how beneficial is over paying your mortgage

[JRmumma]

Been giving this some thought recently. We have a mortgage that we can pay comfortably. Its over 25 years, we are 3 years in so 22 years left, but want to move in the next 2-3 years to a bigger, so probably more expensive house, so would need a new mortgage and would start again but with a bigger deposit (with the equity we have in this house).

Say we pay £800 pcm. We are allowed to over pay by 10%, either each month or as a lump sum each year but so far haven't. We could afford to overpay, but this would require cutting back in other areas, possibly savings or reducing the amount of free spends we allow ourselves each month.

I'm just wondering whether it is worth overpaying for the next couple of years, or putting the money away to cushion other moving costs or pay for things we needed to do to the next house.

Would we see a real benefit to over paying this mortgage, or would it be better to worry about this when we get to the home we plan to stay in long term? I cant get my head around whether we would see a real difference in the equity we have (deposit on next house) in a short period, or if its not really worth it on a mortgage we would get rid of in 2-3 years?

Is anyone able to explain it to me in simple terms?

Thanks!

Some things to think about....
What interest are you getting on your savings vs your mortgage?
How much will you need as a deposit for the next house?
What is your attitude to having less"free spend"each month?

With saving rates low at the moment it is better to pay of your debts as quick add you can. The way I thought of it was each year it costs m £40 for every 1000 borrowed (if mortgage was4%). So over 22 years you pay £880 back plus the £1000. So, for every £1000 you pay it back now, it means you keep the £880!
Plus it gets you on the way of saving, because once you have the house sorted, there is likely to be renovation/work, later followed by children possibly, followed by uni fees, followed by childrens weddings, followed by retirement funding. Life moves on quickly!

Should have said, we kept overpaying where we could. Money was always tight, but now the mortgage is out of the way, we feel like kings, and savings and investments are mounting quickly! We eventually paid it 4 years early.

We could have paid mortgage earlier, but with the crazy banking situation, we were able to borrow at 0.5% and were getting over 4% on savings, It seemed rude not to borrow the max, stash it in savings for a couple of years earning us nice interest. Then just hands back the borrowed money and pay everything of!

If what you're saying is that you potentially have spare cash after you've met all your regular outgoings then it's really where best to place it so that it works for you. Obviously any short-term debts, loans, credit cards etc would be the first place because they'll be costing you the most. If you don't have any of those, do you have an easy access 'rainy day' savings fund? Sinking all your spare money into a house is fine but if you suddenly need a few thousand to pay for a new boiler or similar, you can't pay for it with roof tiles. Then, as the PP says, what interest will you get on savings vs the interest you're paying on the mortgage?

Personally, when I've been able to, I've paid back 10% of the remaining capital which is what my lender allows before charging early redemption penalties. I don't change the monthly repayments, I just bring the finish date forward.

I think the question is how will you fund the things you want to do on your next house, and/or moving costs, as you say.

If you would have to borrow these from any other source once you get to that point, then don't overpay- save it up.
If you can add them to the mortgage, it won't make any odds in the medium term which you do. In the short term, if there's any danger you might be tempted to dip into the pot/not quite get round to it, overpay the mortgage because that will stop you doing it.

Kill all other debt, though- car loans, credit cards, etc- before you overpay your mortgage.

Nope no other debts. The only credit card we have is an interest free one which we took out to make an expensive purchase and just pay that off every month so its paid off before the 0% period is up.

We have SOME savings but not a huge amount.

I guess what I'm wondering is whether there will ne any increased equity in the house in 2 years, but it doesn't seem like there would ne much so better to just save the money.

Does it go straight off the mortgage or into an overpayment fund which you can access (sometimes called an offset mortgage)?

We have the latter and it is great - the money is effectively put into a savings account linked to the mortgage and is offset against the mortgage so we only pay interest on mortgage less savings so it acts as if we've paid off the mortgage. As it's actually a savings account we have access to the money at any time. That way we are reducing the term of our mortgage (the basic payment stays the same so the money we save on interest payments by offsetting goes against paying more capital) but still have a pot to dip into if we have any unforeseen big expenses. When/if we want to we can then use the savings to pay the mortgage off in part or completely.

If your mortgage pays any overpayments directly off the capital then you don't have access to that capital again unless you remortgage. An offset retains your control over your extra payments while giving you the benefits. It's working well for us, and may be worth looking into as an option.

Small warning on overpaying on an offset as pp says. When your solicitor requests a redemption statement on the mortgage, your reserve (the amount you've paid off) is locked and you can't get at it. So they do grab everything you have overpaid and you can't take money back out.

You can just withdraw it from the offset account before that point though if that is the case.

This calculator should help you work out the sums but yes, you would increase the equity. We are overpaying our mortgage and by March 2015 (when the current 2 year rate is up) we will have paid 11k more than if we hadn't overpaid. We are planning another DC over the next 12-18 months and the overpayments mean that if I were to give birth in December this year then we wouldn't have to pay any mortgage at all for the 12 months I would be on ML as the payment would be covered by the overpayments.

You'll increase the equity by the amount extra you pay back, plus the interest you would have paid on that amount.

So if you pay back £500/month for 3 years, the equity will increase by £18,000 plus interest (another £1000-1500 or so)

It's equivalent to saving the same amount of money at the interest rate you're paying on your mortgage (plus you're not taxed on it).

So if im only over paying by £80 a month over 2 years, just short of £2k extra equity, plus a small amount of interest i wont have paid on the overpayment value. So id be slightly better off than if i stuck it in savings but the money would be ties up in the house rather than available to me to spend on removals, solicitors fees, stamp duty etc. Is that right? Or is it a bigger saving than that?

Everton absolutely but iirc there is some fine print around it, some people may not notice etc. I think offsets are very good if you are a saver.

its a no brainer if your deal lets you

OP, just coming back to you saying you would overpay £80 per month, is this because it is 10% of your current £800 payment? The 10% maximum is against the total value of the mortgage (or is with every mortgage provider I have dealt with), not the maximum against your current payment. So if you had a mortgage of £100k for example, the maximum you could overpay (without fees) is £10k which would be a monthly overpayment of £833.33.

Mortgage amortisation calculator

If you put your current details in this, look at the schedule and the 'total interest paid', and then change it so that the payments are higher, you can see what you would save in interest payments

Another mortgage amortisation calculator ... that might give you the answer more easily.

ladyk no its 10% of the payments, that's what they told me when i took the mortgage out. It is a first time buyers mortgage if that makes a difference though?

cogito thanks ill have a look at that calculator.

I prefer my spreadsheets because they highlight how you cut into the banks profits by overpaying

Just did the calculator and it seems like id shave about 2k off the mortgage debt in 2 years and over the term pay off 3 years early (if we over payed till the end).

That's very interesting. I think at the moment it would be better for us to save the money to cover other costs such as actual moving costs. I will seriously think about over paying on our next mortgage though as even a small amount will clearly be beneficial long term.

Look at the interest you would save over the remainder of your mortgage term.

It's so big it might persuade you to really go frugal for a while and pay down the mortgage while also saving for the moving costs.

The people I know in middle age who are in a good financial position are the ones who attacked their mortgage debt early on.

OP our mortgage is with HSBC and we're allowed to overpay 20% of the monthly repayment each month, not of the total mortgage each year. It's a pain as it really limits the OPs we can do, but IMO it's still definitely worth it.

In paying the extra 20% each month, the bank's figures suggest we will save £30k in interest. Of course we intend to overpay far more as soon as the fix is up.

We overpaid our mortgage - consistently - over the last 10 years, and were mortgage free at 40 (I'm SE, so whenever I get a large payment in,I wacked a nice big sum onto the mortgage). It was, and is, the most fabulous feeling - knowing you've managed to save so many years off the mortgage and claw back cash from the bank!

We're just about to take on a new house & mortgage, having enjoyed a few years of being mortgage free, & will absolutely be overpaying to the max 10% - although like you we may not stay in this house for long.