Overpaying mortgage

[Livvyliv18]

If you overpay your mortgage every month how do you do it and how much do you over pay ?
Ive increased my DD by £100 and then I add the odd £50 when I have spare cash.I also round up my bank account every night.It works out Im probably overpaying about £250 pm.
Would it be better to pay larger amounts at a time or is it ok to trickle money in?
The balance never seems to go down!
My mortgage company allows up to 10%.
Ive looked at the overpayment calculators so I know it’s worth doing but I’m just unsure if I’m doing it the best way
TIA

Thanks @BarbaraofSeville we have no other debt and can afford to throw another couple of hundred a month at it for now at least. Sadly can’t pay it all of at the moment! Good luck with getting yours paid, that’ll be such a good feeling!

If you can overpay, it's now worth it even if it hasn't been in the past, but if you're on the SVR, what rate are you paying and can you save money by swapping to a cheaper deal? I know some SVRs used to be really high, but not sure if this is still the case.

Best way is to pay what you can, when you can.

Why?

Because when you pay, affects the compound interest and how much you spend on the mortgage overall.

Mortgages don't feel like they are coming down until you hit a tipping point with how much you have left. At that point it will start to feel like it's coming down quiet quickly.

Basically keep doing what you are doing. It's the right thing.

As for saving cos you get higher interest rates and then paying off the mortgage - be wary... The compound interest affect still means you may be better off paying the mortgage.

Paying off the mortgage gives you more security and less exposure to economic turmoil.

You're already overpaying by more than 10% though?
Your monthly overpayment of £330 is an overpayment of 49%

Are you sure that you're not being charged a fee for exceeding the overpayment?
(especially if you think you're limited to a 10% overpayment limit per year)

@Remainiac - actually you might just have a massive mortgage !
I can only overpay mine by 10% of the outstanding balance each year which would be equivalent to overpaying by c. 20% each month

As for saving cos you get higher interest rates and then paying off the mortgage - be wary... The compound interest affect still means you may be better off paying the mortgage

But you also get compound interest on your savings. It's a simple comparison of numbers. If the interest rate on savings is higher than that charged on your mortgage, you profit by saving instead of overpaying.

Paying off the mortgage gives you more security and less exposure to economic turmoil

Both mortgages and savings are exposed to economic turmoil that plays out in terms of the rate charged/paid. It's no more complicated than looking to see which is the highest rate and sending your money that way.

**

@BarbaraofSeville

Thank you for taking the time to reply. Lots of food for thought.

I’m not sure what constitutes massive. Current balance around £71k.

Because the interest is calculated on the capital, so if you pay down the capital you'll pay less interest ovetall.

Whereas I can overpay by 10% of the original mortgage.

So my standard payment is £450 per month. Of that, it's about 50-50 capital Vs interest. So I could overpay up to 10k per year (or pay them an extra £830 a month) without penalty - so it's not necessarily the case that increasing your monthly DD by 50% takes you over the repayment limit.

Even on 10% reducing balance I could still pay double my monthly payment (100% over the mandated amount) without incurring penalty fees.

I can overpay by 10% lump sum PLUS up to £500 a month on top of my usual direct debit.

I've just paid this year's 10% after an inheritance, in the middle of changing the rate of my mortgage, so I'm not sure how it affects my payments, but they will be lower!

I'm not sure how it affects my payments, but they will be lower!

@Fuuuuuckit

It's in the mortgage providers interest to have overpayments reduce the monthly cost to you. Overall, you minimise the total interest paid if you keep the monthly payments the same and use the overpayments to reduce the amount of capital.

We’re definitely only overpaying by 10% of the outstanding balance each year. We make these high monthly repayments then speak to the lender at the start of each new mortgage year to find out how much cap rep we need to make to top up to 10%. Last week we made a cap rep of £4000. Our new fix has changed the date of our mortgage year to align with calendar year so we will make another cap rep in January and carry on overpaying monthly.

what I want to know about this is that we are about to remortgage. Our mortgage is quite a lot - are we better off overpaying 20k now so that when we remortgage it will be for that much less at the outset?

It depends on your situation, but it most cases, paying down now - if the terms of the mortgage allows - is preferable. But not all mortgages would allow.

You could pay the amount at the point of remortgage in some circumstances too.

What is important to note here is the £20k could affect the LTV on the mortgage you go for in the future. If for example it means you now own 50% of the property rather than 46% it may mean you can get a mortgage with a better interest rate because you are regarded as lower risk.

If you can pay it now, rather than in 6 months time (if that's when you renew) you may also be benefitting from reducing the amount you are paying on compound interest.

If you don't understand compound interest, do take the time to learn. It's the single most crucial thing about understanding a mortgage and how much you pay. It's badly taught in schools when it should be one of the most important things you learn because of its relevance to the real world and repaying loans.

In most cases, riding yourself of anything with compound interest is the most sound economic choice you can make. Its rare than compound interest on your savings will exceed compound interest on your debts simply because 'the house always wins' rule applies (the bank will always protect its financial interest and work to turn a profit for itself).

Thanks for taking the time @RedToothBrush really appreciate it.

I do little and often. If I don’t have a coffee on my the commute, I go online and make an overpayment of £2.70. Daft I know but I’m in the every little counts club.

For anybody remortgaging and wanting to overpay substantially, we have had First Direct mortgages for a few years and they allow unlimited overpayments, as long as you don't pay off in full during the fixed rate.

We're also on first direct and the unlimited overpayments are great. When we last fixed I went for a longer term and lower monthly payments as we were TTC so having the flexibility to have a lower mortgage was reassuring for potential IVF costs / covering shared parental leave, but with the unlimited overpayments we can put more into the mortgage while finances aren't an issue!

As it stands our repayment amount is about £500 and we overpay £500 as a standing order. Then at the end of the month whatever is left is chucked at the mortgage too. At the moment with our rate it would technically make more sense to put the money into a savings account, but I like seeing the massive number coming down and there's always the temptation to dip into savings...

@Labradooor Wow that is a good tip! About missing a coffee and putting in the mortgage instead. I will definitely be doing that one!

I’m not sure that you understand the impact of compound interest in the context of overpayments. If your savings account has a greater interest rate than your mortgage then saving the money rather than making an overpayment would give you the greatest return. There’s nothing rare about it. Whether the return to sufficiently great to justify the hassle is a different matter.

Can anyone in the know help please …

We are thinking about remortgaging with additional borrowing for home improvements. Currently we overpay our mortgage by circa 40/50% each month - a very rough number because I don’t even know what the actual payment should be I just know what I pay.

It occurred to me tonight are we now just overpaying that money to borrow it back in a few months time at a higher rate? Would we be better to just pay that actual mortgage payment and save the rest?

Hope this makes sense!!

Yes it sounds like you should be saving separately @Chipsriceandgravy as overpaying now could well mean you will end up borrowing at a higher rate later.

Anyone with a current fixed mortgage taken out before recent rate rises could be paying rates well below 2%. You can get around 2% in instant access savings so you actually make a profit by saving instead of overpaying. Plus in your case you could use what you save towards your home improvements.

When is your current mortgage due to renew? Depending on the amount you need, when you need to remortgage and the relevant rates, it might be worth getting a personal loan for any additional borrowing.

This is what we did when we got an extension. Our mortgage is an old lifetime tracker with a margin of 0.3% so obviously cost almost nothing in interest between 2008 and a few months ago. Instead of overpaying we saved all our money separately and when we got our extension we were only about £15k short of the amount we needed so we left the mortgage alone and financed the extra money needed with interest free credit for the kitchen from IKEA and a £10k personal loan over about 3 years.

Thank fuck someone else said it. There's been so many people going on about overpaying mortgages 'to save thousands' when half the time, it's nothing of the sort because the interest cost is tiny and you can get more in savings.

So effectively the same as an offset mortgage but even better because, as well as offsetting some of your mortgage interest with savings, you earn even more on top.

Although now interest rates are rising the tax consideration could return, but for those who've fixed around 1%, it's definitely worth looking at, and ISAs and even premium bonds could overcome the tax issue.