Overpaying a mortgage - worth it?

[Dollygirl2008]

Hi, I've recently come into some money. My current mortgage allows up to 10% overpayment to be paid each year. I was planning on doing this now, and then again Sept this year, as my current deal ends September 2022.

My question is - is it worth it and are there any situations where it's not the right thing to do? I can afford it - it won't leave me short of savings.
Thanks

I would. Use of the amount that youre allowed to pay off each year. If it leaves u plenty of savings too, I would maybe up contributions to your pension too?

It often is worth it, but sometimes not. It's certainly better than leaving it in cash in a current account or frittering it away on non essentials, but it may not be better in investment terms than some other options, it depends.

Aside from situations where you'd be left short of cash or where you'd be incurring overpayment penalties or where there are imminent large maintenance or improvement jobs required on the house (none of which seem to apply to you), the main one where it would be better to not, is where your mortgage interest rate is very low, and you are able to earn more in interest on other investments than you'd save in interest on the mortgage. So it depends really on how much interest you are currently paying on the mortgage and how you would plan to invest the money otherwise, what interest rate you could reasonably expect in the light of how much risk appetite you would have - look at managed investment funds, increased pension contributions/buying added years pension, bonds etc. Make sure you are using compound interest calculators etc both for how much you'd save by overpaying the mortgage and for how much you'd earn on any investments (assuming in both cases any 'profit' would be reinvested rather than withdrawn and spent). Do consider also since you are on a fixed term mortgage, what you would plan to do when the term ends, can you reasonably expect to remortgage on a comparable rate (and does your bank charge you admin fees for this) or would you have to go onto the banks SVR, these are often much more expensive than their fixed rate deals so if so it may become more worthwhile paying a chunk off at the stage (and therefore as a PP says using your overpayment allowance each year in anticipation of this, if that is the case)... so long as you still pass credit checks and have a good income level it's usually not too difficult or expensive to remortgage though so I wouldn't necessarily expect you'll def have to go onto the SVR. It might be worth investing into some proper financial advice to go through all the sums with you if we are talking substantial sums of money?

Thank you for the advice - some really interesting points. I think you're right - I'll take up some advice on based on my actual figures and will take it from there!

Are you better paying off in 2 lump sums or a lump now and then making monthly overpayments...just thinking about how interest is accrued. Do you pay less interest making smaller monthly payments than 2 large lump sums??.
Ive no idea by the way - we are overpaying monthly and our hope is that when we remortgage in 3 months we can still get the current advertised interest rates as we will be overpaying even more

It depends on how low your mortgage rate is and what rate of growth you could achieve investing it elsewhere. My mortgage rate is v low so it's very cheap borrowing. For me it would be better to invest the money elsewhere.

I'm on a fixed rate of 1.99% for another 18 months. I have also put some in premium bonds and ISA's as interest rates are fairly rubbish!

Really useful calc here which shows how much you'd save and also how much sooner you'd repay by overpaying regularly as well as overpaying a lump sum.

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

When you move your mortgage you could look for an offset mortgage (if they still exist). Then your savings are offset against mortgage but you keep the capital in case you need it.

If you want to make overpayments higher than the amount allowed, you could consider varying the term of the mortgage. Shorter term = higher monthly repayments = clear the debt more quickly

At the moment, intetest rates are low, so I'd think it would be a good time to reduce your debt

It depends. If you'd get into a different LTV band for remortgage, then yes I would, as this would make a big difference to interest.

Otherwise I'd do a stocks and shares ISA. If you're not sure where to start, something like Nutmeg could be an option as they invest it for you, and fees are low.

Thanks for the link. We are just about to arrange our overpayment.

Check with your mortgage company whether overpaying will mean you end up with a shorter term (and the same monthly payments as now), or same term but lower monthly payments after overpaying. I think most allow you to do either, but worth checking if you need to specify how you want the overpayment used

I've paid off two £10k lumps in three years.

Better to do this as interest rates are non existent for any savings you have and now our monthly repayments are much, much smaller

@CupcakesK

Check with your mortgage company whether overpaying will mean you end up with a shorter term (and the same monthly payments as now), or same term but lower monthly payments after overpaying. I think most allow you to do either, but worth checking if you need to specify how you want the overpayment used

Yes, watch this. My bank automatically keep the term and reduce the monthly repayments, which doesn’t help pay it off. A quick call rectified this.

I overpay by 10% each month where possible. It makes a huge difference even if the mortgage interest rate is low. Yours at 2% isn’t especially low at the moment. Pop your numbers into the money saving mortgage link above. It also means in 18months time when you’re looking for a new deal your LTV will be lower/better and therefore could get a better rate.

It can be worth looking at pension contributions too especially if you are a higher rate tax payer.

When you do remortgage, go with First Direct, you can pay off as much as you like just so long as the product is still ticking over at the end of the term. We cleared our mortgage a few years ago, but we were on a fixed rate, fixed term product, we got it down to comedy levels, I think it was around a tenner a month for a few months.

Definitely worth it.
It's a brilliant feeling knowing you have a low or no mortgage.

We’ve always done this if we have been fortunate enough to have spare money. In our flat we paid all savings into the mortgage and it enabled us to buy our first house in a very desirable area. We had an inheritance windfall about five years later and knocked another chunk off the mortgage. Ultimately that enabled us to buy a great house. It’s important to reduce the term and not the monthly though.

This is assuming you have zero other debts and all credit cards are paid off each month. Credit cards and any loans over 2% should take priority.

Look at Martin Lewis' website for a mortgage overpayment calculator. Even if you just get rough results. Overpaying can lead to staggering levels of savings over the mortgage term - you aren't just reducing the balance, you are reducing the future amount of interest payable and those savings are huge. You will also have a better loan to value ratio when ending your fixed term and so get a better deal for your next one. it's usually always worth it if you can afford it and have some back up money for emergencies.

I’ve never over paid the mortgage but instead put money into pensions and stocks and shares ISAs.

I'm fascinated with that over payment calculator.
People say it's cheaper to keep mortgage and pay money into investment.
Personally I'd always do a mix, my dp lost a very valuable home because they cocked up right at the end... Depression, drink affairs...

We would have been so much better off if they had been able to hang into it... The mortgage at the end was so low but they couldn't pay.
The strain on the marriage etc the fear...

You literally cannot put a price on your own home... Owning it outright...

We have overpaid ever since we bought our house as due to rubbish credit we had to buy a house much cheaper than we could actually afford.

I’m not sure how much it’s saved us in terms of interest but overpaying by at least £200 on a £300 mortgage.

We are really bad at saving so this has always felt easier as it’s just our mortgage payment and always has been.

I am due some inheritance soon and I’ve been paying slightly more a month as an overpayment and dropped the amount I have been putting into savings. When my inheritance (which isn’t massive) comes through I will keep that in savings as a fall back but will continue to pay a small monthly overpayment because I don’t need as much in savings. By paying the small amount a month we will actually drop 4 years overall. X