Is it worth my while overpaying mortgage?

[Tattted]

I’m a single mum to 2 small children and bought a house last year with a 35year term. I am 35. I’m on a low enough parttime income and work parttime, I have been thinking lately that I really don’t want to be 60,65,70 and still paying a mortgage. Should I start looking into overpaying, realistically I could only afford around £100 a month which would reduce my term by 10 years. Is this something I should consider or just keep the money as savings (I don’t have much savings as is)

@AllTheYoungGoodyTwoShoes

Thank you *@Mia85* this is what I was thinking, there is still some risk. The kids have some money in the child trust funds which have been added to but I was shocked that it wasn't making anything in the last couple of years. In fact I was shocked they might even lose some money, hopefully not.

What is it invested in? Obviously there was a big drop just as Covid was announced (and a smaller drop recently) but generally the past couple of years have been pretty good. If they aren't going to need it soon then the fact that it might drop for a while doesn't matter. It's having to cash out when the market is low that causes loss.

In your shoes I would siphon the 100pcm into a separate account. At the end of the year, you can decide how much of it you want to move into your mortgage account.

You could also habitually go in the evening before you get paid and move whatever is left in your current account into there too and this will slowly build.

A friend of mine has a "round up" feature on her account so every transaction she makes on her account (chip and pin, direct debit, online purchase etc) it rounds it up to the next pound and moves the pence into the account too.

As a single mum I think 6-12 mths to cover sickness etc would be ideal

Depends on your employer. Mine pays full pay for 6months sickness, so I'd not squirrel away 6-12months on top - that money is better directed elsewhere.

@BernadetteRostankowskiWolowitz

As a single mum I think 6-12 mths to cover sickness etc would be ideal

Depends on your employer. Mine pays full pay for 6months sickness, so I'd not squirrel away 6-12months on top - that money is better directed elsewhere.

Still might be handy in case of redundancy/job loss though (unless you have insurance to cover that situation)

If you don't have any other savings you should keep it easily accessible and use it to meet the rising cost of inflation so you don't end up in debt.

I never bothered. The interest rate was so low that it didn’t make sense.

If I had my time again I would definitely. Instead I'm having to find a chunk of money to get it paid off before I retire fully.

@Mia85 the child trust funds have been moved a couple of times over the years, at the moment it's with One Family, I'm sure it's a stocks and shares one. Not due to be paid out for at least a couple of years.

We overpaid for years and we’re mortgage free in our forties, we then saved the mortgage money and now have a reasonable amount for our future.

Yes, do it - it makes a huge difference. As someone else said, a mortgage offset account, if they still exist, is the best way as you can get your money back if you need it. We had that for our first mortgage and we put all our spare money in, because we knew we could get at it in an emergency.

@Dogsandbabies

I have never overpaid my mortgage. I always save in my ISA. You need to understand your finances. What is you interest rate on your mortgage? What would you actually be saving? And equally how much can you make from your money in an investment?

I always save on my ISA knowing that this is money I can use to pay off my mortgage if I choose to. I earn around 10-12% on my investments and would have saved a meagre 1.6% if I was overpaying my mortgage.

Do you mean you take 10-12% income on your investments?

Because otherwise remember you only crystallise a gain when you sell the investments. So it all depends what the market is like when you disinvest.

OP, remember you are not tied to a 35 year term indefinitely.

Make sure you remortgage when the fixed term is up and, depending on the rates available at that time, and your income at that time, you can choose to reduce the term.

You could put the £100 away in a savings account for now. After a year (or whatever), see how much you've got (if you're also making other contributions to the pot) and pay some to the mortgage if you choose.

Alternatively, splitting it might be a good idea. Put £30 or £50 a month aside and if you don't need it after a year or whatever, pay it into the mortgage.

@FrownedUpon

Mortgage rates are so low that it’s rarely the best financial decision to overpay. Get a decent emergency fund, then plough your money into a pension or S&S ISA. The earlier you start this, the more your money will grow.

People focussed on growing their wealth do not overpay their mortgage. Their money works harder elsewhere.

Tbh is true for money, but it the OP is a single parent and on a tight budget, she could be in real trouble if/when interest rates rise.

OP, what is your fixed term? It might be worth a look on MSE mortgage calculators. It'll show you how much you will still have outstanding at the end of your fixed term without overpaying vs paying. You can then adjust it for higher interest rates to see what payments would likely be.

You can use these figures with your projected income (ie if you have childcare fees which will soon stop).

There's a lot of variables and a lot of it is down to psychology as well. As a pp said, yes, your money would probably work harder elsewhere, but for some people the security of paying down the mortgage is very important.

Can I ask a dense question in relation to this?

If a mortgage can be good, cheap debt, does that mean it is no real advantage to get a 15 year mortgage rather than a 25 year one, for example? Because you can make that money (the difference in the monthly repayment accumulate) faster elsewhere?

And then use it to pay off a lump and reduce the term at some future point in a more economical way?

Sorry if I've got complete wrong end of stick, I probably have

AbsentmindedWoman by the replies on this thread a lot of people do view it like that however for us being mortgage free as soon as possible was always a priority. As long as you've got some savings then being free from debt, having a secure roof over our head and the freedom to reduce working hours was worth far more to us than money in an ISA. I suppose everyone has different priorities but the peace of mind it brings is massive. To not see that debt of tens of thousands of pounds when we check our accounts, it really changes your mindset for the better. I'm SO glad we did it.

@AbsentmindedWoman I can only speak about my personal experience. I bought my first place with a 5% deposit for £125k. It's now 15 years down the line (and three houses) where I have always just paid my repayments and prioritised savings.

I now have a 30% deposit on a £850k house. And enough cash in my investments that should interest rates rise or I decide I want to retire/become ill, I can pay 85% of my mortgage.

The thing about investments is compound interest. I have money in my ISA that has been making interest and the interest making interest (if that makes sense) for 15 years. I am therefore able to almost pay off my mortgage at the age of 38. That wouldn't have been the case if I overpaid my mortgage.

However, and this is a big one, investments can go down as well as up. Brexit and Covid hit my investments but overall I have made a lot of money by playing it this way.

Thanks both. It's interesting.

I wonder if low-interest mortgages soon to be a thing of the past though, for anyone who doesn't have one at present but thinking of it soon.

In your circumstances I would first build a bit more cash savings. Then prioritise pension - as others have said, over time the tax relief on a pension will easily outstrip any benefits of overpaying the mortgage AND you are saving for the long term.

Ideally you should aim for a fixed term rate on the lowest rate possible. If you can get an offset mortgage as well you are winning, but they are not easy to come by.

[quote CanIPleaseHaveOne]**@BarbaraofSevilleIt depends. Mumsnet seems obsessed with overpaying mortgages when it doesn't really make sense if you look at it rationally.

If you play with compund interest and see how much you pay for the money you borrow over the lifetime of that loan then convert it into money paid long term into pension plan or investment portfolio then the idea of not paying is irrational.

Mortgage free by a certain age combined with the usual increase in property value creates wealth.

Why are banks billion pound industries?[/quote]
But if you are investing tax free money via a pension then the compound interest can work in your favour and outperform the growth in your debt. We have averaged 4% growth in investments over the last two years and the mortgage rate is under 2%. Add the tax advantages and it works much better. However there are lots of scenarios to consider , and neither pensions or paying down a mortgage give you access to cash easily so that needs to be taken into account

@AbsentmindedWoman

Can I ask a dense question in relation to this?

If a mortgage can be good, cheap debt, does that mean it is no real advantage to get a 15 year mortgage rather than a 25 year one, for example? Because you can make that money (the difference in the monthly repayment accumulate) faster elsewhere?

And then use it to pay off a lump and reduce the term at some future point in a more economical way?

Sorry if I've got complete wrong end of stick, I probably have

Potentially , because stock market funds have generally accumulated at a higher percentage that current low interest rate mortgages. However there is a risk in that approach as you have to factor in as investments may not grow more slowly or even decline. It also helps if you are investing in a tax free way (ISA) or even better via your pension. Obviously money in a pension can only be withdrawn when you are older (55 rising to 57)

@AbsentmindedWoman

Thanks both. It's interesting.

I wonder if low-interest mortgages soon to be a thing of the past though, for anyone who doesn't have one at present but thinking of it soon.

I'd agree that there's no point taking a shorter term mortgage unless you are dictated by your age, as you can always overpay, or while interest rates remain low, invest elsewhere and use some of this money to overpay later on.

The other advantage is that the monthly payment is lower, so it gives you flexibility and options if your income drops (eg job loss, wanting to work part time) or costs increase (eg childcare) as the lower payment will be easier to make and you're less likely to default if the monthly payment is £850 vs £1300 (for a £200k mortgage at a 2% interest rate).

You could always take out a 25 year mortgage, pretend to yourself that the term is shorter and save/invest the 'full' payment separately then the money is available to draw on if you need it.

Compared with signing up to a 15 year mortgage, where the bank will expect you to pay £1300 every month without fail, and if you don't, you'll fall into the missed payments, default and ruined credit rating spiral very quickly.

But obviously it requires discipline and actually putting the spare money aside, and not spend it all on a better lifestyle/depreciating assets like expensive cars instead.

Yes. I'm a LP and could only afford an extra 10-20 a month. Even that got me to the halfway mark a year faster.

Sorry, replied to the wrong comment, should have been the one about 15 vs 25 year mortgages.

But on the matter of interest rates, I'm not sure there is much scope to put them up too much, and certainly not to the levels that people always quote 'I remember 15% interest rates in the early 90s, I had to work 3 jobs to meet the payment and couldn't even afford to live on beans' type comments because there is a lot of government, business and personal debt that is linked to the current very low interest rates that will skyrocket in cost if interest rates rise significantly and plunge us into deep recession because a lot of people will have no money and a lot of businesses will fail and the government debt will also be very expensive so costs will go up, but tax take will fall due to failed businesses and lost jobs.

I’d get in the habit of saving instead, build up some decent savings and then pay a chunk off mortgage at some later point. Mortgages are cheap at the moment, it’s fairly inflation busting too,..

Also live a bit.

It’s likely your salary will increase and you can deal with mortgage later.

In short, in our circumstances, get some savings together first.

To illustrate why investing separately is likely to be better than overpaying, using the example of a £200k mortgage with an above average interest rate of 2%, a £100 pm overpayment will shorten the term by just over 3 years and save £7648 in interest.

www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

However, if you put that £100 pm in a stocks and shares ISA, the Hargreaves Landsdown growth calculator suggests 5% as a medium average growth estimate (yes there is a risk, but it's very unlikely to not outperform your 2% mortgage over the long term) after 22 years, the £26400 that you've put in will have grown to £40608, so after you've knocked off the £7648 interest you would have saved your left with another £6k that you wouldn't have if you'd just overpaid your mortgage.