Should we overpay on the mortgage?

[N12345625]

Hello,
My husband and I have a three bedroom house that we bought about 2 years ago (first time buyers) and was around £200,000 with a 10% deposit.
We are looking to buy a 4 bedroom house in about 7 years time (and after looking in my area, they cost around £450,000).
We have about £8,000 spare in our savings. Do you think it would be a good idea to put that money into paying off some of the mortgage or do you think it's best to leave it in our savings? We have a 5 year fixed mortgage for our current house which is at around 2.2% (I am not sure if that makes a difference). Our mortgage is also 35 years.
Does anyone have any ideas of what we can do now to prepare ourselves for buying a bigger house? Thank you for any help, I am clueless with mortgages!!

If you have no other debts, and nothing urgent to save for, then I would definitely overpay on the mortgage. Even a relatively small amount each month can make a difference to how much interest you pay overall.

You should always keep some easily accessible savings for emergencies - 2-3 months living expenses at a minimum - but otherwise overpaying your mortgage is an excellent idea, assuming you have no other more expensive debt.

Check your terms and conditions about how much and how you are able to overpay.

It's very enjoyable watching your mortgage debt come down and see how much interest you save by overpaying.

Definitely overpay. It makes a massive massive difference

I’d maybe keep a quarter of your savings for emergencies though.

I'm a big fan of overpaying on your mortgage (even more so at the moment when interest rates of savings are appalling). That being said £8k isn't a huge amount and you'll want to keep some savings, so have a think about how much you might need in case of emergency (e.g. job loss, new car etc) and if there's anything left then pay it off the mortgage. As a PP said, any small amount you can overpay can save you a lot of money in the long run.

I would not pay a lump sum off, you may need the cash for an emergency - car replacement etc. However, I would look carefully at overpaying the mortgage. Some mortgages have a limit on this, but an extra £50 per month can make a difference. Make sure the mortgage company know that you want to reduce the term otherwise your payments will reduce. Also check that the overpayments are credited when paid. We were regularly overpaying a couple of hundred per month, to find that it wasn't credited to the mortgage account until 1st December annually. Would have been better to save it up until November and pay it in then.
If you do pay a lump sum off, check if there would be a penalty. It all depends of the terms and conditions of your mortgage.

Overpaying makes sense if you have the cash available, most mortgages allow you to overpay 10% each financial year without penalty but do check with your provider as some do charge fees. With corona virus and job stability now factors I'd keep some cash though!

We overpay as and when we can, either small chunks monthly or if we get a bonus etc. In just over 2 years we've managed to knock 8yrs off the mortgage term through overpayments which led to a better LTV (loan to value ratio) when we remortgaged after our 2yr fix was up. This meant we've also been able to get a really good interest rate on a new fix too,which I'm really glad I sorted in advance given the current situation.

Martin Lewis's money saving expert guides on remortgaging and the interest calculators are brilliant. I had no clue before and have used it like my bible,saved us £££ in interest which is really satisfying.

I overpay £110 a month and it will take almost 7 years off the term of my mortgage.

Hello, contrarian view here;

Normally best advice is to overpay your mortgage, you will save a lot of interest over the lifetime of the mortgage.

HOWEVER; there is speculation that house prices will go down or remain static, and you have a 90% mortgage. If you put your savings in at the moment and house prices do fall you might struggle to get back on the sale of the property.

Also you are planning on moving that will mean I assume, a new mortgage at that point? So any saving on this mortgage might be wiped out by your new arrangement. You will definitely have the money to put into the next purchase if its in your savings account.

Given the current uncertainty, your current high LTV and the fact you are planning to move , I'd hold fire in your position.

renegade but whether the house loses value or not, they still owe the bank the amount they borrowed, so does it make a difference?

I would not put all your savings in the mortgage - it is sensible to save some incase you lose your jobs or a rainy day. £8k isn't that much to have in savings - maybe put £3k in so you still have £5k saved?

I overpay, but do so by reducing the term of the mortgage when I re-mortgage. It started at 25 years. After 4 years, I reduced the term to 14 years, effectively overpaying but locked into it. I now have 12 years left to run.

Check your mortgage Ts&Cs to see if there are any penalties for overpayment. A lot of companies allow you to overpay by up to 10% each year without penalty.

I'd be wary of using all your savings though. Ideally you want a buffer of at least three months' expenses in case of emergency, redunancy. I also have a household emergency pot to cover off any large items that break (fridge, oven, washing machine etc). Maybe see if you can overpay by moving money around in your current budget (even if it's only £50 or £100 per month) and keep your savings set aside?

I would say that access to some cash will help in these uncertain times - even if don't use it, just the knowledge that it's there may help.
Take a look at the calculators as suggested, but look at how much interest you'll have saved in the 7-year period, rather than the whole term of your mortgage. (You'll have to look at the figures to work this out yourself.) Then decide whether this amount saved is worth not having access to that money over the next few years. You can still put it towards your house move in a few years' time if you decide to keep hold of it (and don't need it in the meantime) and it will still have the effect of reducing the interest for those later years.

Definitely try to over pay if you can

It will depend how far house prices fall. At a 90% mortgage any fall over 10% would lead to negative equity and in that situation I think its better to have money in the bank. My view is a very cautious one based purely on the belief that at the moment cash is better as its value is more certain than house prices.

I think that they could reevaluate in a couple of years and then if they have a bit more equity / the housing market looks better they could make a lump sum overpayment. Bear in mind that in a fixed rate any saving from a lump sum repayment will come at the end of the fixed rate (you are usually tied to the monthly payment agreed for the duration of the fixed rate) I think they have time to wait before committing the funds to their property.

If they were planning on staying put best advice would absolutely be to overpay because they'd owe the money regardless .

I'm in the same position and I'm considering it. I'm with Nationwide and they allow you to take a break to 'use up' any over payment you've made if you want to.

I'm still putting off doing it though as right now with so much job insecurity I feel less worried with the money sitting in the bank.

I also put the car in finance to get the extended 4 year warranty (no idea if it was a good idea or not?!) which I could pay off. If I do it'll save some interest, but again, less cash in the bank and I can't pay bills with the car! (I can't sell it either as I'd be utterly screwed without a car where I live)

I'm currently furloughed, but would be totally unsurprised to be made redundant. Not even sure what would happen re redundancy payments in the current climate

I can't decide what to do for the best

It makes a massive massive difference

With low interest rates, the difference isn't that great any more. You can get near to the OPs rate on various notice accounts so the 'massive massive difference' is something like about £40 a year - based on £8000 in a fixed rate savings account paying 1.7% pa.

And that's a price worth paying if the OP doesn't have much in the way of other savings, so in a lot of cases, there isn't much of a rush to overpay as there has been previously, even if your rate is comparatively high in the current circumstances, which 2.2% is, I've seen rates for new mortgages below 1% these days.

As for 'preparing for a new mortgage' it doesn't really matter whether you overpay, or save the money, it's available to go towards the new property from either source.

Although another consideration would be if you're ever required to claim universal credit, which could be necessary, given the expected recession etc. If you overpay your mortgage, you won't have savings so will be eligible. If you keep the money in savings, it could reduce your entitlement to UC if you need it.

In short, make sure you have some liquid cash to pay 3-6 months living expenses should you lose your income for whatever reason. Make sure it's in an account where you will get at least some interest. Anything above that, overpay the mortgage if you have one.

It depends on your attitude to risk. With 7 years to go I would be putting it into stocks and shares given they have taken a massive nose dive recently and you will get much more for your money but it’s not for everyone.

Thank you so much for your replies everyone, it is a huge help and gives me lots to think about.
We have about £13,000 in savings, so £5000 to give us some flexibility. We are also both teachers so feel our jobs are quite secure at the moment. It seems the best thing would be to wait a few more months to see what the situation is then. I guess if we pay more on our mortgage it is money that we will have for the next house.
Thank you again.

I would find out your terms and conditions - we have overpaid and reduced the term but this is held on our mortgage account as an overpayment so we could now not pay half our mortgage (we have 2 mortgages as we moved and transferred a fixed term mortgage) for about a year and the other half for about 3 months.

Does anyone have any ideas of what we can do now to prepare ourselves for buying a bigger house?

Since much equity is unlikely you need to earn more

I probably wouldn't overpay the lump sum, but if you can afford it I would overpay the monthly amount by 20% and reduce the term when you remortgage. Ultimately it reduces the interest and looks better when you apply for a bigger mortgage.

Usually I'm all for overpaying, but with the economy the way it is I would rather have the savings right now. Our jobs seem pretty secure but you never know what is round the corner (As this whole situation proves!)

I'd strike a balance. I'd keep the £13k out but start now with "excess money" each month doing a mixture of overpaying and putting money into savings.

Your savings account isn't earning more than 2.2% so of course you should pay off mortgage.
However there's usually a limit of 10% so check the terms. Overpaying by even a small amount will help you more than savings :)

I just moved from a £177k house to a £500k house! Earning more wasn't the thing that actually affected this as some people will say.

Our salaries increased by a combined 20k between the houses. We obviously earned enough to get a 450k mortgage but that was also because we are professionals so could get higher multiples.

The difference in our outgoings has gone up a small amount for insurance etc. The biggest thing for us was equity.
People on here trying to make predictions about the market are not worth listening to.
One of the biggest factors will be availability of credit. A house is worth what someone is willing to pay and it's more likely people just won't move rather than house prices crashing.
Since it'll be a few years until you're ready to move, I'd look into reducing your mortgage, getting an estimate of your sale price and seeing how much that leaves you with. Then just try to save each month,

My DP is a teacher so when it came to mortgage applications he got a TLR to increase his affordability. Also, always get a broker.