Overpaying Mortgage to Reduce Pot but Retain Borrowing Power

shoei

Morning,
We have been overpaying our mortgage by a significant amount (the overpayment is larger than the monthly repayment) each month since we moved to this mortgage 2 years ago.  We are on a 10 year fixed term at a good rate.

We are lucky to be in our forever home, have a good stable income and are in our late 30's with a mortgage of approx. 130k.

We would like to get to the end of the fixed term with a smaller mortgage but one that gives us borrowing power should we want to remortgage.

Does anyone know what the magic number would be?

Thanks

Hoenir

The magic number is whatever you need to achieve your desired onward purchase. 

BarelySentientAI

shoei said:

 gives us borrowing power should we want to remortgage.

You might need to explain what you mean by "borrowing power" before we can give you any sensible answers.

shoei

Thanks.  We'd originally planned to totally overpay the mortgage by the end of the 10 year period but we want to keep the option open should we wish to make significant home improvements (est cost £130k)

We were discussing this with friends who said that if we paid it off or had a very small debt, 20k, for example, this would make borrowing more challenging.

The house has an est value of 400k if this has any impact.

MWT

shoei said:

Morning,
We have been overpaying our mortgage by a significant amount (the overpayment is larger than the monthly repayment) each month since we moved to this mortgage 2 years ago.  We are on a 10 year fixed term at a good rate.

What rate are you on?

Depending how low it is, you might well have been better off ploughing the overpayments into savings accounts and thus retaining the flexibility to just use it for the home improvements...

Hoenir

shoei said:

We were discussing this with friends who said that if we paid it off or had a very small debt, 20k, for example, this would make borrowing more challenging.

In finance terms the logic would be the total reverse. The less you owe and the more security the lender has. The lower the risk in underwriting the advance. 

housebuyer143

Hoenir said:

shoei said:

We were discussing this with friends who said that if we paid it off or had a very small debt, 20k, for example, this would make borrowing more challenging.

In finance terms the logic would be the total reverse. The less you owe and the more security the lender has. The lower the risk in underwriting the advance. 

Apart from lots of levels lenders have minimum amounts they will lend such as £25k. 

10yr FX 2 years ago suggests you might be on a decent rate so potentially just put it in your savings, then you have total flexibility. It sounds great to pay off the mortgage but money in the house is essentially trapped there. 
I choose to offset mine and therefore I have the cash if I need it. 

shoei

Thanks - that's really useful, we'd not thought about putting it into savings!  We're on 2.35% 10 year fixed.

Altior

'no brainer' if you are financially disciplined, with a little bit of effort you can achieve close to 8% gross interest on circa £1K per month. I am on a similar favourable mortgage rate until late 2028 (overpaying when interest rates are where they are now would be an anathema to me), and that's exactly what I am doing. Of course you'll get to a point where you'll have maxed out all the toppy regular savings accounts, but then go for the next highest rate savings options. 

I also locked in a few 3-5 year cash bonds paying ^6% at the peak, keep an eye on these too. They aren't so good now, but still easily beat your mortgage rate, so it's a bit of a judgement call. My approach is to have a mix of easy access/regular saver and long term cash /cash ISA bonds. The theoretical risk with long term cash bonds is that we'll see another bounce in inflation and rates/inflation becomes higher than the rates you've locked in. This is why I hedge it somewhat.