Overpay piecemeal or save and overpay in a lump?

Bluebell1000

If you think that keeping the money separate would work better for you, you could look at setting up a regular saver, there are some pretty good rates around at the moment. We did that then moved our planned overpayment into a 1 year fixed rate when the regular saver matured ( while starting a new regular saver) to make sure it was separate from spending money.

dancing_star

Bluebell1000 said:

If you think that keeping the money separate would work better for you, you could look at setting up a regular saver, there are some pretty good rates around at the moment. We did that then moved our planned overpayment into a 1 year fixed rate when the regular saver matured ( while starting a new regular saver) to make sure it was separate from spending money.

thanks, and yes that system does work better for me - I did that same thing to save for holiday spending money (Iceland - so spending money ) and am probably going to do it again to save for another holiday. I'll probably set up another separate savings account for the ringfenced mortgage overpayments.

It's a nice dilemma to have in the current climate - finding that savings rates are in excess of mortgage interest rates! I am far from smug though and feel almost guilty when so many are struggling.

For what it's worth my parents keep telling me not to worry as I'll eventually inherit enough to pay off the mortgage. I'm not listening to them because a) I would rather have them alive and kicking for the next 25 years, b) should that not happen I'd rather they spend their hard-earned and enjoy life, and c) the possibility of care home fees (I am not caring for them myself in the event care is required. Florence Nightingale, I am not). So in my mind I'm looking at paying this mortgage until I'm pushing 70, and while four months off the term wasn't worth the extra ££ when my finances were tighter, a year or two off the term most certainly is now I can currently afford it.

Zerforax

Interesting that so many reduce the term on their mortgage with overpayments. I've always reduced the monthly payments and kept the term at the full length.

Altior

RelievedSheff said:

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.

You're not considering the counter factual. Obviously you'll still have the capital that you didn't use to overpay, along with the exponential growth. And you don't need to wait until the mortgage is completed to realise it. 

Altior

Zerforax said:

Interesting that so many reduce the term on their mortgage with overpayments. I've always reduced the monthly payments and kept the term at the full length.

As they will tend to look at the interest saving calculation/comparison across the two methods. Reducing the term will always show a higher saving in pure cash terms. Because of the time value of money. The difference between the two essentially reflects the erosion of value over time. 

jimjames

dancing_star said:

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? 
Thanks

Just to pick up on this point, depending on the amount of the lump sum you might not be able to pay that lump sum BEFORE the end of the fix if it's above the annual payment limit. You would be able to pay it in after the fix has ended without penalty.

dancing_star

jimjames said:

Just to pick up on this point, depending on the amount of the lump sum you might not be able to pay that lump sum BEFORE the end of the fix if it's above the annual payment limit. You would be able to pay it in after the fix has ended without penalty.

thanks, but no it won't be above the annual payment limit. Definitely can't afford that!

IdrisJazz

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 find this a bizarre stance, I have to say.

I know people have different circumstances, but if you can comfortably afford what you are currently paying it makes much more sense to reduce the term.

Your logic seems to suggest that it's not worth paying into a pension because you won't see the benefits for years to come (possibly twisting the context slightly!). Would having an extra £100 a month now actually  bring "tangible difference to your life"? - I would suggest not. But having an extra £1000 a month to play with for some 5 years extra at the end of your term absolutely would.

BikingBud

Altior said:

Zerforax said:

Interesting that so many reduce the term on their mortgage with overpayments. I've always reduced the monthly payments and kept the term at the full length.

As they will tend to look at the interest saving calculation/comparison across the two methods. Reducing the term will always show a higher saving in pure cash terms. Because of the time value of money. The difference between the two essentially reflects the erosion of value over time. 

@Altior Reducing the term allows me to stop working sooner!

I stop working, I pay less tax, currently a 40% overhead, and have more time to enjoy life, how do you build this into your analysis?

What is the value of your time?

Altior

Your thinking is still not correct in my opinion. 

You'll have a big fat lump sum, which has been exponentially growing. Outside of the mortgage. So, whilst you won't have to pay off the mortgage with it, you could. Or you could even be earning enough yield by then to be paying the repayments with interest being earned from the capital. You should have a 'break even' point, for the want of a better term, where your capital outside of the mortgage supersedes the liability of the mortgage.

My only caveat would be that it requires some discipline, as it's a bit like a pension, once it has been paid in, an overpayment can't usually be accessed. So if an individual has poor discipline, and can't prevent themselves from dipping into savings to spend on 'luxuries', they would be better off overpaying (there is a sort of halfway house possibility of a bond ladder).