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?

Why pay off the debt? There is no serious answer to this 😂

As I said, I'm mortgage free after 7.5 years. Because I paid off my debt 🤷

We've just worked out that we are better locking the money we already have saved in a 2 yr locked account (which we COULD retrieve in an emergency by paying a penalty than overpaying mortgage. We've got a really good fixed deal just now though. Worth looking at if your mortgage interest rate is in the low 2% range.

An offset mortgage is literally the best of both, you keep your savings and grow your savings pot and your interest rate on your mortgage is lowered. You can then at any point pay off the mortgage from your savings however the benefit is that should you need you money from your savings you can just take it.

Put it in savings. Not the best long term but builds up money short term to pay for mat leave.

Definitely, definitely overpay the mortgage. Even for 6 months at a time, and then review the plan for the next 6 months.

Here's a brilliant mortgage calculator: m.drcalculator.com/mortgage/

We are overpaying...will be mortgage free in November, just over 2 years early. Dh retires for the second time in December, at 58. Paying the mortgage off gives you more freedom.

Are you planning on being a STAHM or have to go back to work and so will need to pay for childcare? I only had 6 wks 90% pay and 12 weeks 50% pay maternity leave and I'm the main earner so if I had had £26k in savings I would have used that to extend my maternity leave?
Also childcare is horrendously expensive however there is tax free childcare account now that whatever you put in the government tops up 20% (up to a certain level) so I would set aside an amount to put in the account knowing that you're getting 20% on top which is a far better return than any mortgage or savings account

You can normally only make overpayments of 10% anymore and you’re penalised.

@DinkyTie
Because you would have paid off your mortgage AND made lots of spare money on top!

Overpay mortgage as you are saving massively on interest, more than you'll earn on a savings account. Make sure you save for a rainy day but I'd overpay while you can.

Considering you may have issues conceiving, possibly needing to pay for assistance (at huge expense) I would be keeping it all in savings as you may need it!

I get 6 months full pay, 3 months SMP and 3 months unpaid so yes will need to use some for mat leave. Not planning on being a SAHM as things stand but we know our ability to save or overpay would be greatly reduced if we did have a child.

You’ve already got a lot in cash so I can’t see how adding more is going to benefit you, especially as your mat pay package is so good.

The money saving expert overpayment calculator is really good and it is amazing how much an overpayment can make over the lifetime of the mortgage.

If it was me, I’d look to pay off £300 per month and invest £200 per month in a stocks and shares isa.

Thanks user we will look into that

It doesn't matter if house prices drop or rise. You owe the mortgage company the amount you borrowed regardless.

I would save £200 and overpay £300. Customers who have a low LTV get the best rates and hopefully for your next property you not need as much as 90%. I think that you should have some cash savings though as it sounds like there's some uncertainty in the future and it'll be good if you can pay straight away

My mortgage company allows payment holidays if you accrue at least 6 months worth of overpayments. Very handy in case of redundancy. Interest rates are very low so I think overpayments are great for protection against future rate rises.

Over pay because it reduces the overall sum borrowed thus the interest which is calculated daily

One other point. If you become unemployed and have cash savings, you must use them to live on before you can claim for any other benefits. They can’t touch them if they are overpayments on a mortgage.

That’s a fabulous point to that I hadn’t even considered, thanks @MachineBee

As a previous poster mentioned, very good source for calculations:

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

Overpaying your mortgage is far more popular than it should be. The reason for that is twofold. Firstly, once upon a time it was an excellent idea - when interest rates were really high, overpaying could save you tonnes. Secondly, many people don't understand investing and are scared of it.

Right now, with mortgage interest rates typically around 2% plus or minus, overpaying on your mortgage is not particularly attractive. Over the lifetime of the mortgage, you will wind up paying a fair bit less than if you simply didn't overpay, but significantly more than if you invested instead of overpaying. Investing does have non-zero risk, but people get far too scared by that statement - with a properly diversified investment, we're not talking about a chance of losing all your money, we're talking about the possibility that you might put in £10K but only get (say) £9K back. And over the long term - like, mortgage term - history says that you will pretty much definitely see positive returns, and very likely see excellent positive returns.

In recent history, if someone invested in diversified global equity markets for 10 years, there's only a 1.7% chance they came out with less than they put in, and on average they earned 5.3% per year, with many earning significantly higher. (Source: www.prudential.co.uk/insights/stock-market-investing-for-the-long-term)

So if you and I both come into £10,000, and you use it to pay off some of your 2% mortgage and I use it to invest, then 10 years later, you owe about £12,200 less on your mortgage because of your overpayment, whereas I don't owe any less on my mortgage but my investments are probably worth around £17,000. There's a tiny chance that I actually have slightly less than £10,000, but equally I could instead have well over £20,000.

What's more, if at any point we find ourselves suddenly needing thousands of pounds, you need to go back to the bank and ask to re-borrow it (and they might say no), whereas I just need to liquidate some of my investment.

If you play it super safe by overpaying your mortgage, you are probably throwing away thousands of pounds.

@ThePants999
nicely demonstrated.

In recent history, if someone invested in diversified global equity markets for 10 years, there's only a 1.7% chance they came out with less than they put in, and on average they earned 5.3% per year, with many earning significantly higher.

I agree. I also suggested investing in stocks before prepaying the mortgage.

I agree that it is possible to make more money through investments but it is also possible to lose money.

If you are comfortable and have a lot of financial cushioning it’s much easier to consider investments as an option.

But if that cushioning isn’t there (no additional financial support from parents or anticipated large bonuses for example), caution is a better way to progress.

Lots of my friends jumped on the endowment mortgage bandwagon when I was first buying property, but for health reasons I wasn’t eligible so had to stick repayment mortgages.

30 years on, despite a divorce and two redundancies, I’m in a much better financial position than those who expected their endowment policy to pay off their mortgages. Many had to downsize to pay off the debt, or take on a repayment mortgage delaying the age they could retire.

This is just an example of what can happens with ‘clever’ financial instruments. They can work if you know what you’re doing but for many, this isn’t the case and it’s possible to lose a lot.

OP - be very certain of what the worst case scenarios are before going down the investment route. I would always take the straightforward way over anything required a lot of time and attention from me, so I can enjoy my life without having to spend it watching my money.

The calculations above miss the lower mortgage rate from lower LTV and give a higher percentage than can be guaranteed from investments.

I've invested significantly in shares in the past. Some of those investments did incredibly well, some muddled along with ok dividends and several other companies went bust losing the lot, plus one is now unlisted, valued at 0.07p/ share instead of the 45p I bought in at (a nightmare trying to change the address with an unlisted company). No calculations tell you whether you will be lucky or unlucky at a certain time with one or another investment, there are risks. I had always overpaid on the mortgage but it some into investments, then at a certain point planning to have DS we took the decision to defer putting any more into pensions plus sold investments so that we could have no mortgage on the new house, which has been perfect for taking lots of parental leave. With no mortgage we have little by way of investments but some risky and some low risk, but when DS is older we'll top up the investments again and our pensions. There's every chance that we'd be sitting here with more total capital from money in investments plus a mortgage if we'd followed another path, but the feeling of security is priceless and I think the decisions about having longer parental leave wouldn't feel as straightforward if it meant selling more investments to pay mortgage interest. Suggest to your DH that both of you close your eyes and imagine life mortgage free versus £200k in investment and a £200k mortgage to pay every month. Would you pay off any of that mortgage then? How much?

In your shoes (which I never will be because I’m useless at saving) I would overpay the mortgage but not by a huge amount, for all the reasons mentioned above. Having said that, you should aim to be in the next LTV bracket when you remortgage, so in that sense you are right and your DH is U. Also, if prices fall, lenders will probably be more stringent.

I would also invest, but given what you’ve said, a conservative amount. I have a few funds I pay a measly £25 a month to (starting payment was £100 - £200). Don’t think of it as liquid at all. In your position you could invest £100 plus a month and not miss it.

I assume you are paying the maximum possible to your pension? And DH as well? It might be worth looking at your pension situations as it is such a tax-efficient way of saving.

Are you getting the maximum interest on your savings? £26k is a lot to have in a crap savings account. You sound very motivated to save so you probably would make the effort to juggle several accounts. Have a look at money saving expert - they are very good on this.