Mortgage overpayment options

Gozza_2

I wish to pay my mortgage off as quick as possible, but am unsure which method of overpaying (monthly or less frequent lump sums) is best for saving money in the end? I have 27 years left and £154,000 to pay. Any ideas please?

homer_j_3

what does your mortgage allow? What rate is your mortgage? How much are you looking to overpay or save per month?

Gozza_2

I'm with Abbey who allow 10% of mortgage overpayments each year. I could pay £300-£500 per month, which will reduce term, or pay a few £1000-£3000 lump sums, which will reduce monthly payments, but not affect term. I don't know which will save the most interest?

homer_j_3

Well.... Firstly you need to look at what interest rates you could get on your savings (remember the tax on savings which will be deducted if you have already used your tax free allowances up or do not put in an ISA , for example) and see if they will return more than what your interest on your mortgage is going to cost. So in short - ISA pays 6% mortgage is 5.5% then put in the ISA as the gain will be there.

However, the second thing I would look at is your discipline. Would you dip into the isa if you were short. If its off the mortgage, you cannot get it back easily - unlke an ISA.

So, work out which will be financially better but if you are not strict with yourself - for the £100 difference it may make, do not go for the £100 gain, go for the one that will ensure you do overpay your mortgage properly.

Gozza_2

Thanks Homer_J,

My mortgage rate is 5.99 fixed for the next 2 years. With regards to my ISA, I use it as a saving fund for holidays, so I do withdraw from it.

Would there be a saving between the two overpayment methods in the long term?

homer_j_3

If you are utilising your tax free ISA allowance (and any other half is too?) then there are other tax free accounts with National Savings I believe but not sure what the returns are.

So assuming that these are not competitive enough to beat your 5.99% you will pay tax on the interest of your savings. I believe these to be 20% for basic rate tax payers and 40% for higher rate tax payers. (I am slowly trying to catch up with all the investment rules again so apologies if these figures are not right but the principal is the same).

Therefore if you found a 6% Gross savings account then you need to net it down to factor in the taxation involved. So to my calculations, the benefit on a 6% gross account really is only 4.8% once tax has been deducted to the basic rate tax payer or 3.6% net to the higher tax payer so in these instances, your mortgage would look a lot more favourable as the winner for your overpayments.

Or another way of looking at it is that you would need to find an 8% gross interest paying account to be level with the benefit overpaying your mortgage will bring if you are a basic rate tax payer or 10% if you are a higher rate tax payer.

Steppy

Hiya,

Overpaying monthly would save more than overpaying the same amount once per year - because you're paying less interest on capital loaned each month / day. Keep your total monthly payments to the same amount.. Just ask you mortgage company to take xxxx per month.

Overpaying off your mortgage is a long term financial commitment, but you shouldn't forget your short term commitments. It's easy to wish away the mortgage by making overpayments, but the real pleasure will come from feeling comfortable with your current financial arrangements and what fits with your spending habits.

I would consider the following:

1. Build up a rainy day fund - 2 ~ 3 months income.
2. Keep track of your monthly bills... save costs where you can..
3. Be realistic about the amount you can overpay the mortgage.
4. Do a combination of monthly and one off annual mortgage overpayments.
5. Watch your spending profile.. If you're a spender.. then work towards becoming a saver...

Your real savings will come from... 1. Cutting back on buying unnecessary items. 2. Overpaying any spare money over your 2 ~ 3 month rainy day fund. 3. Be realistic about your short term and long term commitments. Make a budget plan... and keep watching it / stick to the plan.

I hope this helps?

Cheers,

Stephen