Overpaying mortgage - right decision?

We're currently on a fixed term of 1.75% until March 2025, and we're only in our third year of the mortgage. We haven't made any overpayments so far, but we have been saving and would like to make a lump sum overpayment before this mortgage year is out (our provider allows 10% per year). We were just going to go for it and make the payment, then I started reading advice on here which made me think it might not be right thing to do - perhaps put it into savings instead. 
We'd rather reduce our mortgage term and get a better rate when our fixed term ends as the LTV will be lower (we'll have to see what interest rates are that time), but we just don't know what's the best decision.
If we don't make an overpayment before the end of each year we'll be thinking it's a missed opportunity to use our overpayment allowance whilst we're on a low rate.

Comments

  • anna42hmr
    anna42hmr Posts: 2,844 Forumite
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    edited 24 February 2023 at 3:04PM
    I've been over paying my mortgage since day 1, and for me it has been a great decision.  

    In my instance it has allowed me to drop LTV's quicker meaning cheaper options at following new fixes, reduced the amount I owe quicker so therefore will reduce the interest paid and mean if i carry on the mortgage will be repaid 8-10 years earlier than scheduled.  

    Furthermore whilst I am over paying now, even though my mortgage rate is low, it means that when current fix ends that the increase in interest rate will be less of an impact for me next time as whilst will be higher interest rate, its will be on a lower amount of debt due to the overpayments.  

    As you will see from my signature below, over the years i have overpaid by over £30K, if i had not done so, my mortgage balance would be 30k more than it is now and then added on the interest paid to date has saved me thousands.   And as such, it will mean that when my current fix ends in a couple years time, the balance i would be paying a higher rate of interest on is £30K lower than if i i had not overpaid, reducing the affect of the increase in interest rate.

    As such, overpaying the mortgage where possible can have positive cross the board. That is before going into the peace of mind knowing that the mortgage will be paid off sooner and freeing up the extra money down the line.  

    But you will need to weigh up the pros and cons for yourself and your own circumstances, for example do you have debt elsewhere that is more expensive, are there foreseable events in future you need the cash free for (as once its paid to the mortgage not as simple to get it back) do you have sufficient free cash for an emergency fund etc. 
    MFW#105 - 2015 Overpaid £8095 / 2016 Overpaid £6983.24 / 2017 Overpaid £3583.12 / 2018 Overpaid £2583.12 / 2019 Overpaid £2583.12 / 2020 Overpaid £2583.12/ 2021 overpaid £1506.82 /2022 Overpaid £2975.28 / 2023 Overpaid £2677.30 / 2024 Target: £1800, £572.15 overpaid as at March so YTD = £355.88 Total OP since mortgage started in 2015 = £34,178.29
  • Thanks for your reply Anna. That's exactly how I am about it, wanting to pay it off sooner, but when you hear people say that you should save it and get the interest, it makes you question whether overpaying is the right decision.
    No debts to pay - other than the mortgage - so it's hard saving which will hopefully pay off!
  • anna42hmr
    anna42hmr Posts: 2,844 Forumite
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    no problem happy to help, can see why some may say to save it up if higher interest rates etc.

    However I find that in my case would need more will power to make sure the funds saved with the intention of over paying the mortgage are actually used for that and not diverted to other non essential things instead (holidays etc) lol 
    MFW#105 - 2015 Overpaid £8095 / 2016 Overpaid £6983.24 / 2017 Overpaid £3583.12 / 2018 Overpaid £2583.12 / 2019 Overpaid £2583.12 / 2020 Overpaid £2583.12/ 2021 overpaid £1506.82 /2022 Overpaid £2975.28 / 2023 Overpaid £2677.30 / 2024 Target: £1800, £572.15 overpaid as at March so YTD = £355.88 Total OP since mortgage started in 2015 = £34,178.29
  • South_coast
    South_coast Posts: 4,893 Forumite
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    I would overpay, I never quite understand the "save instead" argument. Yes, you'll earn more in interest on the amount you've set aside for savings instead of OP'ing, but unless that balance is approaching the value of the mortgage you'll be paying a lot more in actual £ every month to service the debt than you would be earning back in interest 
    Mortgage start: £65,495 (March 2016)
    Cleared 🧚‍♀️🧚‍♀️🧚‍♀️!!! In 5 years, 1 month and 29 days
    Total amount repaid: £72,307.03. £1.10 repaid for every £1.00 borrowed

    Finally earning interest instead of paying it!!!
  • I would save the money in a higher rate savings account, ready to overpay when you remortgage when fix ends. The LTV is based on what you want to borrow, so you can overpay by however much you have saved with no limits. You will work out better off if the savings rate is higher than 1.75% 
    Mortgage start date Nov 2014  - £90,545 over 25 years
    Re-mortgage Oct 2017 - 78,295 over 23 years
    Re-mortgage Jan 2020 - 55,000 over 26 years @ 1.94%
    Current Mortgage Outstanding Middle December 2020 - £
    47893.35 - a reduction of £42,652 in just over 6 years!  


  • I would overpay, I never quite understand the "save instead" argument. Yes, you'll earn more in interest on the amount you've set aside for savings instead of OP'ing, but unless that balance is approaching the value of the mortgage you'll be paying a lot more in actual £ every month to service the debt than you would be earning back in interest 
    I think you need to check your maths there - you will probably be paying more in interest on your mortgage than you are earning yes, but the amount you would earn in bank interest is more than you will reduce your mortgage payments by overpaying.

    Basically, paying your mortgage is the same as saving your money in a bank account paying (in this case) 1.75% which you wouldn't choose to do now when other accounts are paying twice that and more. 
  • El_Torro
    El_Torro Posts: 1,463 Forumite
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    I guess the reason people are telling you to save instead of overpay the mortgage is because interest rates are currently higher than 1.75%. Since your fixed rate doesn’t expire until March 2025 you could even lock it away and earn 4% or more in interest. 

    When you get a new mortgage deal you can put all the money you’ve saved plus the interest into the equity, if that’s what you want to do. 
  • WYSPECIAL
    WYSPECIAL Posts: 644 Forumite
    First Post Name Dropper First Anniversary Combo Breaker
    edited 25 February 2023 at 8:49AM
    You can get a lot more than 1.75% on savings at the moment but your chance s of borrowing at 1.75% are probably nil.
    You could reduce the balance you owe when you remortgage in two years time.
    Sounds as I feel you already have some money saved. Look at fixed term accounts that expire just before your mortgage deal expires. They’ll probably pay the highest rate.
  • I did speak to my mortgage company yesterday, who said that we get a 30 day period before our fixed rate ends in which we can pay as much as we like without penalties. 
    Maybe putting the money into a savings account will be a better idea after all, seeing as it would gain interest. 
    I hope this wouldn't affect the LTV when getting a new rate? 
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