Mortgage Overpayments - reduce debt vs reduce term (Martin Lewis podcast)

jrawle

Newbie_John said:

jrawle said:

Newbie_John said:

jrawle said:

But if you managed to save it in 4% saving account you would actually be £5k better reducing the rate, if at 2% you would be £5k worse.

What you describe isn't reallty a real world example. However, sticking with it, if you had a mortgage rate of 3% for the term and a savings account paying 4%, you'd be better off not overpaying at all, and putting the £50k lump sum into the savings accuont. Even if you have to pay basic rate tax on it, you'd still be winning.

I only talked about initial one-off overpayment - later in time using the saved £277 monthly - if mortgage rate is 3% and saving account pays 4% it's better to save - meaning that the initial decision of overpaying many years earlier with reduced rate was better than reduced term - contradicting the podcast.

I know what point you were making. But it's still the case that your hypothetical person with £50k would be better to put it straight into a savings account at 4%, rather than paying £50k off their 3% mortgage then putting £277 from reduced mortgage payments into a 4% account each month. In other words, you should neither overpay the mortgage and reduce the term, nor overpay and reduce monthly payments.

You're right with "don't overpay" approach it works for typical person, but not higher tax payers.

For 20% tax payer, £50k on 4% makes £2000 interest, after £200 tax = £1800 - so still decent 3.6%.
For 40% tax payer, £50k on 4% makes £2000 interest, after £600 tax = £1400 - so just 2.8%..

Obviously the rule about not overpaying only works when you can get a net interest rate on savings that is higher than your mortgage rate. Higher rate taxpayers can find a savings account with a slightly higher interest rate, or save in an ISA.

We are actually in pretty unusual times, where many people can be better off saving rather than overpaying, due to the large number of people on cheap fixed mortgage rates in a time of soaring rates on savings. For most of the time I've had a mortgage, I've made large overpayments because that made financial sense. It's only in the past year or so the situation has changed.

Simple rule: if you can put your money into a savings account with the net (after tax) rate higher than your mortgage rate, you should do so rather than overpay.

PixelPound

Gareth77 said:

OK thanks - I think I could save £1500 a month if I was very discipline.

The mortage says I can overpay 10% per CALENDAR YEAR - Mort is at 350K now, will be at 280K when the fixed finishes in 3 years time.

So it feels like I should do a savings account and make an over payment EVERY DECEMBER?

What I am confused about is - when I overpay do I pay of the loan or reduce the term? Ultimately I don't want my payments to shoot up in 3 years time. But from the above it sounds like I'll save more money reducing the term.  

Also when logging into Santander to do an overpayment I don't see the option to reduce payment vs reduce term?

Have you asked your bank what they do when you overpay? Nationwide just says how much overpayment are at. If when my fix runs out as my balance is lower due to overpayment, I can choose a new fix and shorten the term otherwise the monthly installment is lower.

Overpaying means you pay less in interest. As interest is daily over paying every month saves more than once a year. So it depends on the interest rates of mortgage and savings. 

If mortgage is higher stick £1500 every month, you are overpaying less than 10% per year. If savings higher, save and overpay lump sum in 2nd and 3rd year. 

The caveat is tax on your savings, how much and what rate.