Mortgage questions - is it worth overpaying just now?

[aleene]

I am coming out of a fixed rate mortgage and just heard my monthly payment will come down a good chunk. Is it worth
a) getting locked into another fixed deal?
b) making overpayments if I can afford it?

TIA

It really depends on a few things.... What, for example, is the interest rate that will apply at the end of the fixed rate? If it's lower than a savings account, you're better to keep your money where it's earning the most interest and pay a lump sum at some time in the future. If the new interest rate is higher than a savings account, it pays to make regular overpayments and reduce the term of the mortgage.

As for the next fixed deal, don't rush. Interest rates are not forecast to rise any time soon and you've got the opportunity to shop around and consider your options. If you'd feel happier being able to budget one amount each month, a fixed deal works. If you could afford it if rates rose, you may find the SVR is a good choice

have you got any other debts, for example credit cards?

if you have money in your pocket, does it dribble away?

Are you willing to think about your pension provision?

oh and do you have any other savings - having some money you can get if need be is a very good thing
but that said in terms of long term cost effectivness over paying on a mortgage is a very good thing

www.moneysavingexpert.com/mortgages/mortgages-vs-savings

you could also look into an offset mortgage, we have one and love it, you get to save up in a separate savings account, but it is like paying more off the mortgage. easier to get hold of if you need it though. they are particularly good for higher rate taxpayers I believe, not that we are

When comparing rates, include the fact you pay tax on the interest income - very rarely better value to save.
However saving gives you the flexibility to spend the money if needed in the future.
Standard advice is pay off all other debts (as they tend to be higher interest), ensure you have at least 3 months income in savings (to cover redundancy etc) then potentially pay off mortgage.
Offset mortgages can be great if you can get a good deal on the interest rate

Thank you all.

I have no credit card debt or other debts and have some savings so perhaps I will look into paying off a bit more of my mortgage while I have a bit of leeway with the low interest rates.

It is always worth paying extra off your mortgage if you can afford to do so. The interest you pay on a mortgage is always going to be massively more than you would ever get back in savings. Think roughly that whatever you took out on your mortgage you will pay back twofold over time. You would not get back double your savings!

Look at what sort of mortgage you have and whether you're just renegotiating the deal to pay more each month or whether you're thinking of paying off a lump sum, because most mortgages have fees attached to redemptions. We are on a lifetime tracker mortgage which we took out years ago before the housing crisis hit, and I'm not sure if you can even get it now, but we chose it specifically because we could pay off lumps on top of our monthly payments without incurring any overpayment fees. Or we can settle up early with no early redemption fees.

yes, overpay where you can. While interest rates are low you can afford to put the money into it without it costing you more, if that makes sense! If you were paying £800 a month before, and now it's only £600, then pay that £800. It makes a big difference- we have seen ours diminish dramatically in recent years following overpayment (a little at times, a lot ore at others). We now have an offset mortgage which we love.

Don't get locked into a fixed deal unless it's fantastic. We're paying 0.49% over base rate at the moment on our variable rate. Over the last 11 years we've been better off on a variable tracker than the fixed rates we were offered at the time.

Can highly recommend all the advice above, particularly the moneysavingexpert website which is my bible! We've been overpaying our mortgage for the last 2 years, and with putting 10% of the remaining balance on each January (yes we're in a lucky position to do this) we've reduced the term from what would now be 16 years to 11 years, so that's 5 years of future interest saved as well as another 5 years where the mortgage payments can go towards other things like saving for retirement etc. Good luck!

Our financial advisor said a very sensible thing about fixed rate mortgages: they are there to make the banks money, not to give you security!

Fixed rates are always higher than variables, etc so unless you are on a tight budget and need to know exactly what you are paying each month a variable is normally better!

On the subject of overpaying, yes always. Use the Money Saving Expert overpayment calculator to see the difference it would make. I was shocked to see that overpaying our mortgage by a certain amount would cut it from 30 years (which we took it out over) to just 13.

Flexible rates will be lower at the moment, due to the low BoE base rate. If you overpay, it means:

1. You don't get used to these very low mortgage payments, so if the interest rates go up, you can simply reduce the overpayments to compensate.

2. You will have paid off more of your mortgage, so any future interest rate increases will affect you less.

There's a good calculator here that lets you work out how much a monthly overpayment of X will save you :

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

The bank will probably recommend you take a fixed rate, because they can charge you a set up fee and they earn more interest on them, but I suggest you do your own calculations and do what's best for yourself, not for the bank.

I know eveyone seems to say overpaying, but can I just suggest you do some maths first. It is not always the case that overpaying makes most sense. By way of example I have a mortage with an interest rate of just under 2%. I have some bonds which pay out interest of approximately 3.75%.

I will pay 40% tax on the interest on the bonds reducing the net interest to 2.25%. However I will make an extra 0.25% net on investing the money in bonds consequently I should not overpay the mortgage. My DH is a basic rate tax payer and so in his case he does not have to have such a high rate of interest to make a net profit on investing money rather than repaying the mortgage.

Now I accept that it may be hard to get these rates of interest on both borrowing and saving, and thats what the banks rely on. However I have now had a mortgage since 1996 and have always been able to make some turn with this kind of leverage apart from for a brief period in 2006-2008. I also never put more than £50k in one place, and take account levels of risk - so for example never had money in Iceland.