Overpaying mortgage while interest rates are low?

cfrsh91

Good day to you MSE!

 

I wanted to ask a question with regard to overpaying my mortgage while I’m on a relatively low interest fixed-rate mortgage (2.31%), with the knowledge that my rate will likely increase when my fixed rate finishes (August 2024).

 

Now I know that generally, the rule is that you can save by overpaying your mortgage if your mortgage interest rate is higher than your savings interest rate, which for me is the opposite currently (2.31% mortgage vs 4% savings), but does the fact that I believe my mortgage interest rate will rise in the next 18 months mean I am better off overpaying the mortgage (more than I am already) before the interest rate increases next year? I can find very limited information regarding this specific scenario and I don’t think I’m the only one who would be in this situation, as I’ve heard (yes, speculation) that around a third of all fixed-term mortgages are due to finish in 2024.

grumiofoundation

Would be financially better (assuming that will not be spend money ) so save for now at higher interest rate. Then overpay in lump sum when come to remortgage. 

Altior

It will make a marginal difference either way.

I don't see it being discussed very often in these chats, but because inflation is high, deferring the payment of it as much as possible means your mortgage lability in real terms is diminishing by 10-15% per annum. Virtually everyone thinks this will reduce during the calendar year, but nobody knows how far. 

Other people want to reduce their mortgage liability asap, and I understand that angle. 

I feel like the real tipping point is, is your income increasing faster than the mortgage rate, and is your job secure. If both are yes then the answer is to defer the mortgage liability for as long as possible, and maximise the capital growth that you're saving.  There are of course too many variables to go into specifics, how close you are to a LTV step, accessing pensions etc.
  

Nailer99

I’d say this is a good thing for several reasons. 1) it will reduce your mortgage so the impact of the interest rate rises will be smaller (the pain of internet rate rises is directly proportional to the size of your outstanding balance). 2) it will get you used to paying the higher mortgage payments so again less painful when the mortgage rates rise. 

If you can afford it, go for it!

Nailer99

Altior said:

I don't see it being discussed very often in these chats, but because inflation is high, deferring the payment of it as much as possible means your mortgage lability in real terms is diminishing by 10-15% per annum. Virtually everyone thinks this will reduce during the calendar year, but nobody knows how far. 

Other people want to reduce their mortgage liability asap, and I understand that angle. 
  

This is a very good point. I think it doesn’t feel that way because most of us feel that our wages are not going up by inflation. But of course, they will catch up (at least partially) in the end and what you are saying does ultimately hold true. This is a good argument for getting a low rate 5-year fix now. 

Altior

Yes, a perhaps a more tangible way to put it in context is the proportion of regular income going on mortgage repayments. Most people, for obvious reasons see a mortgage like a regular debt or loan, and would like to diminish it as quickly as possible.

However it doesn't help me now to overpay the mortgage as it eats into my disposable income as of today. It might only help me in 10/15/20 years, when I don't need the help, when hopefully the proportion of my income being used on it is much smaller.

My strategy is to defer the liability for as long as possible, but have the means to significantly reduce the capital balance if needed, for example the achievable rate becomes excessive. In the meantime, investing the amounts I could use to overpay in tax protected wrappers, which over the long term should supersede the mortgage rate.

TheAble

Say you've got £200k socked away. Then by keeping it in savings for the next 18 months rather than overpaying your mortgage, you will be around £5000 better off at the end of that time (taxes notwithstanding).

Plus the fact, if you need the money in the meantime for any reason, it's there sat in your savings account for you to access, rather than in your overpaid mortgage where you now potentially can't get it out again.

There's also the inflation argument which has been made above and is also very valid.

I get that some people just don't like being in hock but on the bare numbers, to me it makes little sense to overpay a lower rate debt when prevailing rates are higher, in a high inflation environment.