Overpaying your mortgage- is it worth it ?

Archerychick

Because the borrowing costs you less quite simply. But whether it makes sense to or not depends on what the mortgage rate is vs what you could earn in a savings account.

we took our mortgage out 11 years ago, on a 20 year term. Initially our rate was higher than we could get on a savings account so we overpaid the mortgage by a decent amount each month. Which in turn reduced the cost of our borrowing each month and grew the equity in the house quicker. We now have a silly low 1.49% rate for the next year and a bit, but we have savings accounts paying from 4.9 to up to 7%, so our overpayments now go into those accounts. At the end of our fixed rate deal we have enough saved to pay the whole lot off, 8 years early l. Those 8 years equates to a lot of interest being saved and financial freedom, and owning 100% equity in our home.

MissG80

If you need to sell in a crash, then the price of all property will have gone down, so you could sit and wait in current property or move to a new property and wait for prices to increase.

I wish I'd made more overpayments when interest rates were low, next time round!   

Habib2342

Point I am trying to make is it worth overpaying if you intend to sell in the short term and during a climate of falling prices and worsening economic climate . I can see its worth doing if you intend to stay in your property in the long term and am willing to ride out the bumps in the economic cycle but if you have relatively short term goals ( e.g wanting to move in 6-9 months ), then I think its best to keep the cash in a high interest savings account than having it tied up in property.  

BarelySentientAI

Habib2342 said:

Point I am trying to make is it worth overpaying if you intend to sell in the short term and during a climate of falling prices and worsening economic climate . I can see its worth doing if you intend to stay in your property in the long term and am willing to ride out the bumps in the economic cycle but if you have relatively short term goals ( e.g wanting to move in 6-9 months ), then I think its best to keep the cash in a high interest savings account than having it tied up in property.  

So the point was "buying an illiquid asset that you know will be worth less that you paid for it when you come to dispose is not the best idea".  Obviously.  Property is not a short-term risk-free investment vehicle.

jrawle

BarelySentientAI said:

Habib2342 said:

Point I am trying to make is it worth overpaying if you intend to sell in the short term and during a climate of falling prices and worsening economic climate . I can see its worth doing if you intend to stay in your property in the long term and am willing to ride out the bumps in the economic cycle but if you have relatively short term goals ( e.g wanting to move in 6-9 months ), then I think its best to keep the cash in a high interest savings account than having it tied up in property.  

So the point was "buying an illiquid asset that you know will be worth less that you paid for it when you come to dispose is not the best idea".  Obviously.  Property is not a short-term risk-free investment vehicle.

Surely the point is that the size of the mortgage, overpayments, etc. is independent of the concept of using a property as a short-term investment. If buying a property is a bad idea, the thing to do is not to buy it in the first place. Once you've bought it, you should seek to pay the least net interest that you can (either by overpaying, or saving in a higher rate account).

BarelySentientAI

jrawle said:

BarelySentientAI said:

Habib2342 said:

Point I am trying to make is it worth overpaying if you intend to sell in the short term and during a climate of falling prices and worsening economic climate . I can see its worth doing if you intend to stay in your property in the long term and am willing to ride out the bumps in the economic cycle but if you have relatively short term goals ( e.g wanting to move in 6-9 months ), then I think its best to keep the cash in a high interest savings account than having it tied up in property.  

So the point was "buying an illiquid asset that you know will be worth less that you paid for it when you come to dispose is not the best idea".  Obviously.  Property is not a short-term risk-free investment vehicle.

Surely the point is that the size of the mortgage, overpayments, etc. is independent of the concept of using a property as a short-term investment. If buying a property is a bad idea, the thing to do is not to buy it in the first place. Once you've bought it, you should seek to pay the least net interest that you can (either by overpaying, or saving in a higher rate account).

The actual point is that, yes.  The OP's point was not - as they have returned to clarify.

Croftys

Can I ask, if you have 100k saved, and 100k left on a 20 year mortgage that’s due a rate change, would the decision to pay off 100k be an easy one? 

Or would the saving- savvy people still plan to secure mortgage rates lower than savings rates, and keep the mortgage running? 

Maybe if we are investing in the future value of our property, using the saved money to get a buy-to-let on a second home might yield a greater return over the savings on interest on 100k?

BarelySentientAI

Croftys said:

Can I ask, if you have 100k saved, and 100k left on a 20 year mortgage that’s due a rate change, would the decision to pay off 100k be an easy one? 

Or would the saving- savvy people still plan to secure mortgage rates lower than savings rates, and keep the mortgage running? 

Maybe if we are investing in the future value of our property, using the saved money to get a buy-to-let on a second home might yield a greater return over the savings on interest on 100k?

For some people, the emotional benefit of paying off the mortgage makes the choice a no-brainer.

The financially best solution would be to get the best overall return - whether that's by avoiding interest on the mortgage, gaining more interest by putting the money elsewhere, or getting sufficient returns from other styles of investment (such as BTL property, or funds/shares/bonds....)

Each of the options have different ranges of possible return, different liquidity (how fast you can get your money out if you need it), and different risk profiles.  The savvy people would take account of their individual appetite for each of those concerns.

RelievedSheff

Croftys said:

Can I ask, if you have 100k saved, and 100k left on a 20 year mortgage that’s due a rate change, would the decision to pay off 100k be an easy one? 

Or would the saving- savvy people still plan to secure mortgage rates lower than savings rates, and keep the mortgage running? 

Maybe if we are investing in the future value of our property, using the saved money to get a buy-to-let on a second home might yield a greater return over the savings on interest on 100k?

In that situation we would most certainly pay off the mortgage.

Croftys

Great insight all, thanks for the replies. Certainly food for thought.