Mortgage Overpayment - Any Downsides to consider?

Pointers

From what I have read on this website ML and others on these boards always encourage borrower to pay off their mortgages as quickly as possible. Seems logical to me but before I make an overpayment I want to consider if there are any other possible issues?

My situation
We (wife and I) have a 2 year fix 75% LTV mortgage with Barclays
Savings in bank - interest rates are very low and so not much benefit in leaving cash there.
Coming to end of first year of two year fix. Thought we had to wait until the mortgage anniversary to make a payment but apparently we can make now. 
We could potentially make a 10% overpayment now and then another 10% in June when we'll be in the second year of the mortgage and so are allowed to make another 10% overpayment
No children and no large expenditures expected in the next 18 months
Jobs are both fairly secure and so not likely to need savings to live on.

My logic is that if we make these overpayments more of our monthly mortgage payments will reduce the capital rather than only paying interest
At the end of the two year fix we can then potentially get closer to a 60% LTV and so help us get better terms if we decide to go for another 2 year fix/ longer 5-7 year fix
If something changed in the next 18 months (perhaps we want money to extend the property) when the current mortgage expires we could potentially re-mortgage and take some money back out? i.e. we do have some flexibility if we change plans? 

Does this sound realistic? Are there any downsides in fully using these 10% overpayment options? 

My assumption is that interest rates will stay low in the short term and so better to pay off the mortgage as much as possible whilst they are low?

can anyone see any issues with the above? Is there anything that I've missed? 

Thanks in advance   
 
  

getmore4less

For many investing and using pensions can give better returns.

As for your overpayments many miss that with Barclays they allow more then 10%  penalty free on a lot of their mortgages.

if it is one that qualifies then you can pay up to under 3 times normal payment without using up the 10%

https://www.barclays.co.uk/help/mortgages/repayments-rates/overpayment-charge/

Check your mortgage terms carefully.

steampowered

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

getmore4less

For an alternative investing site I used to use the "fool" but the UK site shut down the forums.

As a replacement https://lemonfool.co.uk/site was set up

Pointers

getmore4less said:

For many investing and using pensions can give better returns.

As for your overpayments many miss that with Barclays they allow more then 10%  penalty free on a lot of their mortgages.

if it is one that qualifies then you can pay up to times normal payment without using up the 10%

https://www.barclays.co.uk/help/mortgages/repayments-rates/overpayment-charge/

Check your mortgage terms carefully.

Thanks - I'll have a read in more detail. I hadn't heard that before. 

Pointers

steampowered said:

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

housebuyer143

getmore4less said:

For many investing and using pensions can give better returns.

As for your overpayments many miss that with Barclays they allow more then 10%  penalty free on a lot of their mortgages.

if it is one that qualifies then you can pay up to under 3 times normal payment without using up the 10%

https://www.barclays.co.uk/help/mortgages/repayments-rates/overpayment-charge/

Check your mortgage terms carefully.

Was going to say this. The rates are really low, so worth seeing if you can invest it elsewhere. But if you have no appetite for that, then pay it off I say. Although do not dwindle down your savings too much as there is something to be said for liquid cash. From mortgage free homeowner, who wishes all money was not tied up in said house lol

dimbo61

I have been overpaying our mortgages for the last 17 years when rates were 5/6% while also building up our pensions.
You can only pay a max of £40,000 a year and Max pension pot of £1,070,000 I Think ?
Reducing your mortgage debt may well get you a better deal in 12 months if you can hit 60%LTV
Have a look at the Barclays and other lenders Offset mortgages

Thrugelmir

Paying down the mortgage has benefits. In that you'll reach lower LTV's quicker. Usefull in an era of rising interest rates.  You'll pay less interest on the debt owed therefore increasing your equity. Should you wish to move in the future you'll have greater equity to transfer to the new property. If you lose your job or your income reduces. Then you've the flexibility to reduce your monthly outgoings. 

Investments are great until they aren't. Investment era's go in cycles. There's a reset and a new era lies ahead. 

getmore4less

Pointers said:

steampowered said:

Most people are much better off increasing their pension contributions or making use of their stocks & shares ISA allowance before overpaying the mortgage. 

It is highly likely that the return you would get from a pension or stocks & shares investment would exceed the interest you would save by overpaying the mortgage. Especially when you look at the long term, and especially once you get below 70% LTV.

In addition, using your pension and S&S ISA allowances has tax benefits. Overpaying the mortgage has no tax benefits. This is particularly important for higher rate and additional rate taxpayers.

MSE doesn't really cover pensions and S&S ISAs because the site doesn't really cover investing. If you do have disposable income, it is really important to invest a few hours of your time into understanding the basics of investing as this is likely to make £hundreds of thousands difference to your lifetime wealth.

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

The better LTV is often overhyped at the lower end

Once you hit 75%(70% for some lenders) the marginal gain going to 60% it often tiny and it is a big 10%-15% gap to bridge.

4 Feb 2022 rates Barclays reward rates 60% 75% £999 fee
2y 1.35% 1.37%
5y 1.39% 1.41%

75% to 60% is saving of 0.02% 
2y to a 5y is 0.04% increase.

With those differentials where the fee based products are better(Barclays that £100k+ on the 5y)  a 2+3 cannot recover the extra fee over just taking the 5y. 



40%+ tax money pension as it gets that head start

For those going into 40% fixing lifestyle and directing all the 40% into pension can make a lot of sense.
if hitting the limits with 40%+ money then alternatives come into play

ISA is a use or lose but accessible, potentially  useful for the medium term might need money but if not it will be a tax free source of cash 

Mortgage,  rates are low, not saving much and not often easy to recover if needed some options give more flexibility but at a cost in most cases higher rates.
in a rising rate environment fix mortgage then  variable saving can overtake the mortgage rate.


With dual income there are other consideration on structuring the finances, 
eg. if you can meet costs with just one income and the jobs are not likely to be hit by the same issues then the accessible savings can be quite low as the risk of needing to access is reduced.
For the disaster of both jobs going 1-3 months of costs in near instant access with back up if jobs don't happen of 12months accessible like the ISA with the plan being its unlikely to be needed so plan longer term for that pot)  

We took the non optimal route of premium bonds for instant(few days) access savings.

Offsets are very flexible but not so easy to find a decent one these days that stacks up against a cheap as chips fix and alternative places for the money.

I think some lenders still allow overpayment pots to be used to effectively give a holiday on payments

steampowered

Pointers said:

Thanks. In recent years I have started putting the maximum £40k into my pension and last year I also put the full allowance into my S&S ISA (its doing really badly atm but hopefully will recover) and so I think I'm making the most of these. 

I plan to keep putting more into my pension but I do have concerns regarding putting so much in and then not being able to draw it out for another 15 years. I think the minimum pension age is 58? 

With property if I get into financial trouble I could sell the house and downgrade to something smaller and so it feels more flexible to me.   

If you are already putting £40k a year into your pension, you'll hit the lifetime allowance pretty quickly.

I assume you are also filling your £20k stocks & shares allowance.

After that, the next best option will be unwrapped stocks and shares in a regular stock account. There's nothing wrong with that, the returns are still good, you are just subject to tax on your capital gains and dividend income.

You could also look at SEIS/EIS or VCT investments which like pensions have very attractive tax relief, though those are higher risk.

Having money tied up in property (which can take months or in a bad market years to sell) does not offer you more protection than having money in investments (like stocks) which can be sold at any time.