Over paying Mortgages

[Aquarius1234]

AIBU to find those that over pay their mortgages smug?
Moat people can just about afford or want to pay the standard monthly payments. Let alone want to use any more money/ savings on it !!
Why worry about paying off when in 20 years your probably get some form of lump sum anyway

Interest rates were low for years until recently?

Age dependent.

My first mortgage had an interest rate of 15% .

It's really not complicated. If you have some money that you can afford to save each month, then you have a choice between reducing your mortgage debt or increasing your investments. Let's assume that you have got enough saved in easy to access accounts that you don't need to worry about "rainy day" funds (obviously paying off the mortgage is no good for that as you can't easily get the money back to spend if need be!). Then it's simply a matter of comparing the interest rate you are paying on the mortgage versus returns available elsewhere. You need to take into account that paying off the mortgage will give an entirely risk-free return, whereas some other investments won't be. It is also effectively a tax-free return (but you can earn a lot of interest these days without paying tax so probably not an issue for most). But otherwise, that's it. Those people who are lucky enough to still be a good fixed rate details of 1-2% or thereabouts obviously will find it better to invest the money elsewhere. Those of us paying more than 3% might find that reducing mortgage debt is a very low-hassle way to get a risk-free, tax free return of over 3% on our savings. Likely to be better to pay off other debt first though!!

There's nothing special or magic about paying off your mortgage debt versus anything else.

If you reduce your mortgage, you can probably reduce your payments later, if necessary.

I liked to do that just in case there was a downturn in business.

Sorry to hijack but can I ask a question to posters?

I am currently on a low interest fixed deal which will end later this year. We have been overpaying our mortgage by about £150 per month. People are saying that its a better investment to save money in a savings account if the interest rate is higher than the mortgage rate. I don't really understand that? My thinking was that right now while my interest is low I can afford to overpay and it means that when the rate inevitably goes go up my balance will be lower and therefore I will benefit when the interest does go up. Is that not right? I'm unlikely to be in a position to overpay once it goes up.

It just means if you are overpaying £150 a month you are saving your (let’s say) 1.5% interest on the £150. If you put the £150 in a savings account instead you would still have the £150 plus let’s say 4% interest. At the end of the term you’d then put that lump sum into the mortgage (plus the interest you’ve accrued) and you would have (very slightly) more off the capital than if you do it via overpaying.

There’s not much in it if you’re talking about less than a year and relatively low sums anyway. The difference for you is literally less than £20 so I’m not sure if it really matters. Plus it’s probably good sense to get used to the higher mortgage payments now and not be shocked later..

I was just going to mention offset mortgages, but I suspect that might blow op’s mind.

We have gained immensely over the years by setting our monthly repayment as if we have no savings and then offsetting the accounts with our income and savings in. It’s like having accessible savings crossed with paying down the mortgage. Particularly good if you are saving money for a big purchase - house improvement or large item - as the money works for you while it is accumulating and yet can be spent all at once without any issue.

Depends on relative mortgage rates vs savings, though - if the latter is higher, then offset isn’t worth it.

*Sorry to hijack but can I ask a question to posters?

I am currently on a low interest fixed deal which will end later this year. We have been overpaying our mortgage by about £150 per month. People are saying that its a better investment to save money in a savings account if the interest rate is higher than the mortgage rate. I don't really understand that? My thinking was that right now while my interest is low I can afford to overpay and it means that when the rate inevitably goes go up my balance will be lower and therefore I will benefit when the interest does go up. Is that not right? I'm unlikely to be in a position to overpay once it goes up*

Ideally you would put the money into a savings account as long as the interest rate is higher than the mortgage rate. Then immediately use the savings to overpay the mortgage as soon as the mortgage rate goes up to more than the savings rate (if it does...). Though doing that perfectly can be a bit tricky (depends on what your mortgage/savings allow you to do) and the amounts you are talking about are fairly small.

Ahh thanks to you both! That makes sense!

If interest rates paid on savings were greater than interest rates charged on loans, banks would not be making trillions in profits.

“If interest rates paid on savings were greater than interest rates charged on loans, banks would not be making trillions in profits.”

But it is true for a lot of people on low fixed rates. Mine is 2.2% for the next 10 years. You can easily get 4% now. Similarly someone could choose to pay into a pension or LISA instead to get the tax relief and be broadly up before any investment growth during that period. It’s obviously a very different proposition now for people on a higher rate but there are plenty of people around who still have older mortgage rates that were set before the more recent interest rises.

Hey, OP, my mum died last year and left me some money. When my fixed term ends in 2024 I’m going to clear my entire mortgage in one go! 😀😍🤑🖕

is that the sort of bragging you’re on about?

Except that's an over-simplification. (And many of the leading rate savings providers don't offer mortgages.)

People with a low loan-to-value, high income and good credit score will pay a lower rate of interest on their mortgage. They have a greater chance to play rate arbitrage as a result.

There's often timing opportunities on mortgages as people fix for 3-5 years. So some of us have a sub-1% fix but can get 3-4% on savings due to the base rate hike. This could go the other way but most of us look at interest rate forecasts as far as possible before deciding to fix.

And, as most of us have said, the better opportunity is in equity investments (in an ISA, LISA or SIPP) rather than savings in any case.

Also, "interest rates on loans" is too general. The interest rate on a non-mortgage loan/credit card is much higher. My credit card is 10.9%.

Even if it's a small amount it's worth overpaying your mortgage. By overpaying you save money because you pay less interest in the long run.

It's about long term giving the bank less money!

It's not smug. I've been in a position when I've only overpaid a very small amount but it all adds up!