Has anyone considered efficiency of overpayments?

winstonwonders

There is a bit of back story here, so bear with me a couple of minutes. We have a mortgage split in two parts due to moving house and porting part of the mortgage.

Both on fixed rates, but different rates and different terms remaining.

One with approx. 310 months remaining c.£140k at a rate of 3.28% fixed for another 36 months, then a second with approx. 224 months remaining c. £140k at a rate of 4.09% fixed for another 55 months.

We are starting to overpay our mortgage and I have done some forecasts on which to overpay first.

Logically, you would think that overpaying the portion with the highest rate would save the most in interest. Initially it does, but when you extend the overpayment past the end of the fixed period, the interest saved on the second mortgage is less than that saved on the first.

Building up the overpayment to a max total of £400, I have worked through a few scenarios:

- equal overpayment, fixed term remaining
- equal overpayment, 5 years, 10 years, life of the mortgage
- pay off 1 then 2, or 2 then 1.

There were clear winners on which to overpay first in terms of total interest saved (best was overpay mortgage 2 first then move on to mortgage 1).

However, I thought it would be interesting to work out for every £1 of overpayment, how much interest would I save. The clear winner above (i.e. mortgage 2 then 1, higher rate shorter term then lower rate longer term) only saved 46p in interest for every £1 of overpayment. An interest saving 'efficiency' if you like. The term on both mortgages reducing 8 years each.

The most 'efficient' with over payments over the remaining term was to pay mortgage 1 then mortgage 2 with 'efficiency' of 54p interest saved for every £1 of overpayment. Reducing the term on mortgage 1 by just less than 8 years and mortgage 2 by 4.6 years.

More interestingly, over paying both mortgages equally for 5 years resulted in an 'efficiency' of 94p in the £1 of interest saved vs. overpayment, and a reduction of 3 years and 2 years in term on mortgage 1 and 2 respectively.

At the end of all that, my questions are:

1. should one be bothered about the efficiency of the interest saved per £1 overpaid, is it important?
2. is there therefore a point of diminishing returns in overpaying a mortgage?
3. should I consider investing the overpayment instead of applying it to the mortgage?

Thanks in advance.

Bargainhunter30

Investing typically returns on average 7-8% per year (inflation reflected) so financially you would be better to invest.

Emotionally only you know the best option and you seem to understand the figures well...

winstonwonders

Thanks @Bargainhunter30

As you say is also an emotional decision as much as a logical one. I would like to be mortgage free and have that view that I truly own my house and not the bank!

Looking purely at the numbers, roughly speaking the current monthly interest on the mortgages is £885. To get that return in cash terms now I would need £137k on deposit at, say, 7.5% return.

My view is currently overpay 5 years, with nearly 1:1 return in terms of interest saved then switch to investing.

Probably over complicating it, but an interesting exercise for the grey matter! Also curious what others' views were.