Overpaying mortgage?

[tiredandstripey]

Hi apologies for another mortgage thread. We are very very fortunate in that a) we fixed for 5 years in sept 2020 at 1.7% and b) we can currently afford to overpay our mortgage. We are allowed to overpay up to 10% a year on our balance of £295k so we are in no danger of hitting that limit (!) but we could afford to overpay approx £500 per month. I’ve worked out that by the end of the three years we have left, overpaying would mean we have a balance of £256k rather than approx £273k if we just keep paying at the normal rate. I then tried to calculate how much this would save us in monthly payments at whatever the new rate would be and I’m not sure if it’s definitely worth it. If we then get a fix at 6% it makes about £100 a month difference to our repayments which doesn’t feel like much gain given that we would have ploughed an additional £18k in overpayments in three years. If interest rates are at 10% then it would save about £200 a month which does feel more worthwhile I suppose.

I’m wondering if it’s worth overpaying or not, especially since we can now get savings accounts with more than 1.7% interest. If we just put that £500 a month into savings then we would accrue the interest which would be more than the mortgage interest and could overpay lump sums if we didn’t need the cash for anything else. We do already have an emergency fund in savings. We have approx £6k on interest free credit cards but have a plan to clear this before it starts accruing interest. We will need to replace our car at some point though as it already needs a lot of work doing and I don’t want to overpay mortgage and then end up having to take out credit to buy a new car!

sorry for the slightly rambled post but if anyone can advise I’d be very grateful.

Do you overpay now at all? I would always say overpaying is worthwhile. We have a similar mortgage to you, and it’s. 35 year one. We only overpay currently by £100per month and we’ve already knocked a year off the repayment time. We’ve just re-fixed for 5 years and are going to throw whatever we can at the mortgage from now on.

@Overthebow we don’t currently overpay a regular amount but we put random amounts in whenever we have a bit of unexpected money or whatever. Statement says that this year we overpaid £2200 so I think it works out to the equivalent of about £175 a month.

If you’re accruing more interest in savings than the mortgage interest, it makes more sense to save instead of overpay and then put it into the mortgage later. But would you be tempted to spend the savings? In which case just overpay the mortgage. Sounds like you need to split it in your head into a car fund and a mortgage fund.

Or put it in a fixed rate ISA so the interest isn't taxable and also so that it's not easy to access if you might be tempted to spend it.

Don't bother overpaying. Save the money instead, you'll beat that interest by quite a margin then you can send the money to the mortgage later.

For example, you can get 2.75% instant access with Santander and even more than that if you get a fix after you've saved up a lump sum.

Have a look at:

www.moneysavingexpert.com/news/2022/10/martin-lewis-overpay-mortgage-rates/

Logical thing to do would be to put the "overpayments" into a savings account paying more than 1.7% then pay off a chunk when the 5 years come to an end (assuming that at that point mortage interest rates are higher than savings rates). Gives you more flexibility as well as higher returns, so a no brainer really!

You were very lucky to have got that 5 year fix in 2020. Wish we had!

Yes it's worth overpaying.
Yes the monthly difference after the end of your deal is smallish, but £100/m less over the remaining (?22?) Years of mortgage would be £26400 - way more than the £18000 you'd be putting in.

You would be marginally better off if you paid your spare £500/m into a savings account with an interest level of more than 1.7% but the additional hassle of then importing that large lump sum to your mortgage account at exactly the right time to ensure you don't lose out might make that marginal difference not seem worth it.

Definitely save it and pay off a lump sum when you get to the end of your fix. It looks likely that interest rates will increase significantly over the next few months so you will make even more by doing that.

It isn't difficult to pay off a lump sum the moment your fix comes to an end, you just set up a bank transfer for that date.

Thanks for all the replies so far. Some different approaches here!

we are pretty disciplined with saving so if I can sort out a decent % savings account then we might do that. Only thing I might end up tempted by is buying a nicer car next year if we have cash sitting in the bank. Our current car is way too small for our family and doesn’t have mod cons and I would be very tempted to get something much nicer and newer. I would have to make sure I didn’t get swayed!

Remember you pay tax on the interest you earn in a bank account, it’s not all profit.

Whilst you do technically get more money by saving it, I chose to pay off my mortgage, which, like you, has a v low rate for a good while. I do so as I want to pay off this large asset and own it myself, and then get back control of all the money I send to pay the mortgage. I also want the largest asset own to be owned by ME not the bank, and I don’t want to be at their mercy if interest rates go up or something happens and they forclose. If I am ahead in the mortgage and circumstances mean I need to take a payment break for awhile, I can. I also save on interest.

If I were you I would add a fixed steady amount more to your mortgage, but also start another savings account with a fixed steady amount called Car/emergency fund.

Our mortgage is well under 2% until mid 2024. Our savings are going into various accounts, paying from 2.5 - 4%. We'll work out how much we want to pay off when the mortgage is due for renewal. Yes, you have to be a bit disciplined, but financially it makes far more sense.

Remember you pay tax on the interest you earn in a bank account, it’s not all profit

Only once you've exceeded the allowance, which is £1000 pp for basic rate tax payers, so at 4% interest, you'd need above £50k in savings to get past for a couple. Then there's cash ISAs and premium bonds which, while being a gamble are another option.

I am saving instead. I have a mix of instant access and accounts that are locked in until my fixed rate ends. I can then use that to overpay once I move to a higher rate.

(My situation is slightly different in that when my deal expires my savings will cover my full outstanding balance, but the principle is the same - earn a bit more interest while I'm waiting rather than paying it off the mortgage now)

Hi....nice problem to have OP....not that Im jealous or anything lol....
Basically you need to put your cash where you get the most benefit from it....your mortgage rate is quite low so overpaying there seems a bit unneccesary....have you thought about a S&S ISA....good time to invest as most investments have dropped....particularly if youre leaving it there for a while....you could make a killing....also Id pay off the credit cards for certain as the interest will be hefty....
Sorry for rambling....I found some really good info on here....
https://beamoneypro.com/

I’m shifting from overpaying the mortgage to putting the extra in a cash isa paying over 4% with view to put it towards to the mortgage at the end of the fixed rate period. The difference is 2.7% interest, which won’t be loads but better in my pocket than the banks!

We made a large payment in between terms when we renewed last time, and it was no hassle at all. Took minutes on the phone

I think the only delay at time of transfer might be a phone call with your banks fraud protection team who'll want to make sure you're not being scammed. Other than that there shouldn't be any bother.