Savings vs morgage overpayments

Spir4

Hello,

I was looking into mortgage overpayments, and was wondering if there's a right time to do them.

For example,

My current monthly payments for my mortgage are fixed because I'm on a fix for a couple of years. Doing overpayments now reduces how much I owe the bank, but it won't reduce my monthly mortgage payments because they are fixed as long as my fixed term runs. Even though by doing overpayments I now owe them less, and hence there is also less interest to be paid.

So it's my understanding that I'd be better of putting any extra money in a savings account where I get some interest. And then when I'm due to remortgage again when my fix ends, do a massive overpayment with my savings (as long as it stays within the fee free allowance), and then get a potentially better deal because my LTV is lower.

Let's assume the interest rate on morgages and the rate on saving accounts are about the same when I'm supposed to remortgage. 

Does that make sense? Or am I missing something?

I used that Morgage Overpayment calculator on Moneysavingexpert, but that only gives you a comparison between either overpaying your mortgage or keeping that money on a savings account for the remainder of your full mortgage term. It also assumes the same rate for your mortgage and savings account for  your full morgage term, which is not realistic.

Thanks

BikingBud

Perhaps set this up for your current mortgage and tweak or adjust to continually keep track:

http://locostfireblade.co.uk/spreadsheet/Index.html

As discussed here:
https://forums.moneysavingexpert.com/discussion/1157173/my-excel-mortgage-spreadsheet

You can then manage and own your decisions. 

It is not exact as the general tool cannot replicate your lender's in house calculations but it is within £10 or .009% so close enough. You could replace the calcs with actuals as you get your mortgage statements but not worth it for the price of a bottle of wine.

Spir4

Thanks, but that doesn't really help me.
I just want to know if my theory is correct or not

Cheers!

jrawle

Spir4 said:

Hello,

I was looking into mortgage overpayments, and was wondering if there's a right time to do them.

For example,

My current monthly payments for my mortgage are fixed because I'm on a fix for a couple of years. Doing overpayments now reduces how much I owe the bank, but it won't reduce my monthly mortgage payments because they are fixed as long as my fixed term runs. Even though by doing overpayments I now owe them less, and hence there is also less interest to be paid.

So it's my understanding that I'd be better of putting any extra money in a savings account where I get some interest. And then when I'm due to remortgage again when my fix ends, do a massive overpayment with my savings (as long as it stays within the fee free allowance), and then get a potentially better deal because my LTV is lower.

Let's assume the interest rate on morgages and the rate on saving accounts are about the same when I'm supposed to remortgage. 

Does that make sense? Or am I missing something?

I used that Morgage Overpayment calculator on Moneysavingexpert, but that only gives you a comparison between either overpaying your mortgage or keeping that money on a savings account for the remainder of your full mortgage term. It also assumes the same rate for your mortgage and savings account for  your full morgage term, which is not realistic.

Thanks

You already have exactly the right idea. If your mortgage rate is lower than the interest rate you can get on savings, you should put the money into a savings account as you will be better off at the end of your fixed period. Once your fixed mortgage ends, make a lump sum payment. No need for a complicated calculation or spreadsheet; just look which number is higher (although do take tax into account if you will earn above the personal savings allowance, etc.)

Any new mortgage deal will have a much higher interest rate. It's unlikely you'll beat that with savings, so pay off as much of the mortgage as you are comfortable doing at that point. You just need to keep back enough "rainy day" savings for unforeseen expenses, etc. as you would normally.

Newbie_John

Nobody knows what the future brings, hence all this overpayment calculators are simplified - it kind of worked until mid 2022.

If your monthly payment doesn't reduce this means that you full mortgage terms is shortening, it's either way.

If your mortgage now is less than 4% then it's better to save.

When you get to the end of fixed term and rates are equal, then it's up to you what to do - the result will be the same if either continue to save or overpay. Things to consider are:
- savings tax implications
- how likely you are to touch the savings for anything else than mortgage
- how quickly would you like to be mortgage free

But there are three options:
-saving - you're building safety net in case something happens and get easy access to money
-overpay and reduce term (as you do now) - you're losing access to money but will be mortgage-free quicker
- overpay and reduce monthly payments - a bit of hybrid in between, paying less interest overall, and still saving some money monthly

Spir4

Thanks everyone.

So basically there's no point in overpaying your mortgage before your fix ends unless you're changing your mortgage (getting lower monthly payments or changing the term), which I assume you can't just do because the lender will have to do a whole new affordability check?

BikingBud

Spir4 said:

I used that Morgage Overpayment calculator on Moneysavingexpert, but that only gives you a comparison between either overpaying your mortgage or keeping that money on a savings account for the remainder of your full mortgage term. It also assumes the same rate for your mortgage and savings account for  your full morgage term, which is not realistic.

Thanks

Spir4 said:

Thanks, but that doesn't really help me.
I just want to know if my theory is correct or not

Cheers!

You complained that the calculators were simplistic, so I offered a better tool.

It's as helpful as you want it to be, if you don't bother quite clearly it won't be helpful   

Whilst your simple theory might be correct, you have not and cannot stipulate all the variables in a simple thread, hence I offered a tool that would provide the ability to understand and own your decisions.

• You can set the follow on rates and dates so you can see how your payments might increase when your fixed terms finishes. 
• You could add a table to show how a lump sum in a fixed rate would compound up to accrue when that fixed-rate period finishes, whilst also being aware if this might bring about a tax liability.
• You can also add a simple monthly saver with compound interest to see what lump sum you might be able to accrue when that fixed-rate period finishes, whilst also being aware if this might bring about a tax liability.
• You then decide if you want to commit this/these saving pots against the bubble that remains at the end of the fixed period
• Or leave as is and now commit those monthly saver funds to the increased payments the you would know from the step above that advises your changes in payment due to interest rate rises.
• You could set a manual affordability payment and see how that might push out you end date and increase you total amount payable.
• You could use it to verify the figures you might get on any offer and test the accuracy or compatibility with your budget.

All in the interest of teaching people to fish and all that otherwise you are the modern equivalent of taking potentially significant financial decisions based upon someone down the pub!

Best of luck hope it all goes well

Spir4

BikingBud said:

Spir4 said:

I used that Morgage Overpayment calculator on Moneysavingexpert, but that only gives you a comparison between either overpaying your mortgage or keeping that money on a savings account for the remainder of your full mortgage term. It also assumes the same rate for your mortgage and savings account for  your full morgage term, which is not realistic.

Thanks

Spir4 said:

Thanks, but that doesn't really help me.
I just want to know if my theory is correct or not

Cheers!

You complained that the calculators were simplistic, so I offered a better tool.

It's as helpful as you want it to be, if you don't bother quite clearly it won't be helpful   

Whilst your simple theory might be correct, you have not and cannot stipulate all the variables in a simple thread, hence I offered a tool that would provide the ability to understand and own your decisions.

• You can set the follow on rates and dates so you can see how your payments might increase when your fixed terms finishes. 
• You could add a table to show how a lump sum in a fixed rate would compound up to accrue when that fixed-rate period finishes, whilst also being aware if this might bring about a tax liability.
• You can also add a simple monthly saver with compound interest to see what lump sum you might be able to accrue when that fixed-rate period finishes, whilst also being aware if this might bring about a tax liability.
• You then decide if you want to commit this/these saving pots against the bubble that remains at the end of the fixed period
• Or leave as is and now commit those monthly saver funds to the increased payments the you would know from the step above that advises your changes in payment due to interest rate rises.
• You could set a manual affordability payment and see how that might push out you end date and increase you total amount payable.
• You could use it to verify the figures you might get on any offer and test the accuracy or compatibility with your budget.

All in the interest of teaching people to fish and all that otherwise you are the modern equivalent of taking potentially significant financial decisions based upon someone down the pub!

Best of luck hope it all goes well

Yeah apologies, my bad, I should have been more clear. The tool on Moneysavingexpert is too simplistic. The tool you suggested is way more interesting and detailed, but both tools don't give me an answer to my question.

Anyway, it's sorted now, thanks everyone!

dimbo61

Please remember that you can now pay TAX on the Interest you earn from your savings !
So consider the Overpayment option if you come close to earning £1000 a year from savings as a Basic rate tax payer and £500 if a higher rate tax payer.