Advice gratefully received

DBPHJ

Scenario-I have a new 10 year £60,000 mortgage (Which is fixed for the first five years) I will definitively pay off the outstanding balance at the end of this fixed rate five year period. I Have been advised to overpay this mortgage by up to 20% each year, but I am thinking is there any point doing this as I definitely plan to pay off the mortgage after the five year fixed period? Surely this just ties up any extra money I have for at least 5 years, and it won’t save me any money in the long run as the first five years are at a fixed interest rate. Any advice gratefully received. All very confusing Thank you 

Newbie_John

Things to consider:
1) Normally you are limited to how much you can overpay by 10% a year, so only up to £6k in first year, then less and less.
2) When you finish your 5 year fixed and move onto variable rate you can overpay as much as you want.
3) Taxes, you only allowed to have up to £1k tax free interests per year (20% tax payer) or £500 (40% tax payer)

What rate is your fixed mortgage? More than 6%? then it's probably better to overpay the max allowed each year, then save the rest and pay off fully at the end of the fix. If you've fixed at lower rate let's say 4% then better to save for the period of 5 years and pay off in full when you are allowed to do so.  

Also, the first 5 years are fixed but each overpayment will either reduce how much you pay monthly or it will reduce your 10 years term.

Based on your example £60k mortgage, 10 years, let's say 5% interest rate - you pay £636 monthly:
a) if you overpay £6k and reduce term - your mortgage will be shorter - 8 years and 9 months
b) if you overpay £6k and reduce monthly payments - you'll be paying £573 monthly saving £63 every month.

Look at different scenarios here:
https://www.natwest.com/mortgages/mortgage-calculators/mortgage-overpayment-tool.html

gazfocus

I definitely wouldn't pay 20% each year as you'll be hit with a penalty from your mortgage lender for anything overpaying more than 10% of your remaining balance.

The best thing to do (or what I'd do at least) would be to not overpay at all until your fixed term is up and instead put the money in a high interest savings account, then pay the mortgage off in one lump sum at the end of your fixed term.

amnblog

Let us assume you pay off the extra ao that your mortgage balance each year is 20% down = £48,000, £38,400, £30,720, £24,576.

You are now paying mortgage interest on £48,000 rather than £60,000.

The following year on £38,400 rather than £60,000

The following year on £30,720 rather than £60,000

etc

You can see you make a major saving in interest costs.

Kerreh

Just to touch on the comments around 10% vs 20% - entirely depends on the agreement offered. I'm switching product with NatWest at the end of the month - current deal states up to 10% overpayment allowed annually, new deal states 20% overpayment allowed annually.

DBPHJ

Hi thanks for your reply. I am allowed to Overpay by 20%, but I guess my only real question is, is there any point at all overpaying anything in my five year fixed rate period if I definitely plan to then pay back the outstanding balance after five years even though it is a 10 year mortgage. Surely, by overpaying, I won’t save a penny because these overpayments are not going to reduce my interest payments as it is fixed for five years, and then I definitely plan to pay it off. Still confused!

DBPHJ

amnblog said:

Let us assume you pay off the extra ao that your mortgage balance each year is 20% down = £48,000, £38,400, £30,720, £24,576.

You are now paying mortgage interest on £48,000 rather than £60,000.

The following year on £38,400 rather than £60,000

The following year on £30,720 rather than £60,000

etc

You can see you make a major saving in interest costs.

Thanks so much for your reply. I am still confused! I don’t see how overpaying in the first five years can reduce my payments because the mortgage is 5 years fixed, so my payments remain the same for five years! And then I will completely pay off the mortgage once the fixed deal ends. Surely I am better saving the money in a separate account? Sorry, this is all very new to me

DBPHJ

gazfocus said:

I definitely wouldn't pay 20% each year as you'll be hit with a penalty from your mortgage lender for anything overpaying more than 10% of your remaining balance.

The best thing to do (or what I'd do at least) would be to not overpay at all until your fixed term is up and instead put the money in a high interest savings account, then pay the mortgage off in one lump sum at the end of your fixed term.

Hi there, thanks so much for your reply.

It’s a NatWest mortgage and I am allowed to overpay by 20% a year but my real question is is there any point at all doing this? I don’t see how this will reduce my payments when they are fixed for five years and then I am going to completely pay off the outstanding balance after Five years once the fixed rate has finished

Surely it will just mean that NatWest will have my extra money for five years and it won’t help me at all. I agree with you, surely putting any spare money I have for the next five years in a high rate interest account or premium bonds will be the best idea then after five years I can use it to completely pay off my mortgage. Still very confused

kingstreet

The rate is fixed for five years, not the payments.

The payments will be based on what you owe, the remaining term and the rate.

Newbie_John

DBPHJ said:

gazfocus said:

I definitely wouldn't pay 20% each year as you'll be hit with a penalty from your mortgage lender for anything overpaying more than 10% of your remaining balance.

The best thing to do (or what I'd do at least) would be to not overpay at all until your fixed term is up and instead put the money in a high interest savings account, then pay the mortgage off in one lump sum at the end of your fixed term.

Hi there, thanks so much for your reply.

It’s a NatWest mortgage and I am allowed to overpay by 20% a year but my real question is is there any point at all doing this? I don’t see how this will reduce my payments when they are fixed for five years and then I am going to completely pay off the outstanding balance after Five years once the fixed rate has finished

Surely it will just mean that NatWest will have my extra money for five years and it won’t help me at all. I agree with you, surely putting any spare money I have for the next five years in a high rate interest account or premium bonds will be the best idea then after five years I can use it to completely pay off my mortgage. Still very confused

You need to put more numbers:
-what is your 5 years fixed interest rate?
-what tax do you pay - 20/40/45% ?

If it's worth overpaying now really depends on the above answers.

Sarah1Mitty2

gazfocus said:

I definitely wouldn't pay 20% each year as you'll be hit with a penalty from your mortgage lender for anything overpaying more than 10% of your remaining balance.

The best thing to do (or what I'd do at least) would be to not overpay at all until your fixed term is up and instead put the money in a high interest savings account, then pay the mortgage off in one lump sum at the end of your fixed term.

This is probably the best thing to do.