Mortgage Monthly Overpayment vs Lump Sum vs Savings

Blue_Carbon

Hi everyone - could really do with your advice and help for me to understand how mortgage overpayments work. I'm currently on a fixed rate deal of 1.97% with just over 3yrs left on the deal. Now, my original plan was to save £300/month using First Direct's 7% regular saver and then transfer this after 12 months into my general cash ISA which has a good rate of 5%. The accumulating amount and interest in this account would then be more valuable than say, using that £300/month as a regular mortgage overpayment. After 2 years I would then have 10% of my outstanding mortgage balance in savings purely from the regular saver deposits and the interest to pay a large lump sum one-off payment of about £12,000.

However, on using some mortgage overpayment calculators today, I saw that it actually knocks more off my terms and saved interest by paying even just £100/month extra off my mortgage than paying a lump sum of £12,000.

I'm a bit confused about how this works - shouldn't monthly overpayments have the same impact as one large lump sum overpayment?

Also, some people suggest that if your savings rate of interest is higher than your mortgage rate of interest, then it is better to save than to overpay on your mortgage. How does this fit into things too?

Tiredbutdetermined

How much does your mortgage allow you to overpay each year?

My previous mortgage was 2.09% so I used savings and considered the savings to be offset mortgage payments during this time. My deal ended and the best rate I could get now was 4.79% so I am going to pay off my car and then go back to traditional overpayments balanced with offset savings as a safety net. 
It depends what your overpayment calculator was based on as to the effect of the overpayments. I keep my mortgage payment at a set amount each month so each direct debit is a regular overpayment and this brings my technical minimum payment down slightly each month but as my DD is set then I am overpaying by slightly more each month, over time this has more of an impact without being 'visible' to me

Blue_Carbon

Thanks for the reply - my mortgage allows me to pay off 10% of the outstanding balance each year

CanalBoatTime

You don’t say how much your outstanding balance is.  Does £12k represent more than the 10% allowed overpayment?  If so, you would be penalised for doing so.  You’d need to pay in two “mortgage years” (ie the anniversary of when you took out the mortgage)

vacheron

The calculator will probably be calculating the interest saved over the entire remaining term of the mortgage, which could be 20-30 years, whereas savings interest will consider the current year only. It may also assume that your mortgage reverts to its standard variable rate (SVR) once your promotional 1.97% interest rate expires.

Trust in the maths, if you have a mortgage of 2% and a savings account paying 2.5%, the higher number will always win providing you avoid any penalties and saving interest tax etc.