To ask what you would do about mortgage?

[MotherOfDragons90]

Hi everyone. Am posting here to see whether people think me or my DH are taking more sense rather than BU per say.

So our situation is thus.

We currently have a mortgage on a 2 bed terrace house which cost 220K as it is in quite an expensive area. We paid a 10% deposit so took on a 200k mortgage and have now been here two years. I checked today and we have only paid of £9k despite paying 800pm. I know interest is a lot but I am quite gobsmacked! (DH sorted the mortgage with MA, I just turned up). So current outstanding is £191K.

Since we bought we’ve been quite obsessively saving. I am quite anxious about money and the uncertainty at the moment so we’ve built up about £26K in savings which is just sat in a savings account earning rubbish interest.

We are planning on TTC next year although this could take a while as I’ve had some issues which I won’t go into, but hopefully we will want to upsize in a few years time which would mean taking on a bigger mortgage.

Here is where we disagree.

I think we should start overpaying the mortgage by £500 a month. We can make overpayments of up to £1000 for free and it would mean by the end of our fix in 2022 we have 158K left not 177K.

DH thinks we should save the same £500 because in 3 years time yes we will still have a large mortgage but also more savings to offset so our position will be the same. It also won’t reduce our monthly payments as we are on a fix. He doesn’t like the idea of the money not being accessible if we need it he also says house prices are going to drop big time so we would lose the money effectively.

I just can’t articulate WHY I think it’s a good idea. Please could I ask you lovely MNers for your suggestions of what you would do in our situation?

Keep saving or overpay a mortgage that we will likes have to increase at some point in the future and risk losing money in a house price drop?

You are paying interest on the whole sum you owe, so if you pay off the capital sooner then you will pay less interest overall because savings rates are usually lower than mortgage rates. Interest rates are likely to rise in the next few years, which means the less you owe the less you will pay in future. You could remortgage however to take back the capital if you need it in future, or take payment holidays for small sums. Unless your DH plans to declare bankruptcy or has an investment strategy that is delivering returns in excess of the mortgage interest on that money, your plan makes more sense.

Switch your mortgage to an offset one

Then you save the £500 month and it's accessible if you really need it, but whilst you don't touch it it reduces the amount of interest you pay on your mortgage as if you had overpaid

Best of both

The proportion you are paying is interest, that reduces over time so the balance gets smaller.

Personally I'd be paying off the mortgage - BUT please do check your terms and conditions, I can only over pay 10K per annum without penalty - because even if your loan rate is 3, 4 or 5%, thats still a higher percentage than you are getting in a deposit account. Best ISA rates are under 2% at the moment.

Keep saving or overpay a mortgage that we will likes have to increase at some point in the future and risk losing money in a house price drop?

If the price drops you'll lose money anyway as you'll have to pay the deficit.

I'm most concerned by your DH's idea that you would lose the money if house prices drop; however much house prices drop, you will still owe the same amount, that's how people have ended up in negative equity in the past. If that's your DH's financial literacy level then please be very careful to research any investment schemes he comes up with.

I think you should see an IFA for some proper advice. Both of your perspectives are sound, I doubt most people have £26k savings when starting to try for a family if I’m honest. You could leave that where it is and start the overpayments, that’s well enough.

I think if house prices plummet it’s unlikely savings rates will go up, is he worried you may end up in negative equity and no way of mitigating that if you start paying down the mortgage now?

@jackstini we can’t without paying a penalty I don’t think but that sounds ideal, bugger!

@MRex he isn’t an investor Thankfully, I think he just likes being able to see his money!

@Elizapancakes

Yeah, I think that is his concern. Although we are less likely to go into NE if we overpay so I don’t think it really makes a difference.

I'd probably go somewhere in the middle, overpay by a portion, say £250 and save the other £250. It is best to try to reduce the total debt as it will bring down the interest payments, but I think it's sensible not to put all your eggs in one basket.

I agree with pp about an offset mortgage. It works for us.

WE have a similar amount to you in savings and it means we do not pay interest on that portion of our mortgage.

If you can't offset and as you have a good amount of savings already I'd agree with you. If he finds this too stressful then split the amount you have spare, £250 each mo the off your mortgage and the same in a regular savings account. I love overpaying our mortgage.

We bought a 2 bed in London for £205k with a 15% deposit. Like you I felt a bit sick at having this huge debt (as FTB it seemed that way!) so I started saving hard and every couple of months when I was happy with the savings pot would overpay by £500-1000k.

It made such a difference to the balance, and to my motivation to pay off more. I didn't always tell dh how much I was paying off because he was a bit like your dh, it was just another bill to him.

We sold 8 years later, and we're now mortgage free (in a different country).

You've got a good savings pot, but the mortgage has to be paid off, one way or another, there's no 'losing money' by doing this.

Get a spreadsheet, and track the way the capital sum on a mortgage only starts to really reduce a long way into the term As the capital reduces, the interest drops, and the repayments really start to reduce the outstanding capital. In the early years, a mortgage is little different to renting.

now you see all these articles about the benefits of paying off a mortgage early, and an advert on telly with Simon Cowell saying its bad business paying for a lender for you to pay off a mortgage.

Well it's neutral for a lender (or maybe better for the lender). If you pay off (a lot of you pay off), he can just lend the released capital to new loans. It doesn't cost the lender at all.

You save MONEY in cash terms by paying early, but you are spending today's money to save money from years in the future. Today's money is worth more than future money. You don't want to deprive yourself of money you might need this year, aged 30, to save it in the future when you are 50 and the kids are grown up.

In the meantime, a mortgage is the cheapest way to borrow - so don't go paying off a mortgage, at 2% and then buy a car on PCP. at 5% flat (10% true APR). etc.

Who's your mortgage with OP?

We have one with the Halifax and can overpay by 10% of the outstanding capital per year. Whilst we can't withdraw what we've overpaid, if money for tight we are allowed to underpay the mortgage because we've made the overpayments (ie take a break from paying the mortgage or pay less).

I overpaid my mortgage, then when I was on maternity leave I was able to reduce the monthly payment by as much as I wanted up to the total amount of overpayment. I have reduced the amount of interest that will be paid but still have the facility to use the money if needed. Might be worth seeing if you can do this.

Alternative is to compromise and put half into mortgage and half into savings.

[edit]

in 25 years time, when your wages have gone up, repaying the seemingly large mortgage amount each month will be a small proportion of your income. That's why people trade to a bigger house. There circumstances have changed, they earn more, and they can afford a more expensive mortgage.

Also, with the mortgage we've got the overpayments don't bring the monthly payments down by default but you can ask them to reassess the payments (although if you do that then you can't use the underpayment feature).

And my mortgage payments have gone down when we've taken out a new fix - knocked £100/month off last time!

Overpaying reduce the capital so you pay less interest overall.

There’s a great calculator on money saving expert that shows you exactly how much you save. For us, an overpayment of 10k means we save an additional 10k in interest - effectively doubling our cash!

We found that overpaying (even sometimes only £50 p/m) made quite a big difference to the amount owed, I'd definitely be overpaying if I was in your situation.

Your £26k plus any redundancy payment would keep you for a year, which is easily enough time to find a new job.

I’d start paying off the mortgage now. It make a huge difference to how much interest you pay over the term.

My overpayments mean with luck, my mortgage will be paid 8 years early.

NE is irrelevant. You have to pay back the amount you’ve borrowed, the value of your house doesn’t change that.

Go to Martin Lewis MSE website - he has all the info you need on there.

It's worth considering the LTV as well as it was over 90% when you took out the mortgage and that will come with a high interest rate. Although, this doesn't matter too much as you could just pay off a lump sum at the end of your fix.

@Jazzybeats.
@motherofdragons90

you see, that's the fallacy. The martyn lewis money saver. You pay today to save outgoings in the future.

If you have spare money, consider investing some in the stock market. Instead of 1% interest, you might get a bigger return.

That's how endowment mortgages used to be so good. You paid interest only, and bought a tax-efficient endowment policy with the capital element to give you a large lump sum in 25 years. It worked for a long while until stock market returns dropped, and the tax regime became less helpful. But the principle remains. You can judiciously invest your extra cash, and hopefully get a bigger return that the mortgage rate you save. It's also your money if you want to use it in the future.

you might want your spare money to develop a business, or buy a holiday home in the future.

I wouldn't pay off a mortgage early. At any rate, it's not a simple black and white decision.

in 25 years time, when your wages have gone up, repaying the seemingly large mortgage amount each month will be a small proportion of your income.

That was the case in the past. Whereas nowadays you have a lot of people especially in the public sector stuck on 1% pay increases who have no hopes of increasing their income unless they get a promotion.

is he worried you may end up in negative equity and no way of mitigating that if you start paying down the mortgage now?

Negative equity means the property is worth less than the mortgage. Paying down the mortgage is the best way of ensuring that doesn't happen.

I’d always over pay in the mortgage, this way you save £££s in interest, you won’t make that much interest from a savings account.

You can always take a payment holiday due to over payments when you go on mat leave if needed.

This calculator will give you a good idea of how much interest you’ll have saved by over paying
www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/