Overpayment timing
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heston2014
Posts: 208 Forumite
Hi
We are looking to overpay on our mortgage, just wondering if there are any considerations as to make an overpayment e.g. pay before interest is applied?
We recently switched our rate and reduce our term to pay it off sooner than later, I am aware we can overpay up to 10% but not sure if there is a right 'timing' to also consider.
Thank you. :-)
We are looking to overpay on our mortgage, just wondering if there are any considerations as to make an overpayment e.g. pay before interest is applied?
We recently switched our rate and reduce our term to pay it off sooner than later, I am aware we can overpay up to 10% but not sure if there is a right 'timing' to also consider.
Thank you. :-)
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Comments
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"The earlier the better" is the only thing you need to consider when reducing interest, just as "the longer the better" is the way to maximise interest earned on savings. So if you have a lump sum, then the sooner you throw it at the mortgage, the less interest you'll be charged. If you're overpaying little bits here and there, then paying them as soon as the money is available will minimise the interest paid in comparison to waiting until it's built up to a larger amount. Set your monthly payment to be the earliest date that your lender will accept, that you can afford. For example, our mortgage is with Halifax who run their months from 1st to 30th/31st and our paydays are 27-30th of the month so our mortgage payments are set up for the 1st of each month to minimise interest accrued each month. Some providers may run their months from the date of opening the mortgage (eg, the mortgage starts on 11th of the month, so your mortgage month runs 11th - 10th).
However, another consideration is whether you can earn more interest on the money than you'd pay on your mortgage. For example, if you can earn 2% on savings, but pay 1.5% interest on your mortgage then keeping money in savings will actually cost you less overall. This is a double edged sword though - you have to be disciplined enough not to spend the savings!
The most important thing, though, is to do something. Optimising the choice of dates will give you a tiny advantage in terms of interest reduction, but making any overpayment (or saving in higher interest account) is better than not doing it!MFW2023 challenge #99: £1090.11 / £1,000 MFiT-T6 (Jan 2022 - Jan 2025) challenge #99: Reduce mortgage to £400,000. Current balance = £413,551.19 Initial MF date (23rd Aug 2022): Sep 2051 Current MF date: Jul 2051 Last updated: 15/06/20230 -
pinknsparkly wrote: »"The earlier the better" is the only thing you need to consider when reducing interest, just as "the longer the better" is the way to maximise interest earned on savings. So if you have a lump sum, then the sooner you throw it at the mortgage, the less interest you'll be charged. If you're overpaying little bits here and there, then paying them as soon as the money is available will minimise the interest paid in comparison to waiting until it's built up to a larger amount. Set your monthly payment to be the earliest date that your lender will accept, that you can afford. For example, our mortgage is with Halifax who run their months from 1st to 30th/31st and our paydays are 27-30th of the month so our mortgage payments are set up for the 1st of each month to minimise interest accrued each month. Some providers may run their months from the date of opening the mortgage (eg, the mortgage starts on 11th of the month, so your mortgage month runs 11th - 10th).
However, another consideration is whether you can earn more interest on the money than you'd pay on your mortgage. For example, if you can earn 2% on savings, but pay 1.5% interest on your mortgage then keeping money in savings will actually cost you less overall. This is a double edged sword though - you have to be disciplined enough not to spend the savings!
The most important thing, though, is to do something. Optimising the choice of dates will give you a tiny advantage in terms of interest reduction, but making any overpayment (or saving in higher interest account) is better than not doing it!
Hello :-)
Thanks for the advice. We're with the Halifax too and our payment is due 1st of each month. Looking to overpay between £250-£500 a month, so I guess the sooner we pay every month, then interest would be less by end of the month when interest is charged on the balance? Hope I understood that correctly.
Savings isn't great at the moment so we've set ourselves a goal to pay off our mortgage in the next 5 years, we think it's definitely doable, fortunate enough to have a reasonable sized mortgage. That's the plan anyway.0 -
Worth adding I think that because mortgage rates are at historical lows, for some it may be worth investing rather than over paying. That’s what I’ve been doing. Vanguard has easy to understand low cost index. Of course there’s risk involved in investing (as there is with buying property). I’ve made far greater returns on my investments than the interest charged on mortgage.0
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heston2014 wrote: »Hello :-)
Thanks for the advice. We're with the Halifax too and our payment is due 1st of each month. Looking to overpay between £250-£500 a month, so I guess the sooner we pay every month, then interest would be less by end of the month when interest is charged on the balance? Hope I understood that correctly..
Interest is charged daily with Halifax. So reducing the balance early in the month will have bigger impact. Also paying your monthly payment on the 1st as opposed to the 20th will also save a few quid as the balance is lower and interest is calculated daily0 -
Deleted_User wrote: »Interest is charged daily with Halifax. So reducing the balance early in the month will have bigger impact. Also paying your monthly payment on the 1st as opposed to the 20th will also save a few quid as the balance is lower and interest is calculated daily
Thank you, that's helpful to know. :-)
I thought I had to wait until end of the month or something.
Can I also check, the 10% overpayment is based on the annual balance, is that correct? So effectively, we can overpay up to 10% of the balance each year over the Fixed term without incurring ERC?0 -
heston2014 wrote: »Thank you, that's helpful to know. :-)
I thought I had to wait until end of the month or something.
Can I also check, the 10% overpayment is based on the annual balance, is that correct? So effectively, we can overpay up to 10% of the balance each year over the Fixed term without incurring ERC?
Yeah its now in a calendar year. They used to do it as a rolling 12 months when i worked with them but it was a nightmare to calculate the allowance. Wording from their website:
as a concession, in any calendar year, they may repay up to 10% of the amount outstanding on their product, without having to pay an early repayment charge. We reserve the right to change or withdraw this concession at any time.0
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