Worth paying overpayment charges?

dojodan · 14 February 2019 at 1:32PM

Hi all,

I am finding it challenging to work out whether it's worth overpaying on my mortgage and incurring early repayment charges.

My girlfriend and I are just over 1 year into a 5 year fixed mortgage at a rate of 2.85% . LTV is 88.57%.

We can overpay by 10% per annum, currently any overpayments in excess of 10% will incur a 3% charge (until September 2020 when it drops to 1%)

Mortgage is £1,282 per month, so we can overpay by £128.20 per month without charge.

Basically I am trying to to figure out if it's worth overpaying by more than that, even if we incur the 3% charge.

I am totally debt-free (except my enormous mortgage!) and pay 9% of my salary into my pension (which is matched by my employer).

Having moved house and bought nice things and stuff like that, we do not have any savings.

I have around £800 'spare' each month (I have just started saving this in 2019).

Thanks for any assistance you could provide!

Exodi · 14 February 2019 at 1:46PM

I think you're getting yourself confused (though check your mortgage agreement to make sure!)

Normally overpayments are capped at 10% of the original mortgage amount (so with a £100,000 mortgage you can overpay £10,000 a year without penalty)

dojodan · 15 February 2019 at 8:46AM

Ha! You know what, that would make a lot more sense! I have rechecked the mortgage agreement (I only looked at it yesterday!) and it was staring me in the face the whole time...

It clearly states up to 10% of the outstanding mortgage balance, which means we could overpay by something like £30,000 without penalty. That is definitely NOT going to happen so I think we should be fine :-)

Thanks!

somethingcorporate · 15 February 2019 at 12:26PM

You can get a better savings rate with regular savers (5%) so consider this before paying off your mortgage at a lower rate.

NinaSwiss · 15 February 2019 at 12:49PM

Also - worth checking you are happy with how overpayment is applied by your lender. Eg reduction in monthly payment or reduction in mortgage term.

JimmyTheWig · 15 February 2019 at 12:57PM

I would build up a savings pot first for emergencies. What will you do if the boiler breaks down, or you need a new washing machine, or car repairs, etc?
Seems pointless to pay off a loan at 2.85% interest to then need to borrow money at 10 times that rate.

dojodan · 15 February 2019 at 2:27PM

Thanks all for the suggestions.

One question... is it really worth saving at 5% when the 2.85% interest accruing on a loan of £300,000 would be so much more? I thought the general advice was to clear debts first, as they cost you more than you would be saving?

Of course, I appreciate the need to build up a savings pot and am working on this too.

Will speak to our mortgage provider to get clarity around how they approach overpayments.

JimmyTheWig · 15 February 2019 at 6:05PM

dojodan wrote: »

One question... is it really worth saving at 5% when the 2.85% interest accruing on a loan of £300,000 would be so much more? I thought the general advice was to clear debts first, as they cost you more than you would be saving?

The interest on the loan of £300,000 is so much more than you earn in savings because the amount you owe is so much more that you have in savings.

Lets say you have £1000 spare.
If you pay it off your mortgage, your mortgage interest will go down by £1000 x 2.85% per year. Which is £28.50.
If you put it in 5% savings then your money will earn £1000 x 5% per year. Which is £50.

The general rule is to pay off debts first because many debts are at double digits interest rates. And 5% interest on savings isn't achievable for large sums. And, historically, you had to pay tax on the savings interest which you didn't on saved debt interest.

The key is to hit your mortgage (whether by overpaying the mortgage or putting money aside earning interest to cover it eventually) as early and with as much as you can.
And make sure that you are compounding your savings. So in the above example, after 1 year you'll have £1050. Make sure you earn 5% interest on all of that - don't take out the £50 and spend it on rubbish.

AnotherJoe · 16 February 2019 at 8:54AM

What JTW above said, its a common "beginners" mistake to think that its better to pay an amount off the mortgage than have savings at a higher rate than the mortgage "because the mortgage is much bigger / lasts much longer", but the only interest you are reducing is related to the amount you pay off, not to the entire mortgage.

If you pay £100 off a mortgage, you only reduce the interest you pay by the interest on £100 not the whole mortgage, and yes you would pay that every year for say 25 years, but you'd get your (say) 5% savings rate every year you have that saved as well. And 5% is bigger than 2.85%. The maths really is that simple.

Add to that, I suggest that until you have some decent savings forget about overpayments, and when you do get round to looking at them, also consider your pension position. There are many people here who focus on overpayments exclusively at great cost to their long term pension.
Thinking you will sort the pension once the mortgage is done,is often at great detriment to your overall financial position because you havent given your pension the time to grow.

dojodan · 20 February 2019 at 8:48AM

Excellent, succinct and clear advice! Thank you both, very much appreciated.

Guerillatoker · 20 February 2019 at 12:18PM

Hate to hijack a thread but reading this gave me thought to my situation.

If my rate was 4.85%, would it still be worth going with a 5% regular saver rather than overpayments?

I understand that on the raw maths that it will save me 0.15%, but is there any practical or technical considerations that would make that 0.15% not worth it?

Worth paying overpayment charges?

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