Is there any benefit to overpaying in my circumstances?

pb3

I am currently have a two year fixed term mortgage. I plan to pay off the mortgage in full once the fixed term ends in around 18 months time.

I am allowed to overpay up to 10% of the outstanding balance per year.

Given I plan to settle the mortgage at the end of the two year fixed term, Is there any benefit at all to my overpaying?

Many thanks.

la531983

Yes, interest is calculated daily so any overpayments instantly reduce your interest.

Guna

Unless you anticipate needing money urgently and have the need to keep it liquid, then I would overpay to save on interest.

Brie

It depends.

A How much is the money earning now that you might use?

B How much is the mortgage interest rate?

If A is higher than B don't overpay. If B is higher than A overpay as much as you can as early as you can.

Yorkie1

If A is higher than B don't overpay. If B is higher than A overpay as much as you can as early as you can.

Subject to ensuring you have enough funds left to satisfy any other needs, e.g. emergency savings.

pb3

Thanks to everyone who replied and I regret if my query was rather basic. As you may have surmised I am a relative newbie to mortgages.

Out of interest I followed up by asking a popular AI engine the same question. Its conclusion was that I would save around £600 in interest by overpaying. Crucially it showed that I would save more if I overpay in monthly installments over the remaining 18 month term rather than paying lump sums towards the end of each overpayment period.

It went into details of Amortization formulas (my eyes glazed over slightly), but it all seemed to make sense. It allowed me to model various scenarios such as overpaying a lump sum immediately to cover the 6 months that have already elapsed followed by montly installments to cover the overpayment allowance over the remaining 18 months.

All good. This along with the responses received will allow me to make an informed choice taking into account the current interest rate achieved for my savings vs the mortgage as well as the need for an emergency fund etc.

Yorkie1

"Crucially it showed that I would save more if I overpay in monthly installments over the remaining 18 month term rather than paying lump sums towards the end of each overpayment period."

This is because interest on the capital balance is calculated on a daily basis. As soon as you make an overpayment, you reduce the capital balance you owe, and so the interest you are charged per day is lower.

If you leave the overpayment until later, then the capital balance is higher for longer, and therefoer so is the interest.

There is an overpayment calculator on the main website, which can also look at.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/