Overpaying your mortgage- is it worth it ?

Habib2342

So I've been wondering what is the point of overpaying your mortgage. if you're fortunate enough to have spare cash around to put towards clearing what is most likely, the biggest debt most people will ever have, to me it seems pointless and a waste if your home's value is subject to the peaks and troughs of the economic cycle. For example, you've got spare cash , clear your mortgage now. Fine. 6 months later, you decide to sell, however the value of your property has gone down due to the local market and general economic indicators all down. So now , unless you need to move urgently, you have to wait until the next 'boom' period occurs and property prices increase..

BarelySentientAI

Paying less interest.

Nothing to do with the house price.

lr1277

You get the proportion of the value of the value of the mortgage against the value of the house down.

So you increase the equity in your house.

In 2008 after the financial crash, when property prices plummeted for many people the value of their mortgage was more than the value of their house. So they could not sell to pay off the mortgage unless they made up that difference. Not saying that will happen again, but those with low mortgages compared to their property values went through far less stress whether they needed to sell or not.

And yes pay less interest. And with the excess cash from the reduced interest payments, you could put this excess cash into savings/investments thereby making you more money.

Edited to add: you might need to sell because

you lost your job/income, especially in a economic downturn, so can no longer afford the mortgage.

your family situation/needs might change which migh be helped by moving house.

It will be a case of are you in negative equity as I described above and do you need to move now? If you can wait out the situation whilst making mortgage payments then that is one less stress inducer.

El_Torro

I don’t follow the logic in the original post. If you have a small mortgage then you can be more flexible when moving, either to a cheaper or more expensive house. You get more equity out of the property regardless of whether house prices have risen or fallen.

There are very good reasons not to overpay your mortgage. For example people who invest spare cash rather than putting it in the mortgage will be financially better off in the long run. Paying off the mortgage early doesn’t reduce your flexibility when moving though.

BarelySentientAI

El_Torro said:

I don’t follow the logic in the original post. If you have a small mortgage then you can be more flexible when moving, either to a cheaper or more expensive house. You get more equity out of the property regardless of whether house prices have risen or fallen.

There are very good reasons not to overpay your mortgage. For example people who invest spare cash rather than putting it in the mortgage will be financially better off in the long run. Paying off the mortgage early doesn’t reduce your flexibility when moving though.

People who invest spare cash rather than putting it in the mortgage might be financially better off in the long run, if returns from investment performance are greater than the interest that could have been avoided on the mortgage.  Often true, particularly over a long enough time frame, but investments have risk and there is no guarantee of any level of return.

Hoenir

With mortgage terms getting longer and longer. For many extending into retirement. Overpaying makes financially sense. 

Then there's job loss and relationshp breakdown to consider. In both scenario's owing less has a benefit. 

Think of overpaying the mortgage as a form of insurance. What ever the final outcome it's a win win no lose situation. 

HampshireH

We have just started overpaying ours. Eventually we need to move but interest rates mean any mortgage would be double our current re-payments. So we decided to put our money off the mortgage, boost the equity so we need a smaller mortgage when we move due to the higher interest rates which it will come with.

Newbie_John

Two cases to consider:
1) overpaying but not ending up paying off - you save on mortgage interest, but lose on savings interest - so not many benefits really unless there is a big difference. 
2) overpaying and paying mortgage in full - all the restrictions from mortgage are now gone - you can rent your house, you don't need to buy house insurance.. Also much easier to plan future as your main monthly cost is now gone. Easier to sell the house - no need to wait for fixed term to finish etc.

Also some people say that it prevents them from dipping into savings to buy not-so necessary items.

Tucosalamanca

When interest rates were near zero (last decade or so), it made very little sense to pay off debt, as the loan was almost free of charge.

Now, when we have mortgage rates at 5% or higher, you can argue a good case for paying off debt.

The best savings accounts *might* pay marginally higher rates, investing *might* offer better returns but it's certainly not without risk.

Personally, the potential profits from investing (profits in excess of mortgage interest) are no longer attractive enough for me to warrant the risk. Mortgage rates are the most expensive borrowing I have, it makes sense to get this debt reduced as quickly as possible (particularly in my situation, where the mortgage is nearly paid off).

SkyeD

I made savvy annual overpayments for a number of years, always at the start of the mortgage year, and went in and paid off the balance yesterday.  Overpayments reduced the interest, and shortened the term, and in a couple of cases when it was prudent for me to do so, it reduced the contractual monthly payment.  What's not to like about that? 
It was a mortgage for 11 years, fixed for 10, and paid off in 5 with a very low ERC (i.e. less than £50).
It feel great to be mortgage free

jrawle

Newbie_John said:
2) overpaying and paying mortgage in full - all the restrictions from mortgage are now gone - you can rent your house, you don't need to buy house insurance.. Also much easier to plan future as your main monthly cost is now gone. Easier to sell the house - no need to wait for fixed term to finish etc.

Then when your house burns down, you set up a GoFundMe page and expect other people to bail you out.