Another Mortgage one, over pay (a bit) or save as a buffer

[DialsMavis]

We have a fixed rate deal until Jan 2024, we pay £1100 pm and currently owe £300,000. I have just had a pay rise and was planning on overpaying by £150pm. Is this sensible or is it such a small overpayment on a massive mortgage that we would be better to build up savings?

Our current mortgage interest rate is 1.85

Do you have £300,000 in savings?

The compound interest on a £300,000 mortgage debt is always going to be higher than the compound interest on your savings (unless you have a comparitive amount of savings).

Because basic maths.

HTH.

Rule of thumb:

Its like gambling. The banker always wins.

So owe less to the banker.

If you put £1000 in savings that earns 2% interest after a year you have £1020. If you leave it there for another year, you get 2% interest on £1020, the year after that interest on £1040.40, etc etc. That is compound interest.

If you use your £1000 to overpay a mortgage with a rate of 1.5%, you are charged interest on £1000 less, so it saves you interest of £15. Keeping things the same, the next year, you now save £15.23 in interest, so a total of £30.23 in interest saved.

Using basic maths, £30.23 is less than £40.40, so you've lost money by overpaying the debt that charges less interest than your savings.

And no, the bank doesn't always win. I've spent the last 15 years beating the banks with interest rates. At one point HSBC were lending me money at about 0.88% on my mortgage and at the same time paying me 5% in a regular savings account.

I was earning enough interest to offset over half of all the interest on my mortgage by keeping £2500 in my Nationwide current account paying 5%

It's called Stoozing, read up about it.

Thats not compound interest.

Yes it is.

Plus, its not about how much you owe on a 1.5% mortgage.
The point is that rates are going up. So you want to be owing less before you end up on a 5% rate.

Given that MoneySavingExpert is in agreement, I would suggest that Snoozing is for the financially illiterate.

Have you worked out if you can afford the repayments on 6% or higher?
If there's doubt I would save the money in a savings account and at the term pay the mortgage down with a lump sum if you don't require the savings. You aren't looking to lower the £300k substantially by overpaying but if the repayments are too high you have a problem and savings will come in handy.
IMO saving a small buffer of £3-£4k isn't enough on a mortgage of £300k- it won't touch the sides of interest rates go sky high.

Overpay now to reduce the term before the rates skyrocket, so you pay more now at a lower rate. Then build up savings, then overpay again while you still can.

We could afford 6% but it would be unpleasant, 8% quite scary. Regarding building up savings perhaps I should finish the house on an interest free card? Need to spend £2k to finish it off, could pay that off at £90pm and not deplete our savings. Sorry, not my original question I know!

Interest on any credit card once the interest free period is over is massive - vastly more than mortgage rates will ever be. As PP have said, build up a savings buffer, put it in the highest interest paying account you can find, then start paying down the mortgage

If I overpay my mortgage, my mortgage company will give me a payment break for as much as I've overpaid, up to 12 months I think, worth checking. You get the eBay of both worlds then, if you don't need it you've over paid and saved interest, if you do, you could live mortgage free for a while. I do know tho, if you take a payment break the interest you pay when you restart is very slightly higher

I did some calculations on another thread and over a short period of time I think it’s better to save up and have savings rather than overpaying. Overpayment makes a big difference in shortening a long term (i.e cutting a mortgage from 30 to 27 years) but it doesn’t make much difference in monthly payments in the short/term especially if your interest rate is low.

It also depends on what your mortgage interest rate is at the moment. Mine is 1.3% (that's going to be a shock when I come to renew next year), so over paying doesn't reduce the term by a great deal. When it was nearly 4% it made a huge difference to the term

@properdoughnut as lots of others have said you can check out the effects by using an overpayment calculator. Generally it is best to use the overpayment to reduce the term, if you do this then there is less time that you need to pay interest on the outstanding balance. Our nationwide mortgage statement details the amount as it can be withdrawn if needed.

My overpayments over last 4 years are recorded by my mortgage company (nationwide). So if I needed a mortgage break for any reason I can offset the overpayments if that makes sense.

in my mind overpayments (which reduce both the principle & interest) are much better than savings (which get eaten by inflation & don't earn much interest).

It's a no brainer. Do it.

Of course make sure you have some emergency cash first.

I want to overpay so it doesn't make sense to reduce monthly payments.

Nice to have this as an option in the future in case circumstances change.

Every year I can pay off early reduces my interest payment by thousands.

It's worth having a play around with mortgage interest calculations. I use YNAB. And they have one built in.

Who knows what situation we will be in with interest rates in 2024?

My thinking would be I want to reduce my principal as much as possible by overpaying now, so when it comes to remotagaging, at higher interest rates, the impact will be minimalised.

If you are on a low interest rate nowOVERPAY, OVERPAY, OVERPAY!

I would get a 6-month savings buffer in place before overpaying.

I would have more of a buffer unless you have another source of funds for emergencies eg loan from family.

Then I would overpay.

Or if you can’t decide put half on the mortgage and half into savings. I’d also focus on seeing if you can reduce sone of your other bills eg phone plans and insurance. Also look at commuting costs - could you walk or bike instead of taking public transport?? Everything extra you can put on your mortgage now will make a huge difference but you still need to be able to cover emergencies.

But you can save at a higher rate, and send the money to the mortgage later, and make more money on savings in the mean time.

Some people are paying less than 1% on their mortgage and you can get double that on savings. It doesn't make sense to overpay if you're in that situation.

As for whether it's best to reduce the term or the monthly payments, it doesn't matter, the effect is the same if you're regularly overpaying.

You just send the money to your mortgage account until it's paid off, then it stops. If your lender reduces the monthly payment, you just increase your overpayment, because if your regular payment was lower, you have extra money left in your current account, which you can then send to your mortgage account.

@BarbaraofSeville is quite correct and I am doing exactly this. I can get a better rate on savings after tax than I get by paying down the mortgage.

It also means I can get at the cash should something go wrong like losing my job.

Please do not overpay your mortgage if your fixed rate is lower than the post-tax interest rate you can get in a savings account. Put the money in the savings account and then repay your mortgage with those savings when your fixed rate period expires. Otherwise you are turning down free money.