MFW Newbie

wydsiwyrg

Hi all out there in moneysaving land!!

I'm a long time reader of MSE but this is my first day on the forums.

My wife and I would like to be Mortgage Free... now I've noticed in some places on this forum people have mentioned they're overpaying on their mortgage, sometimes upto 3 or 4k per month! Are there penalties for this? From reading our mortgage agreement, I drew that we were only allowed to overpay a MAX of £500 per month.

From this summer we will be able to afford that, and will be able to pay off our mortgage in 9 years (before I'm 30!). However, if we can find a way to overpay more each month, we would be able to finish in less, we could afford to overpay around £1200 per month, is there anyway we could do this, or would we incur penalties from the bank?

Thanks in advance for all your help!!

Tim

Daft_Pegasus

How much you can over pay is determind by your mortgage t&c's. On your's it's £500. If you want to pay more than this, when your current mortgage deal comes to an end simply look for a new deal which allows you to overpay as much as you want. In the meantime, if you can afford to overpay by £500 a month, then do so - it will have a big impact on the amount you owe and save you loads in interest. If you want to pay off more then put that into a high interest savings account/cash ISA and then use it to pay off a lump sum when your current mortgage deal comes to an end.

It must be great to think you could be mortgage free before you're 30 - I'm very envious:D

wydsiwyrg

Thanks for the ideas Pegasus. I hadn't thought of putting it into an ISA, don't really understand what they are - but that makes sense. We've only got a small mortgage (and a small house); but according to the overpayment calculator if we overpay 1200 we can be Mortgage free in 3.9 years! Very exciting.

dimbo61

this whole site is about making the best use of your money.
If you can overpay by £500 a month great
If you can also pay into high interest saving accounts such as alliance & leicester 12% before TAX £ 250/month max even better
Dont forget isa,s which pay about 6% tax free.
You should have six months worth of earnings in a savings account for emergencies,
build up your savings in the best accounts and if you wish to use all this
money to clear your mortgage early you can.
good luck

David_B_2

Good information above.

I'd be inclined to say the same.

Max the overpayment you can and the rest into a ISA. ISA are basically tax free savings. With a cash ISA you can pay £3000 into it each tax year. April/April. So if you've not paid any in this year you've got some catching up to do. From April the allowance will go up to £3500 into a CASH ISA.

Noting that this is each person so your partner can also have one ISA and pay £3000 into it before April. Then use that money to overpay when you are allow too. Might to worth ringing your mortgage provider up and asking what they can do for you regarding overpaying. i.e. what is the penalty? I'm with the Halifax and has a bank I don't like them but to be honest they have always been ok with the mortgage. By that I mean I have rung then up a few times and changed deals for free. I'm currently on a very flexible deal (not the cheapest) but I am allow to change at anytime to another deal. Worth a phone call?

Also as mentioned above make sure you have funds to cover any unforeseen events.

Enjoy and welcome on board.

PS: The calculator is a great tool for motivating me, I am forever playing with it

wydsiwyrg

Hi David,
Thanks so much for your detailed response.

Just one more question - I read somewhere that there are ISAs that you can save £7000 each tax free per year? Where are these and how easy are they to set up/transfer to. I'm worried that I'll just ignore ISAs because I don't really understand who supplies them, and just go for traditional savings - will I lose a lot this way?

Thanks,
Tim

Kaz2904

You will lose the interest.
An ISA is an tax free savings account. You can get an ISA that invests in shares too (the £7000) one. I personally am a bit wary of that kind- I think Dithering Dad got caught out by one of them in September/October. You can't lose money on the cash ISA.
The best way to work out if you are earning the best rate of interest is to see what you will lose in tax.
Example. My mortgage is 5.29% my ISA is 6%- no contest.
My savings account is 6%. Because I pay tax of 20% on interest earned, I will only earn 6*0.8= 4.8% so it loses against the mortgage.
You need to look around and overpay your £500 to the mortgage.
You then have £700 left. Put £350 a month each into an isa. (I have to say that I would not start this strategy until after April- until then you need to cram as much as you can afford into your ISA to hit your £3000 limit). Once your ISA is full look for the next best savings vehicle to put money into.

This does require regular review because things like the 12% A&L account will beat ISA and mortgage rates. It needs to be drip fed as well so you would pay into it monthly.
It can be confusing but is well worth the effort of working it out as you can save thousands of pounds over a few years by cutting interest costs.
HTH, Kaz.

belfastgirl23

The £500 per month you 'can' overpay into your mortgage - is that because you are on a fixed rate 2 or 3 year deal? I know that's the situation with my nationwide mortgage but if we weren't on a fixed rate we could overpay whatever we want (I think anyway!). so you can always transfer any lump sum savings when you come to the end of your fixed rate if this applies to you ...although agree with the others that it is always a good idea to have some £ in easy to get to savings as well.

TallGirl

I really like my offset mortage that way I get the savings account and I know that all my money is benefit my mortage. It is not worth for us to have an ISA as we are higher rate tax payers. Another benefit for us on the offset is that we can borrow back money at the mortage rate. We borrowed some to pay for a new car and could then pay it back at the rate we wanted to without any penalties.

I agree the calculators are a great motivator.