Overpaying mortgage advice

[princessbear80]

I have an overall mortgage of approx £180k.

It’s made up of two mortgages - one for £40k and one for £140k. Both are the same interest rate and same term.

I’m in a position where luckily I can overpay about £200 per month. The mortgage lender asked me how I would like this allocated against each mortgage.

Does it make a difference to how much I’d save? Should I pay one off before the other? Or split the amount in the same proportion as the mortgages are split (roughly 22% to 78%).

I don’t know what’s best, so would appreciate any advice. Thank you.

I'm no expert but think you should overpay the largest loan as although the interest rate is the same you are paying more interest on the 140k as it's a larger amount. Ie 10% interest on £100 = £10, 10% interest on £1000 = £100

Hopefully someone with more knowledge will be along to answer soon.

Same term and same interest rate means it makes no difference.

Overpay the larger one

If you're on a fixed term deal, how much are you allowed to overpay? Most mortgages allow 10% after which you get heavily penalised, which obviously changes the equation. Make sure your overpayments stay within the limit.

The same term and interest rate means there would be no difference in interest.

Personally, I'd try and overpay the smaller one first, with a view to clearing that ASAP and then being able to streamline into just having one left.

Makes no difference which loan you overpay but if you overpay the smaller one, it will be paid off relatively quickly so you have the psychological boost of doing that and it makes your finances a bit tidier.

Then you can overpay the bigger one if you can.

Unless there is a specific reason why you want to overpay your mortgage if the £200 is "spare" money each month consider paying it into your pension instead as you get a triple benefit.

1. If you can it it into an employers pension scheme you save on the tax so if you are a basic rate tax payer you can pay in £240 a month and it costs you £200. Often an employer will also match contributions so your £200 could be worth even more.
2. Most pensions over the long term (typically, not so much in the last 6 months!!) average growth of 4-5% pa whereas most mortgage rates are less than than.
3. Finally you have the power of compound interest rates meaning that the longer the money is in there the more it grows.

If you model a £200 overpayment on your mortgage and then £240 into a pension you will make much more on the pension.

Thanks all. Yes I like the psychology of paying of the smaller one first. But the pension point is very interesting, I’ll need to consider that too.

Make sure there are no penalties or a limit on the %age you can overpay on them

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

Plug the actual numbers in here and you'll see what will cost less in the long term. We overpay ours (not by enough to incur a penalty) because we are trying to move up the property ladder. Interesting to learn about pension, so thank you as when we are in our forever home this is something to consider if we are still fortunate enough to have spare money.

Same here, for no other reason than its tidy and id get a sense of accomplishment sooner from clearing it

@MavisMonkey
Your pension calculations are slightly off, the 20% tax relief is on the gross, i.e. on £200 paid in added tax relief is £50.
Apart from that it should be pointed out that a mortgage is secured against your home and as people are starting to find out as they are coming out of their cheap fixed rate deals, it could become comparatively expensive to pay off your mortgage over a longer term.

Thanks for correcting my off the cuff numbers 😊 and yes whilst I agree that paying mortgages is going to get more expensive in the UK we seem to have a fixation on overpaying mortgages but a blind spot re pensions.

Many of the demographic in the 30-50 yrs old gap don’t realise how much they need to save to have a decent pension. The generation before more often had jobs for life and generous / defined pension schemes and so were able to concentrate more on home ownership whereas outside of public sector pension schemes now rely heavily on self contributions and the earlier you can pay in the more beneficial it is.

Lots of people think they should overpay the mortgage first as the mentally want the feeling of being mortgage free and pour all their spare cash into that but that then leaves a short time period to build the pension pot and years of compound interest that are missed out on. A balanced approach to both works best. I am slightly zealous about this as I made this mistake myself and wish I had put more in my pension earlier instead of the mortgage. As the mortgage is a fixed term commitment it’s going to get paid one way or another whereas pensions are more often overlooked.

Thanks @MavisMonkey and@messybutfun for the extra info. I’ve been paying into a public sector pension since I was 24. Does that change your advice?

Agree with @MavisMonkey I am early 50s and put more into overpaying my mortgage than my pension when I was younger. Now I am closer to pension age I wish I had done the opposite. I am now doing that, but should have started sooner.

Hi @princessbear80 oh yes that could be a game changer depending on how good your pension scheme is! I'm not a financial advisor or anything close so I'm far from an expert so you will need to do a bit of your own research and ultimately make your own decision but from what I have read teachers, NHS and civil servants have amongst the best schemes in the country (personally I'm still not sure if this benefit outweighs the low pay and stress of many roles in these sectors but it feels like the least they deserve!)

It would be well worth having a look at your scheme and seeing what your projected pension value is- most public sector pension providers have helplines that offer appointments etc to help you make sense of what you have, what contributions you can make, what your employer puts in, what age you can drop it down etc. If the projected pension number is a number you are comfortable with then I would say go for the mortgage overpayment, but otherwise consider topping up the pension.

Thank you! @MavisMonkey

Whilst I totally agree that putting the money into a pension could be your best option, another thing to consider is whether this is your forever/long term home. If it's not, then paying the mortgage down increases your capital, whilst paying into your mortgage doesn't. Plus look at your ERC in regard to paying your mortgage off & not porting it. IF they're exactly the same mortgage deal it won't make any difference, but it will if they have different agreements.

obviously there's also the question about how best to 'ring fence' this if you you're not the sole name on the deeds.

Certainly over the last 15 years most people would have been far better off paying into a pension and letting their mortgage run its course, due to the tax relief and far better growth over the long term.

Or if you didn't want to tie the money up, mortgage interest rates have been so low that it's been possible to match or even beat the rate with standard savings accounts, regular savings accounts and even premium bonds.

At one point, we had covered about 80% of the interest charged on our mortgage with £2.5k in a Nationwide current account and were also paying into regular savings accounts paying 3% annual interest instead of overpaying a mortgage charging under 1%.

It's now only just happened that we can't match the mortgage interest rate with instant access savings although it still is with fixed rates and regular savers. But what we're doing now is sharing out spare money between pensions, S&S ISAs and mortgage overpayments in an attempt to balance any poor performing investments against the certainty of paying off the mortgage in a climate of rising interest rates.

Thanks, so much useful info to help me research and make a decision.

Mortgages are exactly the same deal
I am sole name on deeds/mortgage

i don't follow this, please can you explain? 20% is £40 so where is the £50 from? thanks

i don't follow this, please can you explain? 20% is £40 so where is the £50 from? thanks

It's 20% of the total contribution, including the tax relief. Your contribution is effectively 80% of the total.