How does overpayment affect mortgage overpayments in future years?

ElmoTheCat

Ok, so I am trying to work out how much I can overpay my mortgage by. I have 21 years left on my mortgage and using the calculator on this site I can see that overpaying by what I can afford will reduce my term by just under 9 years.
But that is based on paying less than 10% of my balance based on the initial balance. But when I get to Year 9 of the repayments, the amount I have plugged into the calculator as my overpayment becomes more than 10% of the remaining balance, so presumably it will take me longer than 13 years to repay? 
Have I got that right, and if so, how do I work out how much longer it will take? 

My other thought is once I hit that point, putting the overpayment money in a savings account instead and waiting for the amount to be enough to pay off the remaining mortgage and any overpayment fees in a lump sum, but I can't work out how long that will take, either.

Can anyone give me a clue as to how to work these things out? I am super confused!
Thanks!

tacpot12

Typically, you will have an annual overpayment allowance of 10% of the outstanding balance (not the initial balance), so it is quite difficult to work out how quickly you can reduce your term. 

If you have access to a copy of Microsoft Excel, the Loan Amortization Schedule template can be used. There is a column where you can provide an Overpayment amount and you can set a formula so that this amount is 10% of the Ending Balance in the previous year. I've tried this and it turns a 25 year mortgage into a 12 year mortgage, irrespective of the amount you have borrowed or the interest rate.

To figure out the effect of you putting an extra amount of overpayment (beyond what the lender will allow) into a savings account and the effect of the interest on that account is harder, but you can do it using Excel. You would have to create a spreadsheet to calculate the growth of your savings due to interest and due to the money you are adding each month. I do this by having a column for the opening balance in the account, a column to the payments I make into the account, a column for the interest added, and then a closing balance column where I add the payments and interest to the opening balance. For the next period, I use the closing balance from the previous period as the opening balance from the next period. 

Once your savings amount is greater than the Ending Balance on the Loan Amortization Schedule, you can repay the mortgage in full. 

While it is good to have a plan to pay of 10% of the outstanding balance each year, your cicumstances can change, and so putting the money you afford to overpay (but can't pay due to the 10% limit) is a good idea as it means you still have access to it if needed. (It's a bit like a DIY Offset mortgage).

Newbie_John

You can always pay the 10% to saving accounts/ISAs etc. and when you have more saved than remaining balance you can pay off the mortgage in full (best if your fixed rate ends then you have no extra fees to pay).

Your 21 mortgage will have periods when savings rate are better than mortgage interest and vice versa - so really difficult to give one answer what's better.
Savings though allow you access money without need for remortgaging (if ever needed), and if roles really reverse - mortgage 10% and savings 1% you can do overpayments, unlike if it was the other way round - savings 10% and mortgage 1%.. 
Obviously you need to be strict with money and not deep in there if you want to go on holidays etc. as this will ruin the entire plan.

Also there are banks like First Direct that don't really have limits with how much you can overpay - just the fee if you pay your mortgage in full during fixed term.

penners324

Whats the fixed term of the mortgage? You could select a product at 1 of your remortgages that doesn't include an ERC charge or a product that allows more than 10% overpayment 

moonbramble

I set up a standing order instead of paying by direct debit on a variable rate rather than fixed mortgage and that had a double effect, I could set it to pay a little over what the direct debit amount would be set at and that was a regular way of bringing down the mortgage, because it also reduced the interest payments on my mortgage at the end of each year.  I also I knew how much I was paying each month.  At the end of the year the Bank would reduce the time, unless asked to reduce the capital off the mortgage bringing down not the length of time but the cost of the mortgage and interest payments.  I would still keep the repayments the same which added to the reduction over time.  After the first few years it left me in a position where I could also put money into an ISA. 

ElmoTheCat

Thank you, everyone, great advice on how to work it out and some food for thought about how to proceed.
Very much appreciated. 
I had forgotten about the mortgage interest changing - we've got £109000 on a 21 year term and at the beginning of 5 years fixed at 3.8% and I was working it out with the whole term at 3.8% which it most likely won't be, so I am definitely off in my initial rough estimation anyway. At least I can see I should be able to afford to pay it off more quickly than 21 years, even if it's not quite as quick as 9 years early!

BikingBud

ElmoTheCat said:

Thank you, everyone, great advice on how to work it out and some food for thought about how to proceed.
Very much appreciated. 
I had forgotten about the mortgage interest changing - we've got £109000 on a 21 year term and at the beginning of 5 years fixed at 3.8% and I was working it out with the whole term at 3.8% which it most likely won't be, so I am definitely off in my initial rough estimation anyway. At least I can see I should be able to afford to pay it off more quickly than 21 years, even if it's not quite as quick as 9 years early!

Try this:

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

You can fine tune the model to suit your own circumstances, set up Mortgage 1 as your current commitment and then change things on Mortgage2 such as set a fixed rate and follow on interest rates, overpayments (set the start year value *0.1) ad build this in every year to see where you might end up.

See this thread: https://forums.moneysavingexpert.com/discussion/comment/80530715#Comment_80530715