Overpaying Newbie

plymothian

Hi,

I want to start overpaying on my mortgage, with the hope I can pay it off earlier than the 30 years predicted.
I just have a couple of questions:

1. When I go to make an overpayment with my lender it says I can either select to decrease “payments” or “balance”. Which is more effective?

2. Is it better to overpay (for example) £100 a month for a year, or put £100 into savings and pay £1200 plus the interest off as a lump sum after a year?

Thanks for your help

BridgetTheCat

You can run all these calculations using the mortgage overpayment calculator under the tools menu on this site. It also lets you compare overpayments with savings over the same period.

Hoenir

1. Reduce balance.

    - by decreasing payments you'll still be repaying the mortgage off over the original 30 year term.

2. Overpay immediately 

   - interest accrues daily and is charged monthly. Think of it as rolling a snowball. Starts very small and over           time  accelerates and grows bigger quicker. 

grumpy_codger

Hoenir said:

...

2. Overpay immediately 

   - interest accrues daily and is charged monthly. Think of it as rolling a snowball. Starts very small and over           time  accelerates and grows bigger quicker. 

How can you be so sure without knowing the mortgage interest rate and other details?

Best regular savings accounts pay 7-7.5%, end even with easy-access you can get 6% (before tax, if any). This, most likely, is higher than the mortgage rate, in which case it can be better to overpay annually or even less frequently.

plymothian

Thanks for the replies so far. I had no idea if snowballs. So I have a two part mortgage:

A £77k 1.89% (which becomes 3.89% in September)

B 67k 1.49% (which I remortgage in April)

Is one better to pay off than the other? 

amnblog

plymothian said:

Thanks for the replies so far. I had no idea if snowballs. So I have a two part mortgage:

A £77k 1.89% (which becomes 3.89% in September)

B 67k 1.49% (which I remortgage in April)

Is one better to pay off than the other? 

Pay off the tranche with the higher cost (A)

grumpy_codger

plymothian said:

Thanks for the replies so far. I had no idea if snowballs. So I have a two part mortgage:

A £77k 1.89% (which becomes 3.89% in September)

B 67k 1.49% (which I remortgage in April)

Is one better to pay off than the other? 

It makes much more sense to pay £100 p.m. into a good regular savings account and then think again in a year, when it matures.

https://moneyfactscompare.co.uk/savings-accounts/regular-savings-accounts/?quick-links-first=false&product-favorites-first=false&sort-order=AER&sort-order-text=Rate

- ignore Principality, it's just £50 p.m. and 6 months only.

6% on easy-access savings (up to £4K) is available with Santander Edge Saver. Plus £30 voucher for opening Santander Everyday or Edge account

Newbie_John

Look at a mortgage as a savings account locked for 15+ years (or whatever your length is).
By overpaying you actually put money into saving account with under 2% rates - it currently doesn't make sense.
Especially when you have options with easy access at twice the rate.

There's also no answer what's better, there is answer what will pay your mortgage quicker (it doesn't say cheaper, just quicker), there is answer what will make your monthly payments lower..