Mortgage — Overpay or not?

paperclap

Hi all,

This country's volatility scares me at the best of times... but now is even worse.

We're currently on a 5-year fixed term, at a rate of 1.56%. In around 20 months, that'll expire.

Total left is 21 years 4 months. God help me. Anyway.

When that 5-year fixed term ends, I'm going to assume mortgage rates won't have fallen all that much. Presuming they'll sit at around 5%.

Right now, we're trying to save all we can. Do we (or do we not) overpay as much as we can now, in a bid to save money when we do need to take out another term?

Thanks.

MorningcoffeeIV

You don't overpay on a rate like that.

Put your money in a 5%+ savings account.

Newbie_John

mortgage% > savings% = overpay
mortgage% < savings% = save

If you save for another 10+ years you may find yourself being able to pay off the entire mortgage in one go - achieving what overpayment wit reduced term does.
If you find yourself unable to pay monthly payments - you have a pot to reach for money - achieving what overpayment with reduced payment does.  

paperclap

Well I'm not sure I could pay off the mortgage in one lump sum (as a lot of mortgage lenders restrict overpayments to 10% of the remaining mortgage per year), but I see your points

I'll have a hunt for the right savings account, me thinks!

MWT

paperclap said:

Well I'm not sure I could pay off the mortgage in one lump sum (as a lot of mortgage lenders restrict overpayments to 10% of the remaining mortgage per year), but I see your points

That restriction usually only applies while you are in a fixed rate period, once that ends you can make lump sum repayments without fear of an ERC.

Newbie_John

MWT said:

paperclap said:

Well I'm not sure I could pay off the mortgage in one lump sum (as a lot of mortgage lenders restrict overpayments to 10% of the remaining mortgage per year), but I see your points

That restriction usually only applies while you are in a fixed rate period, once that ends you can make lump sum repayments without fear of an ERC.

Exactly that, in the future when your savings will be close to your remaining balance, just wait till your fix term ends - and pay off the mortgage 

WittyUserName

Great advice, but they assume rational behaviour, and as human beings we are very often irrational. 

In your shoes @paperclap I would conduct an honest assessment of my relationship with money - do I control it, or does it control me?

If I have a solid history of managing money with restraint and self-discipline, I’ll put the overpayments in an interest-paying savings account as advised. 

If I’m likely to dip into the savings while rationalising that “I’ll replace it later” I’ll overpay so I’m certain the money does the job I’ve allocated to it. 

If I’m somewhere in the middle and / or need some flex to access the money, then I’d go with a savings instrument that comes with barriers eg a fixed term of no access, to ensure I can’t dip into it frivolously.

What you don’t want, is for your overpayment budget to end up serving as an emergency fund…and then when your current mortgage fix is up, you’re in a bit of a bind.