Mortgage vs Overpayment confusion

Gareth77

Hi

My mortgage is currently £331066 with 16 years left. It is fixed on 1.27% for the next 2 years.

If I can save £1500 a month - am I better off putting that in a 5% savings account and putting the saving off the mortgage in 2 years time, or should I be doing the overpayments directly to the mortgage each month?

When I do the calculator it says 

"We've calculated that you repay around £1,910 per month. If you regularly overpay £1,500, we estimate that by the time you clear the mortgage...

Overpayment saving:
(in interest alone)

£16,510

Debt cleared:

7 years and 5 months earlier

Total repayment:

£349,580"


which seems too good to be true??

Or what should I negotitate at the end of my 2 year fixed

BarelySentientAI

That doesn't seem too good to be true - £1500 is a massive overpayment on a £1900 scheduled payment.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Try that, and tick the "compare with savings" button.

Gareth77

Jesus - 

COMPARED TO SAVINGS

You would be £21,430 better off if you saved at 4% rather than overpaying the mortgage for the 8 years and 7 months it'd take.

This is because if you saved the money, after this time you would still have £163,160 to pay off to clear the mortgage, but you'd have £184,590 in savings, more than enough to clear the balance and still have £21,430 left over (this doesn't include any early repayment fees charged by your lender). Whereas if you had overpaid the mortgage you'd be mortgage free but wouldn't have anything left over.

Gareth77

actually, tax -> 

COMPARED TO SAVINGS

You would be £10,510 better off if you saved at 4% rather than overpaying the mortgage for the 8 years and 7 months it'd take.

This is because if you saved the money, after this time you would still have £163,160 to pay off to clear the mortgage, but you'd have £173,670 in savings, more than enough to clear the balance and still have £10,510 left over (this doesn't include any early repayment fees charged by your lender). Whereas if you had overpaid the mortgage you'd be mortgag

Newbie_John

1.27% for another 2 years and then 2%-8% after, really hard to predict how much you'll save, so I'll skip calculators 

If you overpay £18k that saves you £228 interest in the following year, if you put £18k to 5% savings account it creates £900. 

So as simple as that, when savings rates are higher - save, if things change - consider overpayment.

If in 10 years time you save enough you can always pay your mortgage of in full. 

Saving £18k a year is great to as it's within ISA limit so you don't need to worry about tax, if you're on 40% tax then youll save less than £900 (about £700).

BikingBud

Gareth77 said:

Hi

My mortgage is currently £331066 with 16 years left. It is fixed on 1.27% for the next 2 years.

If I can save £1500 a month - am I better off putting that in a 5% savings account and putting the saving off the mortgage in 2 years time, or should I be doing the overpayments directly to the mortgage each month?

When I do the calculator it says 

"We've calculated that you repay around £1,910 per month. If you regularly overpay £1,500, we estimate that by the time you clear the mortgage...

Overpayment saving:
(in interest alone)

£16,510

Debt cleared:

7 years and 5 months earlier

Total repayment:

£349,580"


which seems too good to be true??

Or what should I negotitate at the end of my 2 year fixed

Not quite sure what you have done here but the shortening seems excessive and the total repayment seems low considering 16 years left even @1.27%. I feel the illustrator does not accurately reflect reality as it assumes one standard interest rate over the repayment period and if you try to skew it for a shorter period it provides obviously corrupt answer.

Did you leave the interest rate at 1.27% for the remainder of the mortgage?

I work that out as £366015 over 16 years v £358981 if overpaying (24 mths of £1500 ) with 1.27% throughout but nether of those appear to match.

I have modelled with a follow on rate (after 24 months at 1.27%) of 4.5% 

For mortgage 1 I have used an overpayment of £1500 per month for 2 years and opted to keep the payment the same, although there is an uplift due to the increased 4.5% rate, hence new payment of £2036.26.

Mortgage 2 is leaving as is, giving an apparent saving of £13184 over the period of the mortgage.

Or to look at the other way, saving £1500 per month for 2 years @5%=


So £1780 in interest before any tax.

But to get the accurate illustration you then need to put this, £37778.88, into Mortgage 2 as a lump sum once your fixed rate period ends after 2 years:

Saving overall of £28.9k or roughly £16k more by saving the £1500 @5% for 24 months and then lump sum overpayment, also reducing the term to 13 yrs 7 mths.

Depending upon follow on rates maybe rinse and repeat, save to overpay or overpay directly if you still have excess funds.

Try the calculators here and play with the figures yourself. Index.html

These potential savings illustrations likely need to be adjusted to take into account your tax liabilities.

Gareth77

BikingBud said:

Gareth77 said:

Hi

My mortgage is currently £331066 with 16 years left. It is fixed on 1.27% for the next 2 years.

If I can save £1500 a month - am I better off putting that in a 5% savings account and putting the saving off the mortgage in 2 years time, or should I be doing the overpayments directly to the mortgage each month?

When I do the calculator it says 

"We've calculated that you repay around £1,910 per month. If you regularly overpay £1,500, we estimate that by the time you clear the mortgage...

Overpayment saving:
(in interest alone)

£16,510

Debt cleared:

7 years and 5 months earlier

Total repayment:

£349,580"


which seems too good to be true??

Or what should I negotitate at the end of my 2 year fixed

Not quite sure what you have done here but the shortening seems excessive and the total repayment seems low considering 16 years left even @1.27%. I feel the illustrator does not accurately reflect reality as it assumes one standard interest rate over the repayment period and if you try to skew it for a shorter period it provides obviously corrupt answer.

Did you leave the interest rate at 1.27% for the remainder of the mortgage?

I work that out as £366015 over 16 years v £358981 if overpaying (24 mths of £1500 ) with 1.27% throughout but nether of those appear to match.

I have modelled with a follow on rate (after 24 months at 1.27%) of 4.5% 

For mortgage 1 I have used an overpayment of £1500 per month for 2 years and opted to keep the payment the same, although there is an uplift due to the increased 4.5% rate, hence new payment of £2036.26.

Mortgage 2 is leaving as is, giving an apparent saving of £13184 over the period of the mortgage.

Or to look at the other way, saving £1500 per month for 2 years @5%=


So £1780 in interest before any tax.

But to get the accurate illustration you then need to put this, £37778.88, into Mortgage 2 as a lump sum once your fixed rate period ends after 2 years:

Saving overall of £28.9k or roughly £16k more by saving the £1500 @5% for 24 months and then lump sum overpayment, also reducing the term to 13 yrs 7 mths.

Depending upon follow on rates maybe rinse and repeat, save to overpay or overpay directly if you still have excess funds.

Try the calculators here and play with the figures yourself. Index.html

These potential savings illustrations likely need to be adjusted to take into account your tax liabilities.

Thank you so much for doing this - like I said, it seemed to be good to be true.

The 1.27% is only fixed for the next 2 years. After that I have to get a new mortgage, and on paper have 14 years left on it.  Does that make it clearer?

Gareth77

Also in 2 years my mortgage will be £280K (without doing any overpayments) - but my aim then is to reduce by a further 60K, after saving the "overpayments" in a 5% savings account