Question about the timing of a lump sum mortgage overpayment

DanUK1

Hi all,

I have a question about overpaying a lump sum on my mortgage. I've done this in previous years but had a specific question that just occurred to me. I'm on a Halifax mortgage and the 10% overpayment allowance has just reset (it resets 1st January every year). I'm about to pay the full 10% I'm allowed to pay without incurring charges and like with previous years, I'd ring up Halifax after and ask that this overpayment goes towards reducing the term (rather than just reducing the monthly repayment amount, which is what automatically happens). This will in all likelihood knock off another year off the remaining term of my mortgage while keeping my monthly repayment amount the same.

So my question is - rather than make this overpayment now in January, doesn't it make more sense to wait until the end of the year to make the overpayment? I figured that if I may the lump sum overpayment now (just over 11k), then that money is gone. However if I keep hold of that money until December, I can continue to make interest off that money in a savings account.

Given that I'm using the overpayment to reduce the term of the mortgage, I thought that this will therefore just benefit me in the future (i.e. the mortgage will come to an end sooner). Or am I missing something to do with interest that means making the overpayment as early as possible this year makes more sense?

If helpful when answering me, I have savings that have already exceeded the personal savings allowance (i.e. I pay tax on interest), which is why I'm eager to use some of my savings to pay off the mortgage sooner.

MorningcoffeeIV

It comes down to which is more financially beneficial - if you can earn more in savings than you're paying on the mortgage, keep it in savings until that picture changes.

RobfromCornwall

Which is higher: the interest rate of the savings account the 11k is in, or the interest rate of the mortgage?  That will tell you where the best place is for the money. 

DanUK1

The savings account is 5.2%. Specifically though, is there any real advantage to reducing the term of a mortgage in January versus December? Perhaps it's my misunderstanding, but I thought by reducing my mortgage term by a year that this was just saving me future interest (i.e. because my mortgage will end a year earlier in nearly 10 years time, I'll be saving on future interest rather than saving on interest this year). Am I wrong on this?

DanUK1

Oh, and the mortgage is 4.75%, but I am past the personal savings allowance so I pay tax on interest.

RobfromCornwall

The timing makes a difference insofar as the more money you have in savings for longer the more interest you will earn.  Conversely, the less money you owe on your mortgage, the less interest you will pay. 

You will earn ~£572 (~£457 after tax) a year in interest on 11k at 5.2%
You will pay ~£522 less a year in interest in that were paid into your mortgage at 4.75%

So, it seems to make sense to put that 11k into your mortgage ASAP, but that might depend on a few things, including (but not limited to):
- will you still have plenty of cash for emergencies
- the likelihood of savings rates increasing (unlikely now in my view)
- whether you plan to move/remortgage and the need for cash/where this puts you in terms of LTV etc

To answer the question you began with, the sooner that money is in your mortgage account, the sooner you will pay interest on a lower figure. 

DanUK1

RobfromCornwall said:

The timing makes a difference insofar as the more money you have in savings for longer the more interest you will earn.  Conversely, the less money you owe on your mortgage, the less interest you will pay. 

You will earn ~£572 (~£457 after tax) a year in interest on 11k at 5.2%
You will pay ~£522 less a year in interest in that were paid into your mortgage at 4.75%

So, it seems to make sense to put that 11k into your mortgage ASAP, but that might depend on a few things, including (but not limited to):
- will you still have plenty of cash for emergencies
- the likelihood of savings rates increasing (unlikely now in my view)
- whether you plan to move/remortgage and the need for cash/where this puts you in terms of LTV etc

To answer the question you began with, the sooner that money is in your mortgage account, the sooner you will pay interest on a lower figure. 

Thank you! This answers my question perfectly.

BikingBud

DanUK1 said:

Hi all,

I have a question about overpaying a lump sum on my mortgage. I've done this in previous years but had a specific question that just occurred to me. I'm on a Halifax mortgage and the 10% overpayment allowance has just reset (it resets 1st January every year). I'm about to pay the full 10% I'm allowed to pay without incurring charges and like with previous years, I'd ring up Halifax after and ask that this overpayment goes towards reducing the term (rather than just reducing the monthly repayment amount, which is what automatically happens). This will in all likelihood knock off another year off the remaining term of my mortgage while keeping my monthly repayment amount the same.

So my question is - rather than make this overpayment now in January, doesn't it make more sense to wait until the end of the year to make the overpayment? I figured that if I may the lump sum overpayment now (just over 11k), then that money is gone. However if I keep hold of that money until December, I can continue to make interest off that money in a savings account.

Given that I'm using the overpayment to reduce the term of the mortgage, I thought that this will therefore just benefit me in the future (i.e. the mortgage will come to an end sooner). Or am I missing something to do with interest that means making the overpayment as early as possible this year makes more sense?

If helpful when answering me, I have savings that have already exceeded the personal savings allowance (i.e. I pay tax on interest), which is why I'm eager to use some of my savings to pay off the mortgage sooner.

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chanz4

sooner paid less pay