Monthly or Yearly overpayments??

stewart-page

Hi, we pay extra overpayments on our mortgage every month. We've seen a good reduction by doing this but I wondered is it better to pay the extra money off the mortgage monthly or yearly?
My thought recently was to maybe put the overpayment into a First Direct Regualr saver each month instead, and at the end of each year we would be able to take it out with an additional 7% interest so ultimately paying more iff the mortgage than we would of by doing it monthly. BUT would it work out better by continuing to pay the extra overpayment monthly as this would reduce the total capital owed? There may not be much in it but wanted to ask. We are locked into a 10 year fixed rate at 1.99% interest with about 8.5 years left on the mortgage product if that info is any use.
Many thanks in advance.
Stew

MorningcoffeeIV

From a financial perspective, if your savings rate is higher than your borrowing rate, then save and don't make overpayments - either monthly or annually.

If the reverse is true, make overpayments at the earliest opportunity.

stewart-page

We both feel that for personally for us it is important to pay off as much from the mortgage as quickly as possible, as we still have 20 plus years on the full term which would take me to nearly 70 years old. 
Although we feel us always making over payments is obviously the right thing, we are just so unsure weather to allow the overpayment money build interest itself so we have more or just whip it straight off the mortgage earlier. Thanks for the help  

RelievedSheff

We pay our over payments monthly.

We like to see the mortgage account balance coming down by more each month

Sarahspangles

You can calculate this fairly accurately by downloading a free mortgage amortisation spreadsheet and trying your different scenarios.  It’s actually really hard maths otherwise assuming your interest is recalculated every time you make a payment.

IdrisJazz

Well, it's actually quite simple.

Don't get me wrong, I understand the desire to see the mortgage debt reducing as quickly as possible, and it feels like that is the right thing to prioritise. But not in your circumstances.

You have 8.5 years left on your deal. All the money you overpay during that period will earn you 1.99% pa off your debt.

If you put the same money into regular savers, and/or fixed terms savings, you can make the same money earn you around double that (as of right now). Assuming rates stay relatively unchanged, after 8.5 years your savings will be larger than the extra amount you would have lopped off your debt. Because 4% is higher than 2%.

Bear in mind that you need to be disciplined. If you keep it in savings there is only YOU stopping yourself from using the money for other things. That's where fixed term bonds might be useful because you can't touch the money during the term.

If you think there is a chance that you could pay off the whole sum before the end of your deal that may alter things, but you need to factor in how much you can overpay each year. Accruing a separate lump sum may not allow you pay it off without penalty like you could if you use the maximum allowance each year.

But if savings rates dip below 1.99% switch your strategy back and start overpaying again.

I'm doing the same myself at the moment and my savings are earning me 4.4% instead of the 1.24% on my mortgage.

BikingBud

Also consider that tax may be payable on the interest, dependent upon your income.

ElwoodBlues

IdrisJazz said:

Well, it's actually quite simple.

Don't get me wrong, I understand the desire to see the mortgage debt reducing as quickly as possible, and it feels like that is the right thing to prioritise. But not in your circumstances.

This. It really is as simple as putting the money wherever the interest rate is higher. Although there are a few things to bear in mind:

Your will power to keep topping up the savings regularly, and avoiding the temptation to dip into them (but in return you get the flexibility of having the emergency funds available). Potential income tax on savings. Your mortgage overpayment allowance - some are more generous than others, most give you an overpayment allowance on an annual basis. You definitely don't want to get into ERC territory.

What are savings rates going to do over the 10 years of your fixed rate mortage? Right now, you can get a bit better savings rate than the 1.99% so it makes sense to save. But if in 5 years time savings rate drop to the floor (not that likely, but then no one would have predicted it for the the 2010's etiher), you'll have 5 years worth of mortgage overpayments but your mortgage might not allow you to suddenly throw it at the mortgage (depending on annual allowance). So it may be prudent to make a decision towards the aniversary of your mortgage overpayment allowance as to whether to keep it all in savings or use that year's allowance. If you want to spread your bets, maybe go 50/50?

And 10 years is a reasonably long time, you may want to consider putting a proportion into more risky investments like stocks and shares, as they can perform better than cash interest, and generally the longer the term the less you're exposed to market volatility.

Also, if you ever find yourself in the position of claiming benefits, some of them have a 16k capital threshold for eligibility. 

stewart-page

ElwoodBlues said:

IdrisJazz said:

Well, it's actually quite simple.

Don't get me wrong, I understand the desire to see the mortgage debt reducing as quickly as possible, and it feels like that is the right thing to prioritise. But not in your circumstances.

This. It really is as simple as putting the money wherever the interest rate is higher. Although there are a few things to bear in mind:

Your will power to keep topping up the savings regularly, and avoiding the temptation to dip into them (but in return you get the flexibility of having the emergency funds available). Potential income tax on savings. Your mortgage overpayment allowance - some are more generous than others, most give you an overpayment allowance on an annual basis. You definitely don't want to get into ERC territory.

What are savings rates going to do over the 10 years of your fixed rate mortage? Right now, you can get a bit better savings rate than the 1.99% so it makes sense to save. But if in 5 years time savings rate drop to the floor (not that likely, but then no one would have predicted it for the the 2010's etiher), you'll have 5 years worth of mortgage overpayments but your mortgage might not allow you to suddenly throw it at the mortgage (depending on annual allowance). So it may be prudent to make a decision towards the aniversary of your mortgage overpayment allowance as to whether to keep it all in savings or use that year's allowance. If you want to spread your bets, maybe go 50/50?

And 10 years is a reasonably long time, you may want to consider putting a proportion into more risky investments like stocks and shares, as they can perform better than cash interest, and generally the longer the term the less you're exposed to market volatility.

Also, if you ever find yourself in the position of claiming benefits, some of them have a 16k capital threshold for eligibility. 

Our overpayments so far have been coming just off from the capital repayment, so some good amounts are being reduced.
Is the above still work out the same for our capital overpayments?
Many thanks for the information and advice 🙂

bmthmark

I'm in a similar situation. My fixed rate is 0.99% and i'm doing overpayments.
I have just changed my overpayments. I am now saving half of my over payments in a high interest savings account. The plan is to build up the savings and get the interest and make a lump sum payment off the mortgage. I will need to make sure I don't go over my 10% overpayment allowance.
I am paying the other half as overpayment. One of the reasons for this is because it is nice to see the mortgage total drop.

I felt doing the savings and the smaller overpayments was the best of both worlds. Also having the extra savings could always be a bonus if for some reason I need some emergency fund. But I will never just dip in to it, it would have to be an emergency.

jrawle

stewart-page said:

Our overpayments so far have been coming just off from the capital repayment, so some good amounts are being reduced.
Is the above still work out the same for our capital overpayments?
Many thanks for the information and advice 🙂

Overpayments only ever come off the capital, as your standard monthly payments are calculated to pay off the interest and a bit more (otherwise the mortgage would never be paid off).

bmthmark said:

I'm in a similar situation. My fixed rate is 0.99% and i'm doing overpayments.
I have just changed my overpayments. I am now saving half of my over payments in a high interest savings account. The plan is to build up the savings and get the interest and make a lump sum payment off the mortgage. I will need to make sure I don't go over my 10% overpayment allowance.
I am paying the other half as overpayment. One of the reasons for this is because it is nice to see the mortgage total drop.

You can always wait until your fixed deal has ended and make the overpayments then, in which case the 10% limit is irrelevant. Unless you have a very long fixed deal (the OP's 8.5 years is unusual) it's very unlikely that savings rates will drop below 0.99%. You can also put money into fixed rate accounts if you are worried about savings rates dropping.

If you can put the extra money in a savings account that pays a net higher rate than your mortgage rate, you will make money. The idea of it being better to see the mortage balance going down is purely psychological, and one you will pay dearly for. Put the money in a dedicated savings account that you use for nothing else, and make yourself a spreadsheet that shows your mortgage balance minus the value of the savings. This can be your net mortgage balance which you can enjoy watching go down. Indeed, once interest is applied to the savings account, this "net balance" will be lower than it would have been if you just overpayed your mortgage!