into account also £2k mortgage fee, (£252k in total), and yes, we made other ERC chargeable overpayments after August - which were charged with 5% but it's coming from the very same "mistake" that 4% or 5% is "more" expensive than 6.92% and I'm not sure why you say so?

getmore4less

You paid 5% but if you had waited you would have paid 4%.

August is around the break even for the rest of the year

1/2 way through the year the interest is for the rest of the year is 1.73%/2=0.865%

The ERC is 1% more than the reset date in 6 months time.

Overpayment in Sept month 6 for you.
Pay 5% save 7.785% Net 2.785%
Pay 4% save 6.92%. Net 2.92%

Save more by waiting.

Like I said a very common mistake people see the full years but don't do the mid year calculations when the ERC is reducing over time and the saving for the current year are reducing on a different schedule.

jumperabv3

getmore4less said:

You paid 5% but if you had waited you would have paid 4%.

August is around the break even for the rest of the year

1/2 way through the year the interest is for the rest of the year is 1.73%/2=0.865%

The ERC is 1% more than the reset date in 6 months time.

Overpayment in Sept month 6 for you.
Pay 5% save 7.785% Net 2.785%
Pay 4% save 6.92%. Net 2.92%

Save more by waiting.

Like I said a very common mistake people see the full years but don't do the mid year calculations when the ERC is reducing over time and the saving for the current year are reducing on a different schedule.

Yes, that makes sense, we could have saved a few hundreds of pounds here- thanks for this detailed feedback.

getmore4less

There is another factor that makes a difference, can't remember if I have worked it out before so will have a go now. 

The basics done so far are the ERC is 1% a year mortgage 1.73%  saving rate needed is 0.73% going down month on month till reset.

That ERC is an up front cost  and the saving are over the period so that needs to be accounted for as it will reduce the rate needed in savings.

lets go bigger starting with a £60k over payment day 1
ERC 5% charge £3k. savings are £1038py,  £86.5pm. 

looking  at it is over just  one year when the ERC drops to £2400.

That needs a payment of £53.93 to get £3k down to £2400 at 1.73%,  leaving £32.57pm on the £60k a savings rate of 0.65%

Even on this £60k overpayment we are looking at differences of <£50 over a year 

There comes a point where squeezing the odd £ is not worth the effort.
Will try to remember I have done this extra bit, not really worth the bother on future calcs.