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?

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.

You shouldn't invest in stocks unless you don't anticipate needing the money for at least 10 years. In the short run, you can lose you shirt. In the long run stocks historically have been a safe investment.

The other risk people tend to forget about is inflation eroding the value of your investments. Stocks will earn more than inflation in the long run.

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).

Buying individual stocks is a very poor approach unless it's a very small amount of your portfolio. You're betting that you can beat the market. That's almost impossible. Individual investors are much better off buying a diversified, passively managed index fund that owns and holds hundreds or thousands of different stocks.

www.nerdwallet.com/blog/investing/average-stock-market-return/

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

If you're not, the debate is somewhat moot as you can't afford to overpay either. I assert that if you're in a position to overpay your mortgage, you're in a position to invest.

Individual investors are much better off buying a diversified, passively managed index fund that owns and holds hundreds or thousands of different stocks.

Totally agree with this. The fluctuations in individual share prices are what makes people see investments as "risky" - it's quite unintuitive to the average person that if you combine a thousand things that fluctuate a lot, you actually get something that fluctuates only a little.

2 years really isn't long in terms of mortgages, I think its quite normal to only see a small shift in that time.

Property values may have changed - you technically own all of the principal repaid and any capital gain over the past 2 years, and all of that would be available to you for a deposit on your next home

It could be worth paying the fees to restructure your mortgage, shift banks etc (some banks offer cash back intensives which could cover the fees)

Maybe split it into portions benefiting from different interest rates over different periods.
We split ours into 3, and have them staggered so only one renews each year, if the interest creeps up we aren't hit all at once, if the interest drops we don't have long to wait to re-fix the next chunk. we pay the minimum + 20% on each

Look at an offset mortgage - you would be charged interest on the difference between your loan and your savings - run the numbers though, interest on offset mortgages is usually a % or two higher than a fixed term. For us it worked out that we would need 1/3 of the mortgage value in savings to make the offset worthwhile.

I'm sort of the opposite in that i manage our houses finances while DH just goes along with whatever, it is important though that you both know whats going on. If I fell over tomorrow DH knows the plan, where everything is and what to do next.

I saw a thing about mortgages the other day, mentioning a 65 yo couple who had taken out a 40 year mortgage.

It mentioned that at todays rates, a £200K mortgage paid back over 35 years would cost £250K in total.

50K over 25 years just isn't a lot. It used to be 6-8% interest, so £12000 - £16000 a year - which did up to a large amount. To me it still isn't really worth paying off a mortgage nowadays.

it's quite unintuitive to the average person that if you combine a thousand things that fluctuate a lot, you actually get something that fluctuates only a little.

There are two types of risks for stocks, market risk and company risk. Most stocks will be pulled up or dragged down with the market as a whole. Individual stocks can also be hurt by bad news particular to that company - a big lawsuit, failed product, financial mismanagement, etc. Broadly diversified index funds eliminate the company risk you have when you hold individual stocks.

Personally I would work out what you will have needed to pay off to get to the next Loan to value bracket or even better the one after that (Martins money saving expert is useful for this) by the time you need to remortgage and then see about an over payment and by how much. This will reduce your interest rate for next time.

Personally I would meet half way and save £250 whilst overpayment of £250. We overpaid this amount on our mortgage for only a year and currently stopped due to being on mat leave it makes a difference.

Interesting reading - it's certainly given me food for thought.

We overpay our mortgage for 2 reasons. Firstly because we want to get it paid off before our eldest goes to university, so we have more spare cash to help her then. Secondly because interest rates will only rise and by reducing the debt now, we reduce our exposure to future increases in interest rates.

Also if you do go for overpaying, check the terms. Our mortgage provider offers a very flexible system where you can draw on your overpayment pot if you need to, so it's not completely locked away.

We had a 90 000 mortgage and overpaid each month. We paid it off 9 yrs early and saved 40 odd grand in interest. You would struggle to get that kind of return on your savings. It is a no brainer to me and our financial adviser totally agreed. Now we are looking at what to do with the monthly payments we are saving for our future and it is lovely to be debt free.

it all depends on your interest rate on the mortage you have, OP hasn't specified this. If you have a low interest rate then it might now be worth it, better off doing an offset mortgage instead or investing savings instead.

If the interest rate is quite high then it would make sense.

Also if your overpaying and the money is locked in again this is where an offset mortgage is better as it provides flexibility.

Keep your savings if he has to see savings but start paying down your mortgage.When your fix is over you may find interest rates have gone up.
Negative equity is only an issue if you need to move but regardless you will still have the same loan unless you start paying off some of the capital.

Every pound you pay off the mortgage reduces the balance meaning you will be charged less interest in the following month. So £100 overpaid is probably worth £110 with interest saved. It will add up to pay your loan off earlier.
As your mortgage balance reduces over the years the monthly repayment will be paying less of a chunk of interest and more off the capital balance.
Have a look at offsets. Different lenders offsets are all different. Some will be just all in one pot and others will be a mortgage and then an offset savings account. This will earn the same rate as the mortgage account and the interest goes across monthly to reduce the balance or repayments. The beauty of offset is that if the mortgage charges 4.50% ( for example) you also earn this on your savings balance...where else can you get this return!?
Don’t worry about remortgaging else where, it costs money. Ask your current lender if they can do you a better rate. Watch set up fees don’t exceed what you might save though!
If rates are high, again look at offset.
Lastly ask your lender to provide a written projection /calculation of if you pay £xxx a month extra, when Wil it be paid off?

If you can afford to overpay by that amount I would buy a bigger house. I disagree with your dh that a property market crash is around the corner though. People have been saying that since I bought my first property in 2001. Yes there have been dips but overall the gain has been vast. And I have had the benefit of living in increasingly nicer properties....

We overpay our mortgage for 2 reasons. Firstly because we want to get it paid off before our eldest goes to university, so we have more spare cash to help her then. Secondly because interest rates will only rise and by reducing the debt now, we reduce our exposure to future increases in interest rates.

Neither of these are good reasons to choose overpaying over investing, because with an investment, you can convert it into an overpayment any time you reach the end of a fixed rate on your mortgage.

Open two stocks and share ISAs and invest in a balanced fund. You will make more than leaving it on deposit and you will pay the mortgage off eventually.

Can you only repay on a monthly basis? With our mortgage you could repay each month or pay off a chunk of the mortgage at the end of your fixed term if you wanted. We just came to the end of our 5 year fix recently, the original rate was 4% and we've now gone down to 1.5% fixed for 5 years. We decided it didn't make sense to pay off a chunk at 4%, so we just kept our monthly repayments the same now were on a lower rate. Interest rates won't necessrily always increase.

I see what the DH is saying about negative equity and overpaying. If you overpay e.g. 30k off the mortgage and circumstances change and you need it back, in theory you could remortgage to release the equity. However, if house prices drop sending you go into negative equity then obviously you can't. Similarly, if the reason you need cash is that one of you has lost job, ill, etc then you may not get approved for a mortgage.

Of course, keeping the money in the bank means that in that scenario you will be 30k further in negative equity than if you had overpaid. But as long as you don't want to move and can make the monthly payments then that is not an immediate crisis. Needing to borrow money that you could have had in savings at a much more expensive rate could be a crisis.

It's very cautious - definitely worst case scenario planning. I do think your plan is better. I'd maybe meet in the middle and get the savings up a bit more first though.

We overpaid over the last 5 years we spent on a fixed rate, and this brought us under 65% LTV when negotiating a new fixed interest rate this summer. It really helped.

People are talking about the current low mortgage interest rates as though they are here to stay.
If you overpay now then when you come to the end of your fixed term it will have two benefits

• lower LTV meaning you will have the choice of better rates

-less to pay off at a higher rate if they do go up

If you can't agree on overpaying the whole £500 then why not agree on a compromise split? So £250 Overpayments and the same again in another type of investment.

Your husband is completely wrong about house prices dropping. A risk of them dropping is all the more reason to overpay at least something, to ensure you don't end up in negative equity with very limited choices when your fixed term ends.

I overpaid and paid my mortgage off in 20 years instead of 25 (with a payment holiday of a year when I wanted the money for something else). It’s worth it unless you want the money for something, but as you say op, there is rubbish interest on savings.