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!

Compound interest is really complex. I'm like you- I like to be able to work out sums to understand them. I was getting myself totally confused when trying to work out increasing our mortgage by simplifying it too much.

I think the idea of using online tools isn't to understand how they come up with the numbers but to understand the different impact your actions will have. So it's easiest to accept that they've worked out the maths for you and your job is to understand how paying an extra 100pm will make a difference vs saving it and paying it off in the future.

at the start most of what you pay off is interest and not the principle/principal (is it better to guess one and be at the mercy of pedants or to cover all bases) which is heart breaking when you look at your statement and work out how much you've paid vs the change in the overall loan.

Hi OP

If in 2026 you owe 94k and have a term of 26 years
repayments at 6% will be £596

If you have overpaid by 10k so you owe 84k over a term of 26 years
repayments at 6% will be £532

If you think you will be struggling with your outgoings you might be better to keep the savings in place as an emergency fund to supplement your income if you need to.

(I used the money saving expert basic mortgage calculator for my numbers)

OP there's websites where you can get an 'amortization schedule', which I think is more of an American thing. But you put in your mortgage amount, length of term and interest rate and it works out how much your interest etc will be month by month. There's this one, for example. If you play around with them you can work out if overpaying is with it.

It really helps if you write, sometimes in words, what you are attempting before doing the maths.
I know what you are trying to do, but
100,000 x 300 = 30000000.

I wouldn't attempt to calculate mortgage interest without a spreadsheet, or online calculator. It's not straightforward maths.

Basically, what the bank does is work out to total sum owed over the term, including all the interest. They then divide it into equal monthly payments. In the first year of your mortgage, you barely reduce the capital. By the last month of the mortgage you barely have any interest. It's not equal every month.

If you have over paid, you can may have:
*Reduced the capital far enough to get into a lower loan:value bracket, and hence potentially lower interest rates
*be able to reduce the term of your next mortgage, which saves interest.
*keep the term the same, but reduce each monthly payment.

As someone said above, one benefits your future self, nr benefits your current self. Depending on your stage of life, one choice may be infinitely preferable.

I meant divide ➗️ 😅

Basically, what the bank does is work out to total sum owed over the term, including all the interest. They then divide it into equal monthly payments. In the first year of your mortgage, you barely reduce the capital. By the last month of the mortgage you barely have any interest. It's not equal every month.

Thank you - this helps

I think your best bet is looking at one of the overpayment calculators with graphs too. They show the benefit of paying lump sums vs regular overpayments, and usually have a graph showing the decreasing interest if you're on repayment.

As far as I can work out, interest is calculated either daily or monthly (doesn't really make much difference over the figures we're working with) so in month one you'd pay interest for £100k which at 5% would be £5k (divide by 12 for per month) plus a repayment towards the actual balance. Since you've made your repayment that month the next month the interest is charged on the remaining balance (£100k minus the payment towards the balance you made in month one) and because you're paying a set repayment the amount going towards the capital increases slightly as the interest has decreased slightly. This means that the earlier the money goes against the balance the earlier it reduces the balance you're paying interest on so the less interest you pay overall, making overpaying early more effective than overpaying later. That's the basic version.

The complicated version involves inflation making money you pay off now worth a different amount to money paid off later, plus effects on loan to value of changing house prices, plus the opportunity cost of having the money in the mortgage rather than something that could make you money like a business or investments, etc..

If it's any consolation, the basics maybe simpler than rocket science but once you're doing the detailed calculations you're not far off and, more importantly, if even rocket scientists mostly round their calcs to check computer figures these days, it's probably not worth your time and effort.

I find compound interest quite difficult to calculate, it’s not just you.

I’ve had some real curve balls thrown at me and when I got a mortgage, my mind went: right, I’ll overpay just in case I ever lose my job or I’m I’ll or something. Turns out that it’s the most sensible option out there, when I remortgaged after my first 5 year fix term, the overpayment lowered my term time considerably, the interest went from 3% to 1.5%, lowered a little the monthly payments as well.
The payment for first month of the new fixed term was slightly higher.
I would normally pay £278, my new payment going forward became £262 but that first month I paid something like £296, it was some sort of correction, then it went to £262 the second month.
HTH

Monthly payments reduced by "a pittance" across 25 years though, comes to a lot of money.

Whichever option you choose the interest still goes down so it's worth doing. I don't see much point reducing the mortgage term as I will have to work until retirement age anyway and if something disasterous happens before then such that I couldn't pay a mortgage, having paid it off early would just mean I was less able to access any kind of assistance due to having zero housing costs. However, with long term consistent overpayments I am expecting that by the age of 55 or so my official mortgage payment amount will be so low that I could manage it on a very modest income if my circumstances change.

I was caught up in this last time 80’s/90’s
overpaid as much as I could
knocked 8 years off
when I moved kept the term the same as original got better deal as not borrowing as much and mortgage lower% of purchase

From a purely money point of view it may make sense not to overpay your mortgage, e.g. if the interest rate on your mortgage was 2% then I would look at not overpaying but save the money you were using to overpay, as in 4 years time you may have more money saved up, when interest over the 4 years is added, than what the mortgage interest savings would be by overpaying. It all depends on what interest rate you are paying, and then comparing to what interest rate you would earn in the interest after tax. At the moment you can get over 4% interest on savings, and that will go up I would think in the few weeks/months as interest rates continue to rise. After paying 20% tax, that works out to 3.2%, assuming you pay tax on all of the interest ( not strictly true, but I want to keep the maths simple)

From a mental well-being point of view, it may be better to overpay as the mortgage term comes down and you get that satisfaction of knowing you are closer to being mortgage free.

What’s your priority?

Being mortgage free as early in life as possible - I'm 38 now

It would be better to start your own thread. These things are complicated enough without trying to explain two different things on the same thread.

Stop telling her to Google it. Help if you want to, if not move onto another thread! People are allowed to want to discuss thing & have things explained to them where they can ask questions. Not just Google. It's kind of the point of forums!

There's just NO NEED.

people want advice/discussion/real people conversations not bloody Google/online blah blah.

if you don't want to help, just move onto another thread. FFS

@YellowRedBlueGreen

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

that's admirable, but unnecessary. With compound interest etc it's a lot of working out. The best thing to do is use of if the calculators over & over again with different figures and you'll come to understand it more. What the impact of each option is. That's all you really need to know. But there are formulas online for calculating compound interest manually if you really want to be able to do it.

I like the nationwide mortgage calculators, the overpayments one shows you the impact of over paying a monthly amount or lump sum or a combination of the two AND you can use it for playing with balances & interest rates too and it gives you a good summary.

@YellowRedBlueGreen if saving the money gets you a higher amount of after-tax interest earned compared to the mortgage interest payments you could save by overpaying, then it will add a bit of complexity but it will get you mortgage free a little bit faster.

I did a bit of quick math assuming a 5-year remaining fix, and based on that I would estimate that if you save the same amount "X" every month instead of using it to pay down the mortgage early, if there is a 2% favourable difference between net interest earned and the mortgage interest avoided, after 60 months you would have a big enough balance to make the same mortgage debt reduction as if you had done the overpayment amounts for 63 months instead. For smaller amounts it may not be worth the complexity, but for larger amounts that could make a noticeable difference to when you end up debt-free. The quick math was basically assuming you could put the savings into an ISA (so get tax free interest) and earn 4%, and that your mortgage is 2%. If your mortgage rate is lower, or if short interest rates go up higher, then the advantage of savings versus overpayments will become more compelling.

But all this becomes moot if you are worried you might end up using the savings for something unnecessary if it is sitting there and available. In that case you would be better off just making the overpayments ASAP.

I would look into moving your savings somewhere where you can get more interest.

for that the interest of a savings account would need to be substantially higher than the mortgage interest due to the compound interest. you need to run the figures into a mortgage calculator but from last time I did interest on savings would have had to be 5% higher than the mortgage interest to balance out reduced interest due to mortgage overpayments.

@greenacrylicpaint Compound interest does complicate matters a little bit, but I should think not that much when absolute interest rates are relatively low.

You said that interest on savings would have to be 5% higher than mortgage interest, but I assume that means 5% of the interest, not a 5% rate difference. When I look at this in Excel, I actually get a difference of more like 2% than 5%, but what really matters is that we are talking about only 2% or 5% of the interest, so a tax-free savings account would only need to pay 2.04% or 2.1% simple annual interest in order to equal a mortgage at 2% compounding.

However, right now people with fixed mortgages of 2% and below can earn a good spread by putting their savings into risk-free instruments that deliver 4% or possibly more, even for taxable accounts.

Why do I care about this? I supposed it is because banks will be rubbing their hands together, and their coins, if people prepay mortgages fixed at such low rates. If that happens then CEOs newly uncapped bonuses will be enhanced.
On the other hand, people with mortgages can basically get free money if they keep their low-rate mortgages outstanding until they mature, and instead deposit the money into low-risk savings vehicles and collect 4% risk-free and hopefully also tax-free, and then use the savings to reduce the mortgage balances only when their advantageous low rates expire at the end of the fixed mortgage term.

there are soooo many variables, therfore my advice to put your figures into some calculators.

@greenacrylicpaint you are right if a person needs precise figures in order to make a decision. But if someone is reluctant to use a calculator, they can get to the right answer without using a calculator by looking to see if there is a big difference between the interest rates. If there is a big difference, they should almost always put the money where the rate is highest, without needing a calculator to tell them that.

The mortgage calculator app is brilliant and you can see it as a graph too - it’s called MortgageCalc. We’ve been using it to calculate how much we’d save in the long term depending on how much we overpay each month.

There's a website and app called Karl's Mortgage Calculator, sounds similar as it has the amortization schedule for the entire mortgage, let's you put in overpayments, changes in interest rate over the life of the mortgage. It's useful for making sense of interest payments and how overpayments can shorten the term.

www.drcalculator.com/mortgage/
I prefer the phone app version

Well first of all OP didn't state she wanted to discuss it she wanted help with the numbers. Why waste time doing it manually and undoubtedly make a mistake when there are tools to help you.

And more to the point who the Heck takes out a mortgage without understanding how it works. Surely asking these questions to your broker before signing up to something as big as mortgage is the way to go. Speaking to and getting the right advice from the professional then asking random people.