Mortgage Overpayments vs savings

christmaslights

jrawle said:

As for self-discipline, someone who is making significant regular overpayments is already fairly disciplined, and I think the majority of people in that situation are unlikely to dip into their overpayments savings account. That scenario is just used as an excuse by people who want to justify to themselves overpaying for the psychological reason discussed above.

I think you have to factor in human frailty. I flatter myself that I am quite disciplined, at least so far as money is concerned, but there is Bad Me that whispers 'paying off your mortgage is so boring, why not have some fun with your money instead?'.  Bad Me is more easily quietened by the response when I make a monthly payment of 'well it's only few hundred pounds' than I think it would be if I had thousands in a savings account and the choice of whether to use it all to pay down the mortgage in one hit or perhaps keep a bit back and go on a holiday or get a new phone.  I always feel better once I've made the monthly payment and the temptation to do something else with the money is gone.

There are two columns in my spreadsheet related to my regular monthly mortgage payment; how much of it goes on interest and how much goes on repaying the capital.  Watching the former reduce and the latter increase significantly more quickly than it would do if I were not making overpayments is very satisfying. 

But in the end it's finding the method that works best for you to secure your home.   If someone can afford it, I'd always advise taking a balanced approach combining savings and overpayments. For me, the feeling of security I get from knowing that every month I own more of my home than I would otherwise do if I were not making regular overpayments is worth the possible loss of a few pounds.   

nic_c

christmaslights said:

jrawle said:

As for self-discipline, someone who is making significant regular overpayments is already fairly disciplined, and I think the majority of people in that situation are unlikely to dip into their overpayments savings account. That scenario is just used as an excuse by people who want to justify to themselves overpaying for the psychological reason discussed above.

I think you have to factor in human frailty. I flatter myself that I am quite disciplined, at least so far as money is concerned, but there is Bad Me that whispers 'paying off your mortgage is so boring, why not have some fun with your money instead?'.  Bad Me is more easily quietened by the response when I make a monthly payment of 'well it's only few hundred pounds' than I think it would be if I had thousands in a savings account and the choice of whether to use it all to pay down the mortgage in one hit or perhaps keep a bit back and go on a holiday or get a new phone.  I always feel better once I've made the monthly payment and the temptation to do something else with the money is gone.

There are two columns in my spreadsheet related to my regular monthly mortgage payment; how much of it goes on interest and how much goes on repaying the capital.  Watching the former reduce and the latter increase significantly more quickly than it would do if I were not making overpayments is very satisfying. 

But in the end it's finding the method that works best for you to secure your home.   If someone can afford it, I'd always advise taking a balanced approach combining savings and overpayments. For me, the feeling of security I get from knowing that every month I own more of my home than I would otherwise do if I were not making regular overpayments is worth the possible loss of a few pounds.   

It is only a limited deal though - whilst the fix you made before all these rate rises remains and whether the savings rate beats it during that time.

simon_or

jrawle said:

christmaslights said:

Different point of view here. I’ve been overpaying on my mortgage every month ever since I took it out 10 years ago.  Granted that for most of that time saving interest rates were so low that overpaying on the mortgage was absolutely the right thing to do. But even now when savings rates are higher than my fixed mortgage interest rate I’m going to continue to overpay every month for the two years that remain. Part of the reason is psychological. It is very satisfying and a great motivation to be able to see every month in your mortgage tracker spreadsheet (everyone should have one…) that you now own a bit more of your property and are paying the building society a bit less in interest.  But it is also a protection. I could save the money and resolve to use it to pay off the mortgage when the fixed term ends. But stuff happens in life and if a difficult situation did arise I might be tempted to use my savings to resolve it. No danger of any such backsliding if you’ve already made the payments. 

Just understand that you are wasting money by doing so. There are plenty of people complaining at the moment that they have to pay £100s per month extra due to increased mortgage rates, yet at the same time, some people think nothing of losing £1000s by overpaying rather than putting money into a savings account.

Spreadsheets are great, so why not put your "overpayments" into a dedicated, high interest savings account, and have an additional column in your spreadsheet for it that is subtracted from the amount outstanding? Then you can still have the satisfaction of seeing the total come down.

I can understand the psychological element; you just have to think about it in a cool and clear headed way. I only have a small mortgage remaining, and I calculated I could make around £140 over the year by saving instead of overpaying. Is it worth it? Wouldn't it be nicer to see the mortgage balance going down? But then I thought, it's £140, and all the things I could use £140 for. Free money!

As for self-discipline, someone who is making significant regular overpayments is already fairly disciplined, and I think the majority of people in that situation are unlikely to dip into their overpayments savings account. That scenario is just used as an excuse by people who want to justify to themselves overpaying for the psychological reason discussed above.

As for "stuff happens in life", what will you do when it happens and you have no savings because you've made overpayments? Either you are completely and utterly stuffed, or (more likely) you will manage in exactly the way you would if you had your overpayment money in a savings account, without touching the overpayment money.

This is a good point.

Yes, for some people it might be better to overpay as they may not have the discipline (only needed for a few years until the current low rate fix ends) to maintain savings or get large enough satisfaction from seeing their mortgage balance go down to compensate for the loss of interest. And there's nothing wrong with that, both reasons are valid.

But from a money-saving point of view, if you're on a low interest rate, with the current rates of interest on offer, for most people it's a no brainer to leave the mortgage untouched and furiously save until it's time to remortgage. Once in a few years you remortgage to a rate that's in sync with the savings rate at the time, then you revert to overpaying as the gains will be marginal at that point.

moneysaver1978

christmaslights said:

There are two columns in my spreadsheet related to my regular monthly mortgage payment; how much of it goes on interest and how much goes on repaying the capital.  Watching the former reduce and the latter increase significantly more quickly than it would do if I were not making overpayments is very satisfying. 

But in the end it's finding the method that works best for you to secure your home.   If someone can afford it, I'd always advise taking a balanced approach combining savings and overpayments. For me, the feeling of security I get from knowing that every month I own more of my home than I would otherwise do if I were not making regular overpayments is worth the possible loss of a few pounds.   

Love spreadsheets! Would you mind sharing your spreadsheet (remove figures, account details, etc.) or at least a format so I can visualise?

christmaslights

moneysaver1978 said:

Love spreadsheets! Would you mind sharing your spreadsheet (remove figures, account details, etc.) or at least a format so I can visualise?

I’m sure there are more interesting spreadsheets around, but this is a bit of mine (figures have been changed).  The calculated amounts don’t match the statements exactly because in the real world interest is charged daily and payments are applied at different times, but it gave me an overview of how things were getting on. And watching how the capital portion of my monthly mortgage payment was increasing certainly motivated me to keep going with the overpayments. 

Newbie_John

Also worth considering that mortgages last decades, during that time you may be on 1% but you may be on 7%, and even when you're on 3% the savings rates could be 1% or 7%.
So there are certain times when it makes more sense to save, keep overpaying monthly, or save and overpay with lump sum.
So if someone is now on 1% for another year, but been overpaying monthly for past 10 years they could find themselves that in a year time figures will flip over and they'll be on a mortgage with 7% and interest rates at 1% for next decade.. changing habit may not be worth the hassle (although short term financially it's a good choice).

But the more I think about this, the idea of never overpaying, saving for years, and then when our savings hit the amount owned - paying it off in full may actually be the best long term solution.

jrawle

Newbie_John said:

Also worth considering that mortgages last decades, during that time you may be on 1% but you may be on 7%, and even when you're on 3% the savings rates could be 1% or 7%.
[...]

The current situation is unusual. Banks usually have an inbuilt "house advantage" whereby the interest rates on loans and mortgages are higher than on savings. It's only because rates have rapidly risen, which means people with fixed deals are paying less on their mortgage than current savings rates, which makes it worthwhile stopping overpayments and saving instead. Of course, as soon as you have a new, higher mortgage rate, you use the savings you have accrued to pay off a chunk of your mortgage. You are then in almost the same position you'd have been if you had overpaid, except you'll be slightly better off.

As for "not worth the hassle", some people consider it not worth the hassle to switch phone, broadband, utility (in normal times) providers, pick a new mortgage deal instead of go onto the SVR, shop around for insurance each year,  etc., etc. You can save hassle by not doing any of those things, but waste a lot of money, which this forum is supposed to help you avoid. I don't really see why it's more of a hassle to put money into a savings account instead of overpaying a mortgage; compared to the things I just mentioned, it should be the easiest to do.

Gareth77

I think the general consensus here is to save in a savings and overpay at the end of the fixed term

I still may keep a chunk of savings

As if anything happens and you can't make a payment - thats can kick it all in to touch (no matter how many overpayments you have done)

christmaslights

Gareth77 said:

As if anything happens and you can't make a payment - thats can kick it all in to touch (no matter how many overpayments you have done)

I’ve not tried it myself, but some mortgage deals allow you to underpay on your mortgage if you have an overpayment reserve until that reserve is exhausted.