Mortgage overpayment

kerry1986

We are in the process of moving house 

Our new mortgage will be approximately (haven't secured a deal with a lender yet) £1,200 per month - £210k borrowed, 4.3% This is affordable for us and eventually we will pay it off early. 

However in the short term I have been considering whether the first few overpayments could be used to reduce our monthly payment then we would then apply them to the capital.

Eg some lenders if you pay £1,000 they will reduce the monthly payment.  

So I'm thinking we have £5,000 in savings that we could over pay, monthly one overpayment of £1k monthly payment reduces, month two the same and so on.

At this point we would then overpay but have it go towards the capital.

My thoughts are:

1. This would give us a bit more disposable income to build our savings back up quit until emergency fund is sorted (I don't know how to work out how much it would go down by each time but that amount would go to EF)
2. As we are only reducing the monthly payments in the short term we will catch up overpaying and still pay less interest 

I'm not an expert, nor do I have the maths skills to figure out how to work this out so would welcome input from those who know more than me, have done this themselves.

Thank you! 

ian1246

It sounds feesible - however my big thought is there are a number of saving rates at 6% so rather than overpaying a 4.3% mortgage I'd be putting savings into those instead.

HOWEVER - this is only up to the point where the savings amount I earn each year is *just* under the tax-free savings allowance (£1000 for basic rate Tax payer, £500 for high rate payer). 

If your both basic rate Tax Payers, that means you can earn £2000 a year between you in interest, Tax free. 

That means I'd be building my savings up to in excess of £33,000 in your shoes - assuming an average 6% interest return.

3 Santander Edge accounts (1 each, 1 joint) will get you to £15,000 (£5,000 each) at 6%.

You can open a Natwest Digital Regular Saver each and put in £150 a month (£300 total a month) and gradually build up to £5000 in each, which is the max amount you get paid the 6.25% interest on (amount is paid on a monthly basis as well).

Throw into the mix other Regular Savers (First Direct - £300 a month at 7%, fixed for 12months) then you should comfortably be able to drip-feed your savings across Regular savers and achieve a return easily in excess of 4.3% and therefore be financially better off vs. Overpaying your mortgage.

The best bit? You'll have the saved £££ available in the event of an emergency, rather than stuck in the equity of your house.

If mortgage rates dip, you then have that capital available to move as required to maximise returns - if its in your house, whilst it may give a return of 4.3% initially, if on your next fix the mortgage rate is only 3% then all previous overpayment are effectively just giving you a 3% return.

On the flip-side, if rates dramatically climb there is nothing stopping an overpayment between fixes to bring the payments down.

Only thing is whether the overpayment will effect your loan to value ratio's I.e. 35% deposit vs. 40% and then what the difference will be on your monthly payments and how much that works out to on yearly savings + actual £££ value of the interest saved on the actual overpayment vs. The interest returned from savings.

Just my thoughts. Good luck!