Regular Mortgage overpayments - Do I have the logic right or wrong?

Just_A_Dad

Going to over-pay to reduce the term of our mortgage – but how and when? That is our question/puzzle.

Heres our deal/position

M47, F41

1 child (F8)

 House ‘value’ 300K

Mortgage 108K, 17 years fixed @ 3.28% (Monthly repayments £658)

 Current balance 94K, 15 years fixed @ 3.28%

 so paid-off at M62, F56 Child F18

A few years ago, when the interest rates surged – we managed due to the equity in the house to secure a good-fixed deal - I think its going to be a good deal long term as well... but who truely knows.

The deal is fixed 3.28% for the lifetime of the mortgage, so we dont have to more about second guessing the market.

With a current balance statement of 94K and 15 years of repayments left (180 months) at (for sake of ease) £660/pm

We both work full time and can make overpayments – its not a ‘major’ mortgage lender (Kensington) – its slightly tricker to make easy over payments at a touch of a button.

We can save between £50-130 per month towards overpayments - and it’s our goal to save minimum £50 per month for the 15 years.

 

The overpayments currently are going into a number  ‘high interest’ monthly savings accounts – the type that give 4.5-5.5% interest the kind of accounts are Natwest digital saver, Santandar Edge etc.

At the end of the year, the lump sms with interest will then go into an ISA of sorts etc - that we are getting like 4-4.5% on.

We currently have 3K in an ISA of overpayments already saved from the past 2 years of saving.

My question is I presume that, as long as I can get interest rates  on any of these overpayment accounts larger than the 3.28% fixed of my mortgage – we are earning more interest not paying off the mortgage in chunks – is that right?

What happens thou if the interest rates on my savings/ISA’s down the line fall below the 3.28% - should I at that point change and divert new over payments straight into the mortgage company? 

 Regarding the mortgage we can make 10% over payments ( so I believe this is 10% of the original mortgage amount in any year – so 108K/ 10.8K per year.

 If we only save £50 per month over 14 years – this will nett me 8.4K (excluding interest) and I can pay this amount off at the end and finish one year early.

 If I save £80 per month over 13 years – this will net me 12.4K (excluding interest) as this is over my one year allowance – presumeably I would have to split it over different years but can finish approx 2 years early.

 If we save the £130 max each month, then its looking like we can finish 3 years early – but again would I have to split those over payments into 3 different calendar years

Does this mean 12 months in-between payments – or if the Mortgage started on 1st November – I can infact split the payment as 30th October (end of one year) and then say 5th November payment – beginning of a new year?

 

Are we doing the right thing?

 

The mortgage is portable and this is not necessarily our forever home – but we are hoping that as we are in a city – paying that premium – that if/when we come to move – we would be able to get a property for the same price or less and not have any ‘add on’

 

Many thanks,

 

Just A Dad

kimwp

Double check that the overpayment allowed is paid on the original mortgage. My first mortgage was like that but I understood it to be unusual.

Just_A_Dad

thanks - i should clarify - that yes - the mortgage was taken out for 108K with a new lender allowing overpayments of 10% (annually) - the current balance of 94K and 15 years is from the same mortgage deal and runs through to the end

kimwp

Just_A_Dad said:

thanks - i should clarify - that yes - the mortgage was taken out for 108K with a new lender allowing overpayments of 10% (annually) - the current balance of 94K and 15 years is from the same mortgage deal and runs through to the end

You haven't clarified if the 10% applies to the original amount or the amount owing at the start of each year. It's more usual.to have the second 

saajan_12

Just_A_Dad said:

The overpayments currently are going into a number  ‘high interest’ monthly savings accounts – the type that give 4.5-5.5% interest the kind of accounts are Natwest digital saver, Santandar Edge etc.

At the end of the year, the lump sms with interest will then go into an ISA of sorts etc - that we are getting like 4-4.5% on.

Any reason for temporarily saving in a non ISA account? You don't say what your tax position is, but if you're paying tax on the interest, then going straight into an ISA could be better. 
Note Easy Access ISAs exist, they dont have to be a fixed term if that's the reason. 

Just_A_Dad said:

My question is I presume that, as long as I can get interest rates  on any of these overpayment accounts larger than the 3.28% fixed of my mortgage – we are earning more interest not paying off the mortgage in chunks – is that right?

What happens thou if the interest rates on my savings/ISA’s down the line fall below the 3.28% - should I at that point change and divert new over payments straight into the mortgage company? 

Probably - strictly by the numbers, I'd compare the 3.28% with your interest earned NET of tax (depending on your allowance). If rates dropped then I'd pay the savings in a lump sum plus divert future payments. However there's a few more factors to consider
* Money is locked up in a mortgage and you have a long fix, so if you could need access to the savings it might be better to keep a portion out even if the interest is slightly worse.
* Tax and other savings - Currently you're below the ISA limit but this could change. If you were also paying tax on some/all of your non-ISA savings, then the next option may be the mortgage. 

Just_A_Dad said:

Regarding the mortgage we can make 10% over payments ( so I believe this is 10% of the original mortgage amount in any year – so 108K/ 10.8K per year.

..

Does this mean 12 months in-between payments – or if the Mortgage started on 1st November – I can infact split the payment as 30th October (end of one year) and then say 5th November payment – beginning of a new year?

These are all lender specific T&Cs, so you'd have to check yours, other peoples companies may differ.
* Some lenders say 10% of the original balance, others say 10% of the current balance, yet others say 10% of the balance at the start of the year..  
* Some lenders say the year renews on the anniversary of taking out the mortgage, others say on some fixed year end date (mine had 1 Apr randomly).