Explain this to me because I'm really thick when it comes to mortgages...

[YellowRedBlueGreen]

I took out a 35 year mortgage in 2019, now down to 30 years thanks to some overpayments. I've always focused more on savings and have mainly put spare money in that because I'm the "what if" type of person who worries about not having most of my money there to use if I were to become unemployed etc. But now that this interest nightmare is happening I'm thinking, if my new job (starting next month) goes well I will give it six months to feel stable then throw a massive chunk of my savings at the mortgage - the amount I'm allowed to overpay per year. It will knock nearly 4 more years off and I'll still try to have a decent amount for an emergency new boiler or whatever in my savings... my savings account generates basically zero interest and according to Martin Lewis (in my situation) overpaying is best. I'm fixed until 2026 so ideally if possible I'll throw as much money at the mortgage as I can until then. But when I do come to remortgage in a few years, other than the outstanding amount being lower than expected how will I benefit from this? If at that point it's still gone up to 6% the monthly repayments will still be as extortionate as they would be if I'd not overpaid at all, is that right? Or not? Sorry if I'm being a bit dense I really don't understand all this grown up stuff!

@YellowRedBlueGreen I think you'd be better off paying a bit extra each month than saving it up and paying a lump sum off. Although your mortgage rate is given as an annual rate, the interest is calculated monthly for most mortgages. That means that if you pay a bit extra each month, the balance that the interest is calculated on is lower the following month. If you save that up, and only pay it after 6 months, you don't benefit from the balance being reduced in months 1-5.

I've used an overpayment calculator to illustrate it. £100,000 mortgage at 5%, with a £100/month overpayment, Vs the same with a £600 overpayment in month 6. You'd be £200 better off by paying the £100/month.

*ssorry it's the money saving expert site that I find easiest to use.

OP - they are surprisingly hard to get your head around. The issue is that as you start to repay your mortgage the amount owed and therefore the interest you are being charged drops.
However the original figure is calculated to stay the same throughout the whole mortgage.
This means that in the first month it's mostly interest you are paying, with a smaller payment towards the actual amount of money you borrowed, but as time goes on, less of your payment is going on interest and more is going towards reducing the sum you owe.
This is why over paying at the start of your mortgage is very effective, as it effectively removes some of the early months - where the majority of your payment is 'wasted' on interest.
However (as mentioned earlier) this is only the case if you choose the use the overpayments to reduce the overall length of your payments. You can instead reduce the overall monthly payment instead - which will mean you get a far smaller overall benefit in early payment. (But you get the benefit now rather than in the future.)

Actually, scrap that - you'd be £6 better off in month 6, but still £6 difference.

Hello OP, if you can overpay your mortgage that’s a great position to be in. You will save interest in the long run. Also you will have a lower loan to value figure so will get better rates.

OP,

This calculator is good for helping you work out what you would save by overpaying.
www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

As PP said there are different LTV (loan to value) brackets and which one you fall into will help determine the mortgage deals you get offered.
So, for example, person A has a mortgage of £180k on a house that's worth £200k. Their LTV ratio is high, at 90%. The interest rates available to them are likely to be quite high (excluding other variables like credit ratings etc).
Person B has a mortgage for £100k on a house worth £200k and so has a loan to value ratio of 50%. They are likely to be able to access some of the lowest interest rate deals on the market, much lower than the person A.

Overpaying on your mortgage will decrease your loan to value ratio and so should make it more likely you will be offered better mortgage deals.
However, the other variable in LTV is of course the value of your house. House prices declining could mean you fall into a less favourable LTV band or even into negative equity. The more of your mortgage you have paid off the less likely this is to happen.

Here is another calculator you can use to look at the impact of various interest rates and term lengths on your repayments.

www.google.com/search?ie=UTF-8&client=ms-android-tmobile-gb&source=android-browser&q=mortgage+repayment+calculator

Really glad you got some help with understanding this OP. Many people don't and it took me ages to personally
The other factor to consider is if house prices crash it will change the ltv. Not a reason not to do it, but an imbuggerance for us all

What interest rate is on your mortgage? There are bog standard savings accounts offering 2.5% right now - you could put your overpayments in there, get the savings interest and then make one big overpayment when you remortgage to reduce the LTV further.

this only works if you have a higher interest rate on your savings than on your mortgage.

Just go to Google and look for mortgage overpayment calculator. Then you can run scenarios, different interest rate, different overpayment amounts, different term e.g.35yrs etc.

Not rocket science when these tools are so easily available

For fucks sake!! Rocket science. There's always one or two! I understand I can use an online tool to throw a few figures in, what I wanted was to get my head around interest rates in general and work it out for myself. With a brain, a pencil and a calculator.

If you type in mortgage calculator money saving expert.

A really good calculator comes up. You can change your loan value and interest rate and it tells how your repayments would change by altering any of the terms of the mortgage.

I think it's best you spend some time tinkering with it.

I thought the interest rate was all about division so if a £100,000 loan has a 5% interest rate that interest rate is £5,000. Which would be £416 for the first month before it starts going down. I'm obviously going wrong somewhere as the online calculator matched what the Hammer PP came up with and not my own calculation.

Hi OP I think few have pointed it out but the main benefit to your monthly budget is that you could start to increase the term again to lower monthly payments if you needed to. It's an extra cushion.

But given you are on a fixed rate till 2026, and that right will Be lower than the current market, I would pay off as much as you can each year until you renew as it's 'cheaper' borrowing.

Ours expires next may - bad timing. But on a fixed rate of 1.8% we are loading up the overpayments between now and then, and naturally we won't switch until the very end of the mortgage deal as any new mortgage will be considerably more expensive. But we have 15yrs left to pay. Don't want to extend the duration but it's a cushion if we really need to.

Put the numbers through here:

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

I get the confusion. I am intelligent/professional etc etc. But I can fund with this stuff my brain shoves it's fingers in it's ears and goes "La la la la" not listening/not working.

So break it down. Grab a piece of paper to transfer your answers to. The act of writing it down will help.
Try and use the same timescales/amounts/% to get a fair comparison.

Use this www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/ as PP have said. Put your figures in. See how much interest you will save.

Then use something like this
www.moneysavingexpert.com/savings/savings-calculator/

Then also consider:

1. Bringing down the mortgage means you own more of the house (vs the bank) should you need to sell
2. The above means when you come to remortgage you will get a better deal as your LTV will be better 3)If you pay off your mortgage early (we did so with overpaying - 7 years early) we now have 7 years of paying the same amount our mortgage was into savings accounts.

Op there is no point trying to recalculate the actual interest figures. Mortgage interest is calculated using a method called “compound interest” and the vast majority of people don’t understand it and don’t need to. If you just get the basics of how overpayments can help you then you’ll be fine.

When you make overpayments with my bank, they ask you if you want them to use the overpayments to reduce the term of the mortgage or to reduce the monthly amount due. Obviously you can't do both with the same money but if you are putting in a large lump sum you could ask them to do on option with half the money and the other option with the other half.

If you use the money to reduce the term, repayments will still be sky high once your fixed term ends.

If you opt to keep the term as it is, then the monthly repayments due will be reduced.

I am doing the latter.

Nope, that's how Provident work, which is why their APR is thousands.

OK there are different types of mortgage, but mainly they are interest only (used to be called an endowment) or repayment.

On an interest only mortgage you only pay the interest, you still owe the same amount at the end as you did when you first took out the mortgage.

Back in the 1970s these were sold alongside an 'endowment' so your mortgage payment paid the interest but then you paid into an endowment which was invested for you. When the mortgage came to an end the endowment was used to pay off the debt and hopefully you also had a chunk of cash left over.

But then in the 1980s endowments didn't pay enough to clear the debt, and house prices dropped so even if you could sell you didn't have enough money to pay the debt so were left in debt and homeless.

These still exist but without the endowment part, so say you are 20 years old and your gran left you £500 000 in trust that you will get when you are 30. It could be worth getting an interest only mortgage so you don't pay as much each month but you know you will be able to pay a debt of £500 000 in 10 years.

The other main type is a repayment mortgage.

The money you pay every month is paid towards the interest and the amount loaned. So using your example:

5% of £100,000 = £5,000 - this is true, but only for the first month, your payment is towards the interest and the loan, so say you pay 100 off the loan and the rest is interest the next month the interest is:

5% of £99 900 =£4995

So say the rate stays at 5% and you over pay the amount you actually owe goes down quicker than the £100 a month your contract says you pay.

Now that's a simplified version because you often also pay a life insurance policy in case you die.

So the amount you pay is:

Part towards the loan+ interest + life insurance

Your house is your biggest purchase ever, usually.

If you can overpay your mortgage, it doesn't just reduce interest off that month, it reduces all interest on that amount each month going forward.

We took out a mortgage and over paid it by the max amount for about 7 years, then had to stop due to changes in jobs etc, and then restarted after about 3 years. by then there wasn't a maximum amount that we could overpay so we just put whatever we had towards it each month.

We had paid the whole thing off in 16 years. So it took 9 years off the mortgage and reduced the overall amount we ended up paying.

@YellowRedBlueGreen
I would look into moving your savings somewhere where you can get more interest.
I can get more interest in my savings than I am paying on my mortgage (3-5% across various regular savings accounts with a low for holding of 1.6ish versus 1.89%) so it doesn't make sense to overpay the mortgage until such time my current mortgage rate expires and the mortgage rate increases to the new one.
Savings rates are only going to increase (at the moment) and your mortgage is fixed for a while yet. You could lump sum annually once a fixed saver term is ended (or some even allow you to withdraw the funds penalty free for if your mortgage comes to an end during the term of the regular saver).

@YellowRedBlueGreen
The £416 is (pretty much) correct for the first month - but not really that important.
If you monthly repayments were £616 (for example) it would mean that £200 of that money was reducing what you owe, and £416 of that money was paying the interest.
After a few years the amount owed will have decreased. You will still by paying the same per month, but now less of the money is paying interest, and more is reducing the amount you owe.
As you go through the mortgage the proportion of the amount that goes on interest gradually decreases and the proportion which goes on paying back your loan increases.

Yes whenever I've overpaid I've always gone with the option to reduce the term not the monthly repayment cost because you save a pittance with that option.

I know all I have to do is throw in an estimate of what I think I'll owe in 2026 and an interest percentage to find out what my monthly direct debit would be. I just presumed everyone else in the universe could work this out and estimate the repayment figures in their own head!

OP if you overpay £20,000 on a £100,000 mortgage (eg) in five years' time, when you come to remortgage or move house you will only need to borrow £80k not £100k. As interest rates may be higher then your monthly payment may not be any less than it is now, but it will still be a lot better than paying the higher interest rate on the full £100k.

@YellowRedBlueGreen if you could answer the following questions it would facilitate giving you more useful advice:

1. what is the interest rate fixed on your mortgage, and until which date?
2. are you already contributing annually to an ISA, and if so, how much?
3. are you a higher rate taxpayer?
4. how much extra would you be allowed to pay down on your mortgage each year without paying a penalty?
5. if you decided to sock away extra money into savings instead of paying extra on your mortgage, would you have the strong discipline to keep it in savings and avoid spending it for any reason?

@YellowRedBlueGreen let me also add, almost nobody can work out mortgage payment amounts and paydown amounts in their head - you need a spreadsheet or mortgage calculator for that! But, there are some useful simple principles based on the interest rates and your tax rate, hence my previous questions.