Short term overpayments

WiseGuy_3

I have just taken out a remortgage with the option of making overpayments of upto £500 per month. I am well aware of the huge savings I can make by overpaying but all of the posts I've read in various forums and articles relate to making consistent overpayments over the course of the mortgage term (in my case it would be 25 years).

My question is, would making overpayments over a short term be beneficial? The interest on my mortgage is calculated daily so I'm sure there would be some benefit but is it worth it for, say, the following examples:

scenario 1
I make an overpayment of £300 every month for 1 or 2 years only and then just carry on making the regular payments for the rest of the term.

scenario 2
I make an overpayment of £300 every month for 1 or 2 years but then decide to withdraw the money saved up (eg. to purchase a car) and then just carry on making the regular payments for the rest of the term.

Would I be better off just sticking the extra money into an ISA (which is what I have been doing for the past couple of years)?

kingkano

It's a long answer this one!!! And it all depends on what you mean when you say 'regular payments'. If you mean the original quoted monthly repayment figure then YES making overpayments, especially in the early years, then reverting back to the ORIGINAL repayment will knock YEARS off your mortgage term. Even if its small amounts.

But when you make an overpayment the mortgage company will recalculate your regular payment, so as to keep the term the original length and keep milking the interest from you They may ask if you want it off the term or off your payment figure, ask for term. You will save the different in repayment but over the term still pay alot of interest you could have saved.

The same for if you withdraw the money again (assuming your mortgage deal does allow this too).

The ISA answer is alot longer. If you can get a better rate than your mortgage then probably. Also ensure you have 6mths salary in easy access savings for emergencies (in an ISA is great for this). But having these savings affects your rights to any benefits if the worst should happen.

WiseGuy_3

thanks kingkano. Yes i did mean the original quoted repayment figure. Just the answer I was looking for! So I take it the key is to reduce the term in order to save in the long run.

the overpayment method I've been offered works like a savings account alongside my mortgage so I was actually thinking of putting all or most of my savings into it, assuming that I will have access to it in an emergency.

jamesd

Yes, you'd be better off sticking the money in ISAs provided the ISA interest rate or investment return exceeds your mortgage interest rate. Since ISA rates are currently higher than many mortgage rates you're likely to lose money by overpaying. Mortgage overpayment interest "savings" calculators usually ignore the money lost from savings interest.

If you can keep your mortgage payment the same (plus any overpayment you want to make) it won't make any difference to the interest bill whether you change the term or the required monthly payment. But reducing the payment will give you more flexibility if you later suffer hard financial times. Free extra flexibility is a good thing.

You might also investigate the taxable interest rates available from regular saver accounts, which can sometimes exceed the mortgage rate even after paying tax on the savings.