How to Calculate Overpayment benefit

odgeuk
odgeuk Posts: 19
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edited 15 January at 12:17PM in Mortgages & endowments
One for the Financial experts. I'm not sure how to calculate which of these two options saves me the most money.

Mortgage balance: 132,612.20
Remaining Term: 18yrs 6mnths
Current Interest Rate: 4.14%

I have £11,000 available to overpay in a lump sum (keeping the monthly payments the same).

The £11,000 is in a Cash ISA which will earn me £484, if I keep the money in it for another 5mths (thus completing the first year of the ISA and getting 4.4%).

How can I work out if the Mortgage interest I could save (also considering the adjustment to the capital / interest ratio) would be more or less than £484, over that 5mnths?



Comments

  • Hoenir
    Hoenir Posts: 1,239
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    Your ISA is earning a very high rate of interest if it's £484 earnt over the next 5 months. Somethings not right. 

    £484 is a rate of 4.4% on an annualised basis. Higher than you are paying on the mortgage. For the moment you are better off leaving the money in the  ISA. 
  • odgeuk
    odgeuk Posts: 19
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    edited 15 January at 12:19PM
    Hoenir said:
    Your ISA is earning a very high rate of interest if it's £484 earnt over the next 5 months. Somethings not right. 

    £484 is a rate of 4.4% on an annualised basis. Higher than you are paying on the mortgage. For the moment you are better off leaving the money in the  ISA. 
    Sorry, I wasn't clear. It's 5mths till I complete the first year, at 4.4% interest (paid annually, 90 days interest lost if withdrawing before the 12 mnths). Leeds Building Society.

    Although the savings rate is higher than my mortage rate, there is also the factor that, because monthly mortage interest is calculated on the entire Capital remaining,  I'd not only have reduced my Mortgage Lump sum, but also more of my monthly repayment is attacking the Capital instead of going into interest. That's the maths I can't figure out.
  • BikingBud
    BikingBud Posts: 1,649
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    edited 15 January at 12:42PM
     Try here for yourself calcs:
    http://www.locostfireblade.co.uk/spreadsheet/Index.html  

    Set up Mortgage 1 as your current agreement and adjust Mortgage 2 to assess any changes, monthly or annual repayments, ERCs etc 

    If you paid the 11k off now:


    If you paid the 11K off in May:

    These show the saving that is banked by overpaying, in Jan and in May. They show a saving of over 11k in interest and reduces the term by about 2 years.

    But bear in mind the interest, or gain you may get from other sources may be better, it is not only the £484 this year but that might compound up to give you a greater figure, £11k @5% for 18 years might return £27.8k.

    Other routes might also work but you need to determine what's best for your circumstances and your risk appetite.
    Mortgage: £200,000 (Sep 2021)                                      Initial MF date: Sep 2031 

    Int Rate:
    1.19% fixed until Nov 2026 (8.5% follow on rate?)
    Cap+Int Repaid: £65100 (32%)  £80,704 (40%) £82468 (40.48%)£89507 (43%) £91267 (44.7%) £98,309 (48.02%)

    Target MF date: Nov 2026  Current MF date: Dec 2029,  Nov 2029, Apr 2029, May 2029                                    
    Target Int Saving: £25,561 Current Int Saved: £12,350,   £13,421,  £16,991, £17,989, £18,699, £20,495

    Overpayments suspended and surplus cash currently being diverted to high interest savings.
  • Hoenir
    Hoenir Posts: 1,239
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    edited 15 January at 12:35PM
    odgeuk said:
    Hoenir said:
    Your ISA is earning a very high rate of interest if it's £484 earnt over the next 5 months. Somethings not right. 

    £484 is a rate of 4.4% on an annualised basis. Higher than you are paying on the mortgage. For the moment you are better off leaving the money in the  ISA. 
    Sorry, I wasn't clear. It's 5mths till I complete the first year, at 4.4% interest (paid annually, 90 days interest lost if withdrawing before the 12 mnths). Leeds Building Society.


    The 90 day penalty makes withdrawing the money now a non starter. 
  • odgeuk
    odgeuk Posts: 19
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    I've done some Calcs, working out interest monthly, with and without overpayment, and adjusting each month to reflect that the capital is reduced by the repayment the month before.

    If I've done my maths right, overpaying right away would save me £191 in interest over the next 5mnths and reduce my borrowed capital by £1,754.87 at the end of the 5mnths.

    Keeping the money in the ISA till it hits it's anniversary (5mnths more) would earn me £484 and my Mortgage Capital Borrowing would have been reduced by £1,601.86 in that time. However, I'd then have £484 extra to overpay, bringing capital reduction to £2,085.86

    So I guess it is as simple as "if your savings rate is higher than your mortgage rate, then it's better to save", but I suspect that this balance changes over longer time periods, what with the complexities of the Capital / Interest ratio changing as the Mortgage Loan is repaid.


  • odgeuk
    odgeuk Posts: 19
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    BikingBud said:
     Try here for yourself calcs:
    http://www.locostfireblade.co.uk/spreadsheet/Index.html  

    Set up Mortgage 1 as your current agreement and adjust Mortgage 2 to assess any changes, monthly or annual repayments, ERCs etc 

    If you paid the 11k off now:


    If you paid the 11K off in May:

    These show the saving that is banked by overpaying, in Jan and in May. They show a saving of over 11k in interest and reduces the term by about 2 years.

    But bear in mind the interest, or gain you may get from other sources may be better, it is not only the £484 this year but that might compound up to give you a greater figure, £11k @5% for 18 years might return £27.8k.

    Other routes might also work but you need to determine what's best for your circumstances and your risk appetite.
    Ooh, this is brilliant. Thanks! Just digesting the data now...

  • BikingBud
    BikingBud Posts: 1,649
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    Hoenir said:
    odgeuk said:
    Hoenir said:
    Your ISA is earning a very high rate of interest if it's £484 earnt over the next 5 months. Somethings not right. 

    £484 is a rate of 4.4% on an annualised basis. Higher than you are paying on the mortgage. For the moment you are better off leaving the money in the  ISA. 
    Sorry, I wasn't clear. It's 5mths till I complete the first year, at 4.4% interest (paid annually, 90 days interest lost if withdrawing before the 12 mnths). Leeds Building Society.


    The 90 day penalty makes withdrawing the money now a non starter. 
    I would not withdraw not but see how ISA rates pan out for next years fixed rates and decide then.

    Look for compound interest calculators and use something like this 


    and if the year on year increase is better than the Int Paid between M1 and M2, from the comparison sheet on the linked excel, then saving is better, before other things considered:

    Mortgage: £200,000 (Sep 2021)                                      Initial MF date: Sep 2031 

    Int Rate:
    1.19% fixed until Nov 2026 (8.5% follow on rate?)
    Cap+Int Repaid: £65100 (32%)  £80,704 (40%) £82468 (40.48%)£89507 (43%) £91267 (44.7%) £98,309 (48.02%)

    Target MF date: Nov 2026  Current MF date: Dec 2029,  Nov 2029, Apr 2029, May 2029                                    
    Target Int Saving: £25,561 Current Int Saved: £12,350,   £13,421,  £16,991, £17,989, £18,699, £20,495

    Overpayments suspended and surplus cash currently being diverted to high interest savings.
  • odgeuk
    odgeuk Posts: 19
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    BikingBud said:
    Hoenir said:
    odgeuk said:
    Hoenir said:
    Your ISA is earning a very high rate of interest if it's £484 earnt over the next 5 months. Somethings not right. 

    £484 is a rate of 4.4% on an annualised basis. Higher than you are paying on the mortgage. For the moment you are better off leaving the money in the  ISA. 
    Sorry, I wasn't clear. It's 5mths till I complete the first year, at 4.4% interest (paid annually, 90 days interest lost if withdrawing before the 12 mnths). Leeds Building Society.


    The 90 day penalty makes withdrawing the money now a non starter. 
    I would not withdraw not but see how ISA rates pan out for next years fixed rates and decide then.

    Look for compound interest calculators and use something like this 


    and if the year on year increase is better than the Int Paid between M1 and M2, from the comparison sheet on the linked excel, then saving is better, before other things considered:

    That 4.14% is actually my 'New' Rate, to start in 2 weeks time. I was on 2.09% before! Some speculation that interest rates will be cut a few times over the next 24mnths, so tempting not to lock in for too long, but then 2.09% was an anomaly I think. Anything around 4% feels like it might be the new normal for a few years.
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