How much overpaying saves you interest?

PawelK

Hi.

Not sure if anyone could confirm with some basic calculation but I am bit disappointed.
Started overpaying on my mortgage year ago £500 per month on top of my £720 repayment mortgage. At the moment, my mortgage is around £163k with 24 years left and total overpayment is £7.5k (couple of historic overpayments on top of the regular ones in the last twelve months). When I compared my 2019, 2020 and 2021 summaries, I see total interest charged of 2.9k, 2.8k and 2.6k respectively. From this, it looks like I only saved £100 interest or thereabouts from overpaying what I consider large amount of money in 2021. Or perhaps there's some 'invisible" future interest saved that I won't know of or see and the real benefit of overpayments is shortening the mortgage term?

london21

Interest rates are low at present so savings would not be huge.

Check your mortgage document to see how much you can overpay. some allow 10% per year.

Overpay what you can afford but have emergency savings in case. 

Petriix

Assuming your interest rate is around 2%, it looks like a single £500 overpayment now would save around £300 in interest compounded over the remaining term.

The initial savings will be minimal when looking at the yearly summary, but it adds up over time as a greater proportion of the monthly payment is used to bring the capital down.

Obviously make sure that your monthly payments are set to remain the same rather than reduce when you overpay. 

stuartp2000

Based on amount you pay and life I assume you have an interest rate of 2% roughly, over paying £500 a month means that you will pay the mortgage off in around about 13 years saving over the life of the mortgage will be £23k interest.
so yes it is small each year but accumulated its big numbers and then you have that money free earlier.

The bigger question is if you invested £500 a month for 13 years would you earn more than £23k so be better investing than overpaying the mortgage why the rates are so low.

getmore4less

What rate?

Using 2% like others each £500 saves you £10 a year.

A full year of £500 then save £120 every year after.

What were you expecting?

AnnieB2018

Remember that the saving continues each year, yes you paid say £200 less interest this year…and will pay £200 less interest for the next 24 years!

billy2shots

It's not just the interest. As has been said, the capital is being paid off quicker 

Your monthly payment is £700 per month. If you continue to overpay and clear the mortgage in 13 years rather than 24 years you will save 11 years worth of future interest.

PawelK

Thank you everyone. I understand the overpayments will go long way over the mortgage term. Keep well and healthy going into New Year.

PawelK

stuartp2000 said:

Based on amount you pay and life I assume you have an interest rate of 2% roughly, over paying £500 a month means that you will pay the mortgage off in around about 13 years saving over the life of the mortgage will be £23k interest.
so yes it is small each year but accumulated its big numbers and then you have that money free earlier.

The bigger question is if you invested £500 a month for 13 years would you earn more than £23k so be better investing than overpaying the mortgage why the rates are so low.

Thanks. Yes, I had a dilemma whether to save it but I am a risk averse person so while 'safe' ways to save were offering less than 2% (my actual mortgage rate is 2.14), I have decided to also increase my pension contributions at work significantly. The main purpose of overpaying the mortgage was to get below 60% LTV next year when I will be remortgaging. If the rate I will be offered then will be still fairly low (below 2%), I will probably stop overpaying and look to save elsewhere. Just not sure where and how much I'd be prepared to lose...

Thrugelmir

Remember the words of Albert Einstein. " “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

When rolling a snowball it starts small, over time it grows and grows. Patience is ultimately rewarded.