Overpay piecemeal or save and overpay in a lump?

dancing_star

I'm probably overthinking this but wondered if there was an easy online calculator anywhere.

I'm in the fortunate position (through a second job) of having a decent surplus of monthly income. I have never bothered to overpay the mortgage because it's been tighter until recently. 

Mortgage - I'm approx 6 months into a 5 year fix at 2.3% (I know, I was super lucky to get it fixed just before rates went up). I owe about £99k on something like 60%LTV. I have no other debts.

I have a savings account that's about 3% and currently have about £13k in savings. I currently squirrel my savings mostly in that account and I have another savings account ringfenced for holidays. 

I've been wondering about overpaying the mortgage. I can overpay £10k a year without penalty, but realistically I'll be able to overpay a couple of grand a year. That will put me in a better place in 4.5 years time when my fix ends, if I can get the LTV down, right?

Then I thought my surplus is doing better in a 3% savings account than spent reducing a 2.3% mortgage, but I then thought the confounding factor of the mortgage being significantly bigger than the savings might mean it's better to overpay the loan?
I want to keep a healthy cushion of savings because even though my job is secure for now, you never know, and emergency fund for things going pop, and whatever. I don't think my car is about to give up the ghost and I don't have any dependents. 

So am I better to mentally ringfence my mortgage overpayments in the savings account for as long as the interest rate on that > mortage interest rate, and then dump the overpayments in as a lumper before the end of the fix? Or chuck a couple of hundred as an overpayment as and when I can, so the interest element gradually reduces? 

Any pointers welcome to calculation aids. My brain hurts.

Thanks

Altior

If your concern is being able to access funds then overpaying the mortgage is sunk expenditure into an illiquid asset (for the vast majority of mortgage products). 

In regard to overpaying, the interest saving only applies to the amount being saved/reduced being applied to the capital balance, so yes if you can beat the interest via savings, it's better to do that than overpay. The interest on savings will of course compound, if you keep saving and don't draw on it. 

Once you are below 60% LTV, reducing it further has negligible impact on what you can achieve. You can always use the cash saved at the end of the fixed term, if it makes more than a marginal difference for some reason. 

dancing_star

Altior said:

If your concern is being able to access funds then overpaying the mortgage is sunk expenditure into an illiquid asset (for the vast majority of mortgage products). 

In regard to overpaying, the interest saving only applies to the amount being saved/reduced being applied to the capital balance, so yes if you can beat the interest via savings, it's better to do that than overpay. The interest on savings will of course compound, if you keep saving and don't draw on it. 

Once you are below 60% LTV, reducing it further has negligible impact on what you can achieve. You can always use the cash saved at the end of the fixed term, if it makes more than a marginal difference for some reason. 

thank you so much for a comprehensive reply. Sounds like a no brainer then. I'll continue the savings route and try not to dip into it above what I normally would for holiday fund.

I didn't know that about the LTV thresholds so thank you again. The reason I haven't bothered overpaying so far is that I worked out if I overpaid by £20 per month I'd knock something like 4 months off the term... not worth it!

Cheers.

RelievedSheff

We have opted to overpay by a monthly amount. We currently overpay by £106 to make our monthly repayment a round £1300. This knocks 1 years and 3 months off our mortgage term. 

My next pay review is due in June so we are aiming to up the overpayment to £206 per month which will reduce the term by 2 years and 2 months.

Our fixed rate of 2.34% has another 3 years to run yet, it doesn't expire until May 2026. But our aim is to have as much paid off as we can comfortably afford within that 3 years so that we have less to remortgage when the time comes round again. Who knows what rates will be by then? Every bit extra we pay off the balance now means less that we have to borrow in 2026.

dancing_star

RelievedSheff, I'm now planning to do much the same - overpay as much as I can comfortably afford, but I'm going to do it in a lumper now, given the better interest rates on savings. Agree with your principle.

Altior

It's a bit of a drum that I beat on here, but shortening the term brings no tangible difference to your life. Would you for example put money in an account now that doubled your money, but didn't pay out for say twenty years. Probably not. Cash has more utility for you now, than at the end of your mortgage term. 

Essentially, the time value of money is very unconsidered on these boards in my humble opinion. 

I can see how the 'badge' of being mortgage free asap can be very seductive. But for me it's not financially logical, unless at least you can't beat the interest on the mortgage liability with any cash rate. 

geordiejon

dancing_star
the link below may be of help

Mortgage Overpayment Calculator: Pay off your debt early?... (moneysavingexpert.com)

dimbo61

There is a group on here called Mortgage Free wannabe and hundreds if not thousands of home owners  are  keen to clear what for many people iis the biggest debt they will ever have !
A few years ago I sat in the local building society office and explained to the nice lady helping me get a mortgage that I intended to pay it off in 10 years rather than 25.
Why she asked so I pay £30,000 interest rather than £80,000
Chip away at the mortgage debt every month when you have spare cash and consider an Offset mortgage in the future

RelievedSheff

Altior said:

It's a bit of a drum that I beat on here, but shortening the term brings no tangible difference to your life. Would you for example put money in an account now that doubled your money, but didn't pay out for say twenty years. Probably not. Cash has more utility for you now, than at the end of your mortgage term. 

Essentially, the time value of money is very unconsidered on these boards in my humble opinion. 

I can see how the 'badge' of being mortgage free asap can be very seductive. But for me it's not financially logical, unless at least you can't beat the interest on the mortgage liability with any cash rate. 

I'm not so sure about that.

I will be mid 40's by the time our mortgage is paid off.Having an extra £1400 per month(probably more by then) will make a massive difference to us.

We live comfortably now but not having to pay out each month for housing costs will mean we are more comfortable again.

penners324

Your pension contributions need a close look as well.

Balancing mortgage over payments and additional pension contributions is more beneficial than just paying off the mortgage asap

RelievedSheff

penners324 said:

Your pension contributions need a close look as well.

Balancing mortgage over payments and additional pension contributions is more beneficial than just paying off the mortgage asap

Pension contributions are not an issue thanks to my very good company pension contributions and the amount of time I have paid into it. I am in a fortunate position where retirement will be comfortable and we will both be in a position to retire early.