Mortgage overpayment

[LifeContinuesToChallengeMe]

I am planning on overpaying my mortgage to reduce the term but am questioning the maths of it all! I have 24 years left on my mortgage (due to finish June 2046). The value of the house currently is 265k, and the mortgage left on it is 188k.

On the standard variable rate I pay 1,064 a month. If I overpay by 1k every month and so pay 2,064 monthly the bank said I'd repay my mortgage by June 2031, so knocking 15 years off my mortgage.

I spoke to my dad about this and he doesn't think this can be right. My plan was to pay in a lump sum of 20k (which knocks off 4 years according to the calculator), then overpay by 1k a month. So in total reducing my mortgage by 19 years from 24 years to 5 years. Have I made a mistake in this?

Can you do this without paying a penalty for early repayment? Some have a limit of say 10% that you can over pay by.

The mortgage advisor in my bank didn't mention this....Although I realise now that I didn't ask. He did say I'd have to pay a fee of 925 to move from my current fixed rate back on to the standard variable. On my fixed rate I can only overpay by a little, so I am thinking of moving off it to allow me to go ahead with this plan.

Yes.
Very roughly and ignoring interest for now:
188-20=168 (check terms as you may get penalty fees for lump sum payments)
168/2k per month = 84 months /12 = 7 years
Use an online mortgage overpayment calculator and put your interest rate in for more accurate prediction.

Hi are you able to get a fixed deal? If you are currently on standard variable rate you may be paying more. We fixed for 5 years at a lower rate this will bring your payments down, its worth looking at knowing you plan on staying long term, also you need to check terms before overpaying many banks (ours including) do not allow overpayment of more than 500 pounds per month without hidden cost all the better for you if you can pay more best of luck OP x

on my fixed rate I can only overpay by a little, so I am thinking of moving off it to allow me to go ahead with this plan

Don't do this without doing the maths. It's likely to be better to save separately than pay a fee to move back to a variable rate and/or pay early repayment charges by overpaying a fix more than the penalty free amount.

There's calculators on Moneysaving Expert mortgage section to help you work it out. Also calculators that will help you work out how much time you will save. As for whether it will save you money, don't forget to take the lost interest on any savings into account. You should be able to cover most of the interest 'saved' if you get the right savings product.

Id pay off as and when you can so that you are paying off more from less capital each time. Watch out for the ten per cent maximum overpayment. Seek further advice about the fee.

I have just been looking at my bank online and it seems that while there are early repayment penalties and a 10% overpayment ceiling on fixed rate mortgages (which I currently have), there are no fees associated with overpaying a mortgage on the variable rate

The standard variable rate is pretty high right now. I think I'd stay on a fixed rate and pay the max 10% per year then pay a larger chunk off once you're out of the fixed period

Your 5 year is wrong
If you pay back 5 years x 12 months x 2000, that's 120,000. After adding your lump sum that wouldn't have paid back the capital, let alone the interest.

BUT, overpaying, especially with the numbers you are talking about, early in the mortgage, will massively reduce the length of the mortgage.

At 10% extra payment per year on the current balance you can pay 16k. Id be tempted to keep the cash as savings, and add 1k onto each mortgage repayment until you come out of the fixed rate.

Agree with the other posters. Overpay the max 10% allowed until your fix ends. Save the other amount you would have overpaid in PB or an ISA and then apply it to the mortgage at the end of the fix.

Don't just rely on what the lender says will happen. Overpayment / early settlement is relatively uncommon and is really not in the interest of the lender, so there is a natural tendency for it to appear 'complicated' and to discourage people from paying off early.

This made me extra keen to do it. 😀

The easiest way I found to work out the sums is to start with the case of an interest only mortgage. The monthly payment is just interest, and you can capture your payments, subtract the interest and see the reduction on the capital very simply. Add in (or subtract) the overpayments you intend to make, to see when you will have paid it off.

Do that with the two interest rates to show the impact of the higher interest rate and then look at how much interest you save over the life of the mortgage.

I got started on this path when I payed off a lump sum and was astonished how much interest I would save over the life of the mortgage. Rates have been quite low recently, so that mortgage payments can feel affordable.

Anyone providing financial advice will tend to point to the potential higher return available from investments over the same turn. The associated risk put me off along with the way the advisor would earn commission from the recommended investments and not paid by my early paying off the mortgage.

I'm naturally risk adverse and loved having paid my mortgage off early.

Check the terms of your current fix. Usually early repayment charges are quite high and a % of the mortgage you took out. If your fix is only 2 years I'd be tempted to overpay the allowed amount and save the rest in the best savings account you can find to throw it at the mortgage when you can.

As SVR is pretty high, probably around 3%, this will cost you a lot as you pay interest on what you owe. And you owe the most now! So you want a low interest rate to begin with.

Our mortgage with First direct let's us overpay as much as we want and there are probably other flexible lenders out there so this might also be an option if you can get out of your fix cheaply.

There are lots of mortgage overpayment calculators like the one from money saving expert

There are many mortgage products that have unlimited overpayments allowed, and there should definitely not be a fee to go onto SVR! Unless that's the ERC from your fixed rate?

Why did you take out a twenty five year term if you can afford to overpay to that extent? Just wondering if you've been badly advised.

Can't speak for OP, but there is nothing really wrong with doing that as it offers the flexibility to reduce back down to the "normal" payment should circumstances require it. It's easier to agree an overpayment with the mortgage company rather than an underpayment!

5 X 12 months x 2000 = 144,000 not 120,000.
Still not enough though as you mentioned .

Have you considered an offset mortgage? You can then fix and overpay into the savings pot. You benefit from a fixed rate but still have access to the cash.

when does your fixed rate end? Which bank is it with?

XVGN exactly, you don’t want to be phoning your lender saying ‘you offered me 25 years but I took 13 can you reduce my payments a bit as my boiler broke/I took a pay cut /furlough etc’. Just overpay each month, it looks better to a future lender and if bills rise etc you can just cancel the overpayment.

I don't think so? 5x12 =60. 60 x 2,000 is 120,000. Not sure how you get 144k?

Nor am I looking at it again 😁- I must have multiplied the annual £24000 by 6 instead of 5 🙄.
As you were everyone!