Over payments on mortgage

[torthecatlady]

We have £80,000 left of our £100,000 mortgage.

We can overpay by 10% per year without extra charges (need to check what these are).

If I had £80,000, would I be better off overpaying by 10% each year and keeping the rest earmarked for annual 10% overpayments or paying it off all in one go?

Note.. not a bragging thread, I don't have a spare £80,000. I will be inheriting a sum of money from an elderly great aunt, but hopefully not anytime soon.

Paying higher has a massive effect on the total sum paid, due to the magic of compound interest. When you start a mortgage you're paying almost entirely interest, barely digging into the principle at all. Overpayments always dig into the principle and reduces your total spend.

Storing the 10% elsewhere doesn't do that.

You'll probably have to dig up a spreadsheet or mortgage repayment calculater to decide. There are other factors - having a grand or three put aside can come in very useful for emergencies, but you may also be able to take out overpayments (or take payment holidays) which would have a similar effect. Check with your mortgage company.

If you pay it off, you'll probably also have to pay penalties so will be higher than £80,000, check your mortgage offer to see how long your penalty period is.

Just got back from work and had a look at my mortgage with NatWest.

"If you are on a fixed or tracker rate, you can pay up to 10% off... each year without incurring and early repayment charge"

"If you are on a standard variable rate... there is no limit to the amount you can overpay and you will not incur a charge for making any overpayment"

I'm on a fixed rate at the moment, but interesting to see that i could remortgage with a SVR and potentially pay it all off!

Have you tried a remortgage?

Pay off as much as you can now without incurring charges and wait for your mortgage deal to come to an end.

How long is your current deal? Overpay by 10% each year then pay in full at end of fixed term. Assuming a hefty early repayment fee

Current deal is 5 years fixed at a huge 4.38% (we were first time buyers and wanted to know exactly what we'd be paying off every month).
We have 1 year left on this deal before we need to look at remortgaging.

We have 21 years left on the mortgage which I forgot to mention.

Probably best to pay off a huge chunk when you remortgage. However, it's possibly you might be better off making larger pension contributions if they get matched by an employer, given the tax breaks - we would be overpaying but it's more cost-effective to chuck money into MrJP's pension then use a lump sum in 6 years to pay off the mortgage.

Or you could stick the money into a high interest isa. Provided the interest of the isa is more than the interest you pay on your mortgage, you are quids in.

Both my employer and dh's employer make the minimum pension contributions.

We also have private savings which are for our retirement (or if necessary financial emergencies like redundancy or ill health) and if we do pay the mortgage off in the next couple of years, we will add what we would've spent on mortgage repayments to our savings.

Only a year to go, I'd wait the year, make the 10% overpayment this year, and pay the rest off if you wanted too at the end of it.

With that length of mortgage to go the most efficient use of money would be put any overpayments into a pension. Even without any employer top up you will get your income tax added onto it.
Over time the pension pot will almost always generate far far more than any additional costs of having a mortgage for longer. Whilst important to state no pension investments are guaranteed, the length of time you are talking about is long enough to offset any shocks along the way.
Your scenario is slightly different in that you are talking about getting a lump sum rather than a regular overpayment. This is not as clear cut when investing in a pension as there are limits on what you can invest in a tax year.

The downside to putting the money in a pension fund is that it doesn't make you feel good like paying off your mortgage does.

Possibly seek some financial advice regarding the matter and see some projections on the outcome of both options.

@kamelo I actually didn't even think of a financial advisor. That's a good idea, when the time comes. I won't be making any hasty decisions!

I have a standing order to over pay by 10% of the monthly payment each month. When I remortgaged I was able to take years off the term. I've increased my payments when I last remortgaged. As it stands now we are due to finish paying in 17 years instead of 25. I'm hoping to take that down to 15 if possible.

It might not be the best use of the money, but I'll be happy it's gone before DS1 goes to university!

I’m not sure any ISAs out there are paying over 5% @neolara

surely it entirely depends on what interest you'd save and what the early repayment charge is? charge often falls to 1% in the last few years of the mortgage but if it's more than that unlikely to be worth it. could you swap to an offset?

That's a very high mortgage rate. In comparison mine is 1.39% (but for less than 40% of the current value). I'd assume you'd be eligible for a better rate in a year's time after paying the mortgage for a couple years. A financial advisor could help there too - even if they don't find a better rate than the high St, having them complete your forms and sit on hold on the phone is worth every penny.

The interest rate is very high. We were first time buyers with a 10% deposit, borrowing £90,000. And wanted peace of mind that we would know what we were paying for the next few years. The house value has since increased to £115-120k but who knows what will happen in the next year or so). So hopefully the LTV ratio should open up some good deals for us.