Talk to me about overpaying your mortgage

[CarolinaWeeper]

We have overpaid before in our first house but only once when DH was made redundant but found another job immediately.....we put his redudancy payment straight off the mortgage and it knocked 2 years off our term and helped us with the equity to buy our new house. We have just purchased a much larger house that we intend to be the long term family home but the increase in debt is scaring me a bit. Our mortgage payments are now £1100 a month and we extended the term back to 25 years (was at 18) to enable us to manage the leap now. That term takes us to age 60 and just seems like a huge commitment at the moment.

The (sort of) silver lining is that our childcare bills should dramatically reduce once DC are at school and we currently pay £950 a month in nursery fees so I think it's just a couple of tight years ahead but we wanted to take advantage of the stamp duty holiday to start paying off the big asset now. I would really like to overpay if we can right from the start but may only be able to manage £50 a month for the next couple of years....has anyone else overpaid by small amounts and had it make a difference? Do you just increase your direct debit to the bank?

Mortgages are cheap debt. Yes they are debt and it’s “nice” to pay debt off but it’s more financially savvy to utilise the overpayments elsewhere.

I have a SIPP which is up 20% in 4 years. It’s a much better use of my spare funds going in there than slowly chipping away at my mortgage payment.

You never get this time back to invest in a pension or S&S ISA which will start accumulating now. You will always have the opportunity to pay down your mortgage in the future.

For me it was about my own risk assessment which will be different depending on your own circumstances.

Yes it can make sense to invest in pensions due to tax relief or even just S&S before overpaying the mortgage. But if shit had happened I wouldn't have been able to get the money back from the pension until I was 55. Selling S&Ss because you have to means you may have to sell when it is not advisable so again that wasn't something I wanted to do just in case something happened that depleted my savings.

Whereas for me overpaying the mortgage also provided a surplus so if I needed to I could have reduced the future payments by using that which obviously would have meant increasing the term again but at least in the event of redundancy or long term illness it felt safer for my own personal circumstances. I also contributed to a pension so it wasn't all or nothing.

Given the current economic outlook I can say I am glad I no longer have a mortgage.

But others will have different circumstances and also different risk outlooks as shown on this thread so it's worth investigating which is better.

Been overpaying for years. Originally started by just paying off whatever was left in the joint account on payday whether it be pennies or hundreds of pounds. As rates have reduced we have kept payments the same and overpay around £400 per month. We just want to be mortgage free asap and also like the safety net as our lender will allow us to underpay by whatever we have overpaid by

Yes I have been doing this for years too. I just overpay whatever I can afford each month - sometimes it is as little as £20 but every little bit helps. I just transfer the money over using my online banking app.

There's a really good calculator on the Nationwide website (that's who my mortgage is with, I'm sure all banks will have similar) that shows the difference it will make. Even small amounts are really worth doing as they add up over time. I have about 20 years left on my mortgage and overpaying £20 a month will knock nearly a year off of the length and save over £1,000 in interest. I am aiming to up the amount that I overpay this year but, if you can afford to, it's definitely worth doing regardless of the amount.

It depends on the interest rate on your mortgage. As somebody else has said, your surplus money could be more productive elsewhere.

The rate on our mortgage is so low that overpaying would actually cost us money.

Rates so low
Bung it in your pension

Depending on your appetite for risk, it may make sense to invest the money instead.

I go half and half - make modest overpayments on the mortgage, but also add a chunk to a S&S ISA each month as well. That way we're earning around 20% rather than saving the

Even small amounts make a difference! We had a policy that every bit of spare money went on paying chunks off the capital of our mortgage - my husband used to get good bonuses at Christmas, for example. We ended up paying it off much earlier and it was such a good feeling!

Our mortgage is limited to 10% every year. We had a spendy year in 2019 so sent spare sums to the mortgage which only came to 750ish. This year we've managed the full 10% and have the next 10% ready to go in January.

We planned to keep our payments the same and reduce the term but our provider wanted to charge us a fee and have an affordability check 🤨. So as our monthly payments reduce, we have more to save up for the annual overpayment.

Even up your pension. Better returns the earlier it goes in and then look at investments then over pay the mortgage.

We've always rounded up our mortgage, even just to the closest 20/50 quid. Every little helps. We have a home improvement loan which is paid off this month so half of what we used to pay into that will be added to our mortgage repayment. It will up the repayment by 20% each month (small mortgage).

It makes a huge difference and is really worthwhile. I think there's more of a psychological benefit too compared to adding 50 to a pension, especially with a larger mortgage that may take until 60 to pay off.

Having said that, you have high expenses for the next two years, unless I missed something did you mention an emergency fund? I'd highly recommend having 6 months expenses set aside and I'd probably prioritise that myself!

Echo the pension point. Assuming you are 40 ish now any amount you put in will attract capital gains over 25 years. Plus the tax relief. Interest rates are so low that this has to be the better option

We have just remortgaged and for ease stuck to same terms but got a better rate so we are saving £60 a month. Our mortgage allows 10% overpayment but I am not sure on how the 10% is calculated? We are fixed for 4 or 5 years.

Does anyone know?

Useful thread, thank you. Can I ask those stating to pay into a pension some advice please? My husband and I both have employer pensions, the standard local government one. If we wish to increase payment, or pay in a lump sum, how do we do that? I would ask our HR department, but to be honest, they're not usually forthcoming or helpful with pension advice. I'm currently on maternity leave and wish to make the lump payment when I return to receive the employer match amount - (but missed it on my first maternity leave, gutted) so I'm keen to make up this deficit. Also, we have pretty terrible pension pots currently, especially for our age, so keen to really improve them both. Thanks for any advice. I do read money saving expert so will also try there.

Our mortgage allows 10% overpayment but I am not sure on how the 10% is calculated?

It's 10% of the initial amount that is outstanding.

So if you have £100,000 of the borrowed amount left to repay, you can overpay by 10% of that.

I started off with a small overpayment standing order and then kept increasing it each time I had a pay rise or some other expenditure reduced.
I would definitely prioritise mortgage overpayments as well as pension. Mortgage overpayments are reducing a debt and that always has to be a good thing -both psychologically and in terms of security.

I also don't agree with putting all eggs in the pension basket - longevity isnt guaranteed for anyone and nor is job security.

My halifax app has the option to make a one off payment towards the mortgage. (I havent investigated changing the monthly amount)
I am due to inherit some money within hopefully the next 6 months (my Ddad died at the end of last year and we are waiting for his estate to be settled) and we hope to pay off our mortgage with that, but we will continue paying it normally, and overpay by 10% , until we're 2 years into the current fixed term, and the penalty for paying off early is lower.

@WandaDavy

Useful thread, thank you. Can I ask those stating to pay into a pension some advice please? My husband and I both have employer pensions, the standard local government one. If we wish to increase payment, or pay in a lump sum, how do we do that? I would ask our HR department, but to be honest, they're not usually forthcoming or helpful with pension advice. I'm currently on maternity leave and wish to make the lump payment when I return to receive the employer match amount - (but missed it on my first maternity leave, gutted) so I'm keen to make up this deficit. Also, we have pretty terrible pension pots currently, especially for our age, so keen to really improve them both. Thanks for any advice. I do read money saving expert so will also try there.

Ask your payroll team maybe?

If you’re in the Local Government pension (LGPS) that is a good one - it’s defined benefit. That means the payments you make are a % of your salary and the pension you receive determined by the salary (either final salary or average over career or mixture of both) and the years paid in. You are not building a a pension pot as you would be in a defined contribution pension. What you have is much better in terms of certainty and an index-lined (so inflation proofed) payout. It is also possible to take your pension a bit early for actuarial reduced payments, as you will get it for longer.

Often people with such pensions don’t need to up their contributions in the same way those in defined contribution pensions do. Not only are you likely to be paying in between 8 and 12% of salary, your employer is likely to be paying in around 20%. It is these large contributions which allow the pensions to be so generous. However, these defined denefit pension schemes often have the option for Additinal Vokuntary Contribtuons, and it is always possible to start a stakeholder or Self Invested Personal Pension (both of which are defined contribution) as an extra if you want to.

The LGPS will have a website which will tell you all about it, and you can usually logon to see exactly what you’ve accursed so far. Definitely worth spending some time on. Then do go to HR for a chat about options. This is a key part of their job and they administer the LGPS for your workplace so should have useful knowledge.

In my mind, if you have a defined benefit pension scheme, always stick with it, as well as paying off your mortgage early. The difference people can find themselves in financially by their early to kate 50s, if they have paid off their mortgage or at least reduced it to a very minimal amount, plus built a very decent pension is huge. We see a gap now between those who can buy houses and those can’t. The next big gap will be between those who can afford to retire before state retirement age and those who can’t. Some who pay their mortgage down early and have decent pensions will be retiring in their 50s and feeling secure. For others, it really will be another 15 years and never feeling really secure.

Pensions are boring to most, until they get to their 50s, and wish they had looked at it sooner. Great if you’ve got a defined benefit pension that’s just ticking along.

Thanks @WombatChocolate that's helpful. Our accrued pots are very minimal now as we've not had them all too long. I'll try reading around, but often get lost in the info and as said previously, my organisations HR/PAYROLL AND PENSIONS teams are not great with information. But it's the next thing I want us to get savvy on. There's always some life admin to do! Thanks

Oh this is really interesting, thank you for all the replies. It's definitely thrown up some interesting questions regarding the mortgage/pension/ISA split.

For info, DH and I are mid/late 30s, we've got approx £100k in pensions combined but I know that's really not enough..... terrifyingly! I stick a spare £100 in my S&S ISA each month with the aim of leaving it there to help fund early retirement but I may just be dreaming.

We do have an emergency fund in cash savings and mortgage rate is 1.64% so low. I can understand it makes financial sense to put money towards pension, I think there's such an emotional/psychological element to paying off a mortgage. Definitely lots to consider.

I would maybe save half/ pension half. Then you can psychologically cancel out the mortgage but you have the liquidity should you need it.

You can pay up to 10% a year

We did £50 here. £100 there most months

Whoever we remortgaged we dropped another two three years

Our mortgage dropped from 25 to 16 so knocking off 9yrs

@Blondeshavemorefun

You can pay up to 10% a year

We did £50 here. £100 there most months

Whoever we remortgaged we dropped another two three years

Our mortgage dropped from 25 to 16 so knocking off 9yrs

Check yours op As may well be different policy