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?

@ILoveEurovision

The reason the public sector is so good to work for is because as well as the pay increase, there is the "hidden" pay of a very generous pension arrangement.

Unless public sector employees rock the boat, they have a job for life, and a secure good pension. They are one sector that should never think of paying off the mortgage.

Gth endowment so good!!!! Jesus we lost so much money the worth of the blinking endowment was about half of the figure & what they paid in compensation was pitiful! Not worth the risk!

I would definitely try to over pay on your mtg payments. Interest rates are at an all time low and whilst they may not rise for a few more months they are already showing signs that in the next year or do they will go up.

It would only take an increase of 1 or 2% in interest rates to significantly increase your monthly repayments.

I would keep a rainy day fund of 4 months income and use the rest to reduce your mortgage. And overpay if I could afford it.

Unless public sector employees rock the boat, they have a job for life, and a secure good pension.

With constant reorganisations and redundancies, there are no jobs for life anymore, and the pension is far from what it was.

Is your experience of the public sector current?

our nationwide mortgage lets us overpay and we can get the overpayments back out if we want. we took an interest only mortgage (with no ISA/investment attached) as it was the only way we could afford this house at the time. watching our monthly payments go down as we overpay has been really cheering and we're on track to repay in full well before the 25 year term.

How on earth does he think you will lose the money you repay on the mortgage if house prices drop? You will always have to repay the mortgage in full no matter what happens to house prices (unless you go bankrupt). The effect of you reducing the mortgage debt would be to help you, because the more you pay off the less chance there is of you going into negative equity if house prices fall.

Sorry if it's been mentioned already, also buy overpaying when it comes to remortgaging you will have a better LTV, so will more than likely be able to get a mortgage with a better interest rate.

In 2 years you have managed to save 26K, so a grand a month?
Without any financial background, I'd pay additional into the mortgage. Thats what we did (and were mortgage free on a similar priced but 4 bed property before 40).
If he's not happy with 500, why not 300? That would still be 700 per month into savings.
Or maybe 300 into mortgage, 500 into savings, and 200 extra spending cash - it sounds like you might be saving the big amounts by living extremely frugaly - is that sustainable?

Thanks everyone for all the replies.

I am actually public sector, so my pay rises are usually lower than inflation and I don’t see that changing any time soon. DH is private but we earn very similar. I worry a lot about redundancy tbh but I’m comfortable that we could cope (as in not die of starvation or lose our house) if one of us lost of our job.

General consensus seems to be my idea is better (il try not to be smug when I tell DH)!

We overpaid the whole time we have had the mortgage, our mortgage will be paid off this year [we bought it 12 years ago] and then all the extra money is going into a SIPP so that we get an extra 25% free on top.

Overpaying your mortgage [or any loan] is always the best option if your savings interest rate is lower than the mortgage [or any loan] interest rate.

What is your interest rate on your mortgage...must be quite high.

How long have you got left until you can change the mortgage?

I would personally keep saving and then get an offset mortgage, which will reduce your interest but you still have your savings to go to if you really had to.

@sunshinespring

It is approx that yes although some months much less, and we had some money given as a wedding gift that went into savings too.

We do live fairly frugally I suppose. We do go on holiday a couple of times a year but my family have a holiday home abroad so it’s cheap for us. I don’t really splash out on clothes/makeup as I’m quite minimal and our hobbies (cycling/running etc) are luckily low cost so at the moment our outgoings are fairly low! I don’t feel like we miss out on anything we desperately want but we aren’t massively expensive people.

We overpay by £500 a month & have always increased it when we've had pay rises, childcare cost decreases etc which means our 18 year mortgage should be paid off in 7 years when we are 45.

As PP said up thread, investing may yield a bigger return but I personally prefer low risk options with my money.

@Nquartz as do I, I don’t think my anxious disposition would do well investing!

I overpaid our mortgage when we were able. It really made a difference - paying less interest and shortening the time we had the mortgage. Certainly it saved more interest than it would have earned in a savings account!

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.

With all the current uncertainty over the effects of Brexit and so on, I wouldn't rely overly on the above.

I'd also pay extra off the mortgage OP, no question. It will save you money in the long run. If the worst happens and the value of your house drops, you still have to pay the same amount.

If house prices tank that's irrelevant as the mortgage is the mortgage even if the house is worth zero.

If I had this discussion and could not agree I'd just split it in half - half to the mortgage, half to the savings and reassess once a year. That's more or less how I did it when I had a mortgage anyway, which is now paid off.

It's nearly always better to pay off/down the mortgage.

For every £1 you have in the savings account earning 1% interest , the bank are giving you back your own money but charging 3% (or whatever your rate is). Overpaying at the beginning saves interest over the whole remaining length of the mortgage. You've got plenty of buffer, I'd pay off the mortgage

The reason the public sector is so good to work for is because as well as the pay increase, there is the "hidden" pay of a very generous pension arrangement.

Unless public sector employees rock the boat, they have a job for life, and a secure good pension. They are one sector that should never think of paying off the mortgage.

This may have been true in the past, and perhaps still in pockets of certain departments, and the pension still applies to people who joined more than 7/8 years ago (although even then there have been changes) but a more recent/new entrant into the Civil Service doesn't get enrolled into a final salary pension scheme, is at risk of redundancy with every oh-so-regular "efficiency saving" review and is not guaranteed a pay rise or if they are it will be no more than 1.5% max, usually closer to 1% or even no pay rise at all. Your information seems very out of date.

OP I'm overpaying my mortgage by £100 and if I'm able to continue doing so, will pay off the whole thing 3.5 years early.

Are you contributing the maximum into your pensions? Based on the recent pensions thread, one of the things I've learned is that this will offer a greater ROI than either conventional saving or overpaying the mortgage. For various reasons I need the security of bringing down my mortgage balance instead, but this is something else to consider.

Think of it as a waterfall. First, you fill the bucket of savings until there is enough to cover emergencies and loss of job for a time. Then you fill a bucket of long term investments that will hopefully earn more than the rate of inflation. Then you pay off debt, which gives you an absolutely certain return in terms of interest saved on the principle that was payed off ahead of schedule.

My DH, who has a masters degree in finance, followed this approach and we always over payed our mortgages. We also sold twice with substantial gains, which meant that we had to borrow less for out next house. We were mortgage free by our mid 40's and the freed up cash flow went to saving for the kids uni and our retirement. The kids now have enough to graduate uni debt free and we have a very comfortable retirement pot.

I agree with you, not your DH.

Whilst interest rates are so low I'd tend not to pay off the debt. Depends what your mortgage rate is. As others have said, if paying off a chunk gets you into a better LTV band then do that. If you are prepared for some risk then investing into a stocks and shares ISA makes more sense than paying off a debt at 1-2% interest.

If you got to moneysaving expert there is an overpayment calculator it will show you how much money you will save in interest by making regular overpayments. I make regular overpayments and the money is not ‘locked away’ I can ring the building society and the will send me the money back (check your mortgage terms)

bungaloid But it's not just a debt at 1-2%, it's a debt for 20-30 years. It absolutely makes sense to pay it off as quickly as possible.

Certainly in the OPs situation, where there is sufficient savings already.

The more you reduce the capital on your mortgage, the less likely you are to end up in negative equity.

@DinkyTie
The term isn't important. The point is that if you can get a better rate of return on your money, then why pay off the debt.