Confused about overpayments

Leolion1977

Hi all, I'd appreciate your help.

I have a mortgage of 240,000, on a £550,000 property, with just under 4 years left on a fixed 1.44 rate. Current mortgage term is 27 years. I can overpay by a maximum of 10% a year.

I’m currently overpaying by £400 a month (I set this up to reduce the mortgage term). I keep reading that it would be better to put this £400 in a savings account each month, let the savings accrue, and use that to pay down the mortgage at a later date. However I’m confused abut a few things...

Is it advised that I should put the £400 a month into a savings account and then use it to pay down the mortgage when off I come to remortgage? Or should I let it accrue in savings and then use it to make a lump sum overpayment each year?

When I come to remortgaging in 4 years time, (I've never done it before), is there limit to how much I can pay off my mortgage? Let’s say I inherited a lump sum, or had other savings, could I reduce how much debt I owe during the remortgage process or is there a limit to this?

Thanks in advance!

Mr.Generous

With a fix they probably only take into account the overpayment after a set time - each year is likely. But  it's not always the case. It's a long time ago but my mortgage made an instant change to the interest if you overpaid £1000 or more at a time, otherwise it remained the same until year end. The details will be in your mortgage paperwork.

At the end of the fix you can pay off whatever you want. I overpaid every single month - you were allowed to round payments up to the nearest hundred. I paid lump sums off when I could and cleared the debt by age 39. At first it was tiny steps, but year after year the debt got smaller and my payments got bigger. I really wanted to be mortgage free before 40 because of something my Dad said to me, I made it by 3 months.

keep at it.

Leolion1977

thanks, and congrats! I'm already in my early 40s, so not much hope of me paying it off any time soon!

I don't think I phrased my question very well... what I was trying to ask was whether I should overpay each month, or whether I should put that money in a savings account each month, let it accrue over the course of my fixed term, and then use it to pay down the loan when I come to remortgage? 

Newbie_John

If you think about saving for the entire 4 years - it's worth considering tax issues - £1000 interest limit (£500 or £0 for higher earners), also if you stay with your bank for next fixed term then you don't remortgage - you do a product transfer  - I'm not sure if you can pay over 10% then.. but with remortgage it's a different story - you start a new mortgage with a new lender and go through all the affordability checks as you did a year ago - but you can pay as much as you want then.

Although you may be just under 10% after 4 years so it could work better for you then - saving you something under £1000.

MattMattMattUK

Leolion1977 said:

thanks, and congrats! I'm already in my early 40s, so not much hope of me paying it off any time soon!

I don't think I phrased my question very well... what I was trying to ask was whether I should overpay each month, or whether I should put that money in a savings account each month, let it accrue over the course of my fixed term, and then use it to pay down the loan when I come to remortgage? 

If your mortgage is 1.44% at the moment then anything you overpay by will be saving you the compound interest at 1.44%, if you save the money and get 4.5-5.5% then that will be the beneficial gain of the compound interest that you could use to pay off at the end of your fix.

Very basically:
Overpay by £10k in a year, you would save £144 in interest.
Save £10k a year, you would gain £550 in interest, less tax if applicable.
You would be £406 better off by saving, then paying off the lump sum at the end of the fix. 

jrawle

Without question you should put the money into a savings account and use it to pay off a lump sum at the end of your fix in four years' time. You can get 4% on easy access savings at the moment. I did a rough calculation and you will be just over £1000 better off in four years' time if you put the money into a savings account. (Interest rates on savings are also likely to increase further, whereas you can be sure your mortgage will not change for four years!) You can also transfer your savings so far to a fixed bond after say a year, to maximise interest.

You are unlikely to have to pay tax on the interest unless you are a higher rate taxpayer and/or have significant other savings.Even then, you would still be winning with the money in savings.

As for paying off a lump sum at the end of your four years, you can usually do this at the time you remortgage. In your case, however, I calculate this will be just under 10% of your remaining mortgage anyway, so will be under the 10% annual overpayment you are allowed to make in any case.

jimjames

Leolion1977 said:

I don't think I phrased my question very well... what I was trying to ask was whether I should overpay each month, or whether I should put that money in a savings account each month, let it accrue over the course of my fixed term, and then use it to pay down the loan when I come to remortgage? 

If your rate is 1.44% and you can get 4% interest on savings then it makes absolutely no sense to overpay monthly and would be better off to pay at the point of next remortgage.

stuartp2000

Everyone always looks at this from the pure interest and financial short term perspective.
as newbie_john said it’s about 96 quid a year.

So to me if I had 4 years of 400 a month in a savings account would I look at that and say hmm going to put that all on the mortgage or physiologically would I look at that and say hmm might keep 20% of that back for x emergency etc. 

Paying down on your rate is not the financially right thing maybe but would I rather look at a mortgage that has gone down 5k extra this year or a savings account up by 5k
i would all day long choice to overpay, peace of mind every month that it’s coming down and I had a plan to eradicate by x date.

So it’s personal choice and you be happy with what you choose.

IdrisJazz

stuartp2000 said:

Everyone always looks at this from the pure interest and financial short term perspective.
as newbie_john said it’s about 96 quid a year.

So to me if I had 4 years of 400 a month in a savings account would I look at that and say hmm going to put that all on the mortgage or physiologically would I look at that and say hmm might keep 20% of that back for x emergency etc. 

Paying down on your rate is not the financially right thing maybe but would I rather look at a mortgage that has gone down 5k extra this year or a savings account up by 5k
i would all day long choice to overpay, peace of mind every month that it’s coming down and I had a plan to eradicate by x date.

So it’s personal choice and you be happy with what you choose.

Which would you prefer:

a) A mortgage that has gone down by an extra £1000 in a year
b) A savings account that has gone up by £2000 in a year

Slight exaggeration in the figures there, but the point is the amounts will not be the same. Financially, the best thing to do is use a savings vehicle, so it's up to you to make it work. Keep it separate from other savings - simples!

jimjames

IdrisJazz said:

stuartp2000 said:

Everyone always looks at this from the pure interest and financial short term perspective.
as newbie_john said it’s about 96 quid a year.

So to me if I had 4 years of 400 a month in a savings account would I look at that and say hmm going to put that all on the mortgage or physiologically would I look at that and say hmm might keep 20% of that back for x emergency etc. 

Paying down on your rate is not the financially right thing maybe but would I rather look at a mortgage that has gone down 5k extra this year or a savings account up by 5k
i would all day long choice to overpay, peace of mind every month that it’s coming down and I had a plan to eradicate by x date.

So it’s personal choice and you be happy with what you choose.

Slight exaggeration in the figures there, but the point is the amounts will not be the same. Financially, the best thing to do is use a savings vehicle, so it's up to you to make it work. Keep it separate from other savings - simples!

Agreed but you also need to have an emergency fund which stuartp2000 doesnt seem to have. In that case overpayments are a bad idea and you should build up cash reserve before overpaying anything.