Mortgage overpayment - wrong calculations?

Newbie_John

I've always thought that it's better to keep savings if it's % is higher than mortgage interest rate.

But with this example using mse mortgage calc.
We have £300k mortgage at 2% for 20 years. Monthly rate is £1518.
£290k mortgage at 2% for 20 years is £1467.

If I keep £10k in savings account at 4% it will make £33.33 a month.
If I overpay mortgage (to decrease rate rather than to shorten it) the rate drops to £1467 - so that's £51 less.

Shouldn't £51 be less than £33? 

K_S

@newbie_john If yours was an interest only mortgage then yes '£51 should be less than £33'.

However as it's a capital repayment mortgage, the £51 will include both a capital component and an interest component and it's the interest component (around £17/month) that you would compare the £33 to.

Newbie_John said:

I've always thought that it's better to keep savings if it's % is higher than mortgage interest rate.

But with this example using mse mortgage calc.
We have £300k mortgage at 2% for 20 years. Monthly rate is £1518.
£290k mortgage at 2% for 20 years is £1467.

If I keep £10k in savings account at 4% it will make £33.33 a month.
If I overpay mortgage (to decrease rate rather than to shorten it) the rate drops to £1467 - so that's £51 less.

Shouldn't £51 be less than £33? 

Newbie_John

Ok thank you, I get it now.

My assumption was wrong based on the fact that after 20 years I will have £10k in saving account + interests, but with mortgage I will have £0.

So £10000 divided by 20 years divided by 12 months is about £41.67 per month extra.

So it should be actually £41.67+£33=£74.67, and this is greater than £51.