Is anyone amazing at maths who can help work this out please?

MrsPee

So I took out a 38.5k mortgage (15 years) in October last year at 3.94% fixed for 5 years. I have already made the 10% overpayment for last year and only have about £40 left of my overpayment allowance for this year left. I spoke to an advisor from the mortgage company who said I can make payments above the 10% allowance but they will have a 5% charge each time. 
What I would like to work out is... if for example I could make another £5000 in overpayments this year - and got charged the 5% which is £250. Would it be better to do this and reduce the overall interest on the mortgage than to save 5k in a savings account where I'd be getting 2.75% interest. I'd love to know the answer to this and if anyone could work it out for me I'd really appreciate it.

saajan_12

Its not really a complicated maths question, the complications are more from forecasting both interest rates and your future cashflow needs. 

In the below, I'm assuming savings interest rates stay the same, there's no where better you can invest / save the money to generate a better return, and after the fixed term you can reassess and remortgage for more / less. So the decision is just what happens to the money over the next 4.75 years upto Oct 2027. 

1. If you left the £5k in savings, then under simple interest, you'd earn 5000 x 2.75% x 5 = £653 in simple interest (or really £688 with compounding)
2. If you pay off the mortgage, then under simple interest, you'd save 5000 x 3.94% x 5 - 250 ERC = £686 with simple interest (or potentially ~£707 with compounding depending on how the monthly mortgage payments are adjusted and how the ERC is taken. 

Basically end up in about the same place, with £30 in it, though this is highly dependent on what savings interest rates do over the next few years, ie crystal ball time..

However with option 2 means your money is effectively tied up for 5 years, and you may not be able to use it in the future if you need the cashflow or a better investment comes up. If you're willing to treat the cash as tied up, then a fixed rate savings accoutn might have better rates closer to 4%. 

MrsPee

Thanks for your help. I really wanted to work out if I was going to be losing out on much by overpaying, but it seems not - apart from available cashflow. Thanks again.

South_coast

The ERC will usually drop by 1% for every year into the deal you get, so it's worth re-doing the maths regularly to keep assessing