Overpay mortgage or save?

[Bluevelvetcake2]

Hi, We are currently on a 3 year fix and mortgage term is around 16 years. The plan is to move to a bigger place in 3-5 years. I’ve been saving up for this and have a decent chunk of savings. Overpaying is often recommended and I can do this by up to ten percent without any penalty. But I’m wondering whether I should just keep the money in savings and as a cushion for when the fix ends or to add to the deposit for the new place. Overpaying seems to make sense if you’re nearing the end of your mortgage term but otherwise I’m not sure what the benefit is. Maybe I’m missing something? Thanks

Do you have any other debts? If so, pay these down if the interest is higher than the mortgage.

You really need to read your mortgage terms to work out what's best for you. Overpaying is rarely a bad thing to do but it depends on your objectives. If you need liquidity then perhaps save and then overpay once you've reached the buffer you need.

You might be on a fixed rate mortgage but the way the interest is charged might still make it beneficial to overpay.

No other debts.

I just can’t see any benefits to overpaying in our circumstances but I know it’s often encouraged and I feel like I’m missing something.

You're not missing anything. It's a straight comparison of interest rates and if you're savings rate is higher than your mortgage rate, which is likely if you're on a fix, just save separately. Be aware of the tax allowance for interest, but if you're saving a decent lump sum, and have a very low rate mortgage, premium bonds could be a good alternative.

Mumsnet is weird about agressively overpaying mortgages, which often makes little financial sense.

Where are your savings invested? It’s generally recommend to have an emergency cushion.

Then you need to look at your mortgage interest rate vs the rate you’re getting on your savings. If the mortgage interest rate is higher, you’re better paying the mortgage as it will reduce the interest you incur.

there’s a calculator in on money saving expert that shows how much you can save in interest.

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

We are overpaying as much as we can. Our deal ends in 3 years too. My reasoning is that the savings to me in the long run by bringing down the capital on my mortgage outweigh the potential interest on my savings. When we come to renew our mortgage in 3 years time, we will have a lot less left to remortgage so we will be paying less interest at whatever the rate is at that time

Another option is to offset your mortgage against your savings. I'm not sure if you need a specific deal for this, but my understanding is the mortgage sits in one pot and the savings sit in another, but the lender "deducts" the savings off the capital without actually taking it.

So if you owe 100k (capital) but have 30k in savings, the lender only applies interest to the remainder, so 70k is "interestable"

The interest rate on savings is lower than the interest rate on the mortgage. But overpaying is not going to reduce my repayments or my interest rate. Why not just hold on to the savings and earn the interest I can and then if I move house in a few years use those savings for my next mortgage? What will I get from overpaying now,?

By overpaying you are not paying interest over the course of your mortgage on the amount you overpay - so you overpay say £1000 in a year, that's £1000 you are not paying interest on for however many years you have on your mortgage.

If you have a decent chunk in savings and the interest rate is higher on your mortgage than the best savings rate you can finde then I would overpay rather than save. If you are able to get a better savings rate then I would put the money into that and then transfer that money into your mortgage at the end of the fixed rate.

Every penny we overpay goes off the total figure borrowed.

So say we owe 80k now. We pay the usual mortgage, so at the end of the year we've paid 12x 400pcm of which probably only 100pcm is the capital and the rest is interest. In a years time we would owe 78,800. Therefore next year we will interest at 2.19% of this.

As we are overpaying, we pay 12x 600pcm. At the end of the year, the 100pcm has gone off the capital plus the additional 200pcm we are overpaying so by a years time, we owe 76,400. So next year we will pay 2.19% on that instead of 78,800.

@Bluevelvetcake2

nationwide mortgage calculators has one for overpayments which is really user friendly and summarises the interest you'll save how much you'll reduce the years by etc

Will you be porting your mortgage?

I'm looking to move too & my thinking (which I'm happy to be corrected on) is that I'm saving, I'm not over paying my existing mortgage as it'll be beneficial to me to port a higher balance (at the lower rate) and borrow less on the second part of the mortgage (which will be a much higher rate).

I too feel like I'm missing something, but not sure what?

That's true for your fixed rate term now. But it will affect your next product when your term ends. It will also affect the balance owed so will reduce the interest even though you're paying a fixed amount for the duration of your term.

But again, there's not much point asking people here as we don't know your specific product and the terms. You really need to read the info that came with your mortgage to understand the benefits of overpaying.

Also, do you have an offset facility? We had one on a fixed rate mortgage (now variable) and it's saved us a fortune as we have half the value of the mortgage in savings. This gives us the best of both worlds as we maintain liquidity and reduce the mortgage interest/term. The fact that the savings rate it equal to the mortgage interest is a bonus. Admittedly it's not remotely close to the rate of inflation but I can live with that.

Those overpayment calculators don’t take into account if you’re not planning to stay in the same house forever until the end of the mortgage term. If this was our “forever” home they would be useful for showing how much we would save in interest by paying off the mortgage quicker by overpaying.

No offset facility unfortunately. Our broker did suggest an offset mortgage when we fixed a few months ago but when he looked into it he couldn’t find anything for us.

Well, no, whether you move or not you still will still have your current debt to pay off.

The calculators are just calculating the compound interest you save by overpaying for a given amount of money, length of term and interest rate.

If you want to make the decision simple, then it's simply a matter of if you can get a better savings rate than your current mortgage rate, then you are better off putting the money into savings than overpaying over a compariable length of time.

True but I don't think it really matters. Those calculators are just an indicator because they can't be expected to predict interest rates for the duration of your mortgage.

However, it should be apparent that reducing the loan amount will have a beneficial effect on the interest payable.

If it helps you can do two calculations. One where you don't overpay and one where you do.

So, you could do £200k and £180k (assuming a 10% limit on over payments). If you're able to overpay by 10% every time you change products (say every two years), you should get the idea.

But yes, naturally if you move home then your mortgage amount may change but the principles still apply.

Ok so if I have 90k and can overpay by 30k each year for the next three years I’m better off doing that then holding on to the 90k and adding it to my deposit for my next house in 3 years?

Ak ok. This is a whole different scenario and depends on how much your next house is going to cost. I didn't realise you had that much money to play with.

If you have a £90k mortgage and can overpay £30k pa each year then this would clear your mortgage completely. However, buying your next house may be more difficult, if you need to sell up to raise the deposit.

In this instance you might be better off using the £90k i.e. 3 x £30k pa, as a deposit, which may give you more bargaining power as you may not necessarily need to sell your current home to buy the next one.

We are definitely selling this place as we can’t upsize without it. The 90k wouldn’t clear the mortgage completely on this place. If I kept the 90k as savings I could earn some interest before adding it to my deposit for the next place.

You get charged interest daily on your mortgage. The more you overpay the more your capital balance reduces this in turn reduces the interest you are paying.

As others have said it is really quite straightforward. If the interest rate on your mortgage is higher than the interest rate on your savings it is better value to overpay your mortgage. With the caveat that you have no other more expensive debt and have an emergency fund.

I prefer to have the cash savings, in case my circumstances change and I need access to the cash.

If you look at your mortgage statement you'll see how much of your payment each month is interest and how much is paying off the capital (the interest gets added on each month). You should see that the interest added on goes down a few pence each month, because you paid off a few hundred of the outstanding balance each time you make a payment. So by making an overpayment you'll find that out of each mortgage payment more is going on reducing your balance and less on paying interest to the bank. If you pay off a chunk, and ask for it to go off the balance, the monthly payment stays the same but the length of the mortgage will be reduced (unless you borrow more when you move).

I was recommended to over pay by my ifa once i have 6 months emergency money. More of your money will go towards the capital than on a higher rate, you can also extend the term to something more affordable if the total is lower when you remortgage.

Savings rates are improving by the day, so if you have a lowish rate fix then you should be able to beat the mortgage interest savings via a savings account, so you can then overpay at the end of the term / put it into the new property.

If you are selling and buying at the same time then any equity you have in your home (e.g. the difference between what you have left on the mortgage and what you sell for) can/will be used for a deposit, so really in that sense it doesn't make any difference as to whether that 90k is sitting in a savings account or whether you have it as equity. It's still 90k you can choose to use as a deposit or not.

If you buy before selling it could be useful to have easier access to that money to avoid any possibility of needing a bridging loan though.

Why do you need a separate deposit? All the equity in your home becomes your next houses deposit (plus any savings) so 30k off the capital in the home is still 30k to spend when you sell (as you'll have 30k less to give back to the bank) plus the saving on the reduced interest as the actual loan is now 30k less.

My thoughts were that £90k could be 10% on a mortgage up to £900k. As such you could be akin to a first time buyer with no chain. A much stronger position than waiting for a buyer, being in a chain etc etc.

You'd naturally have to pay added stamp duty but this would be refunded upon sale. Any equity released could then be used as desired (offset, over pay, savings etc).