Yearly overpayments ?

bowf

Quick summary.
House worth £190000
Mortgage of £150000
(£63000 on endowment and balance on repayment)
20 year mortgage.
Going to be on discounted rate of 4.64% with A+L.

My question is as follows;
We have a lump sum put away which earns us around £1500 a year in interest.
I would like to use that interest towards the mortgage.
What sort of difference would a yearly £1500 overpayment make to the mortgage ??

??? ???

Robert_Sterling_3

We are not talking big potatoes here.
£1500 left in a savings account at 5% gets you £75 per annum gross or £60 after 20% tax.
Paying the £1500 off the mortgage at yearly intervals while on a discount rate of 4.64% reduces the yearly interest on the mortgage by £69.60
So we are talking a tenner a year give or take.

Ask me again when you are not on a discounted rate.

bowf

Sorry,I maybe didn't word things that well.
The lump sum we have put away is around 30K.
That earns us around £1500 a year.
I would be happy to write a yearly cheque for £1500 to the mortgage company on top of what we pay already.
That's the equivalent of paying around £125 a month extra.
Surely that would make a helluva difference to our mortgage term ?? ???

Robert_Sterling_3

Well it will reduce the term of your mortgage.
Whether it will reduce it by a "Hell of a lot" I cannot say as you have not defined the non standard unit "A hell of a lot". One mans "Hell of a lot " might be another man's "Tidy bit" etc.
Your mortgage is probably one of the cheapest loans you will ever get. Paying it off or reducing it may give you a feel good factor.

bowf

Perhaps I'm being naive but I would expect overpayments of £125 a month ( a 17% overpayment ) to make a big difference.
Unless it knocks along the lines of 5 years off my mortgage I can't see me bothering.
I'd rather use the £1500 a year for a holiday,or lap dancers. ::)

Robert_Sterling_3

You can lead a horse to the water but you can't make it drink.
So yes there is a hell of a difference between overpaying your morgage at $125 per month and frittering it away.
But there is not a lot of difference between saving the money and repaying the mortgage.

wealthsaver

Overpayments on mortgages can be good if you are a higher rate tax payer and have exhausted other good homes for your spare 'savings'. eg ISAs, Premium bonds, Pension contributions like AVCs, etc

Once you consider that tax on normal savings make interest on standard savings accounts look meagre, overpaying on a mortgage can be a great way to save money on your repayments or shorten the term. I am sure there are some good articles on this website on the sums and pitfalls. Make certain that your Mortgage company does not make penalty charges if you are tied because of a discounted or fixed rate. Also some companies still have an annual calculation of interest while others do a daily calculation.

Read up carefully on the small print.

Reaper

Although discount mortgages don't normally allow additional repayments most of the A&L ones do allow up to 10% per year.

When deciding whether to pay off the mortgage there are really just 2 things to consider:

1) Will I need the money? You can't get it back once you have paid it. In your case you are only talking about a small part of your savings so this is probably not a problem.

2) Will it save me money? To answer this compare the interest rate you get on your savings with the interest rate you are paying. Is your figure of £1,500 on £30,000 correct as it sounds unlikely? To earn that much you would have to be getting 5% interest and be a non-tax payer.

If the figure is correct then you should NOT pay off your mortgage because you would lose money. Leave it to compound in your savings.

If the figure is not correct and you are basic rate or higher rate tax payer then your net interest rate will be more like 3.9% or 2%. In that case it does become worth paying it off (unless you can move the money somewhere that pays a better rate of net interest).

If you do decide to overpay then to work out how many years it will knock off you need to separate the endowment part and the repayment part. To work out the repayment part go to this site and play around with the figures.

As for the endowment part - overpayments are not going to make any difference to the term unless you manage to pay off the whole £63,000. They will, however, reduce your monthly mortgage repayements.

johannamse

Go to the channel 4 website and click on money. In the left hand menu, there is a button called overpayment calculator (its great). I have put your details in and on £150000 over 20 years on 4.64, you will pay backin 16.5 years. whopee! check it out.