Overpay on mortgage interest or capital?

[ProseccoOnIce]

I'm fortunate to have got a 5 year fixed rate mortgage at 1.04% when I bought my flat nearly 2 years ago.

I'm 50 & it was a 20 year mortgage, which I want to pay off sooner as I don't think my health will allow me to work to 68 or 70.

Am I better paying off the interest, or the capital? Or perhaps saving instead of overpaying?

My current lender allows overpayment of 10% of the loan per year.

I would save while you're on such a low interest rate, then pay off a lump sum when your fixed rate comes to an end.

I don't understand. I don't think there is any such thing as "paying off the interest". You will be charged interest on whatever your outstanding balance is. Any extra payments will pay down the capital at a faster rate than otherwise (and hence reduce the future interest payments too).

Saving is obviously a completely different choice. It makes much more sense to save while your interest rate is so low as you will get a higher return. You could always choose to use your savings to pay off some of the mortgage later. The only reason to overpay instead would be if ideally you would want to pay off more than 10% in the future, but can't. so want to use this year's allowance too.

Am I better paying off the interest, or the capital

I also don't understand this. If you overpay, they'll start to charge you less interest as the balance has reduced, but you can't 'overpay the interest' all payments go off the capital and you're charged interest, calculated daily based on your balance (compounded up obviously).

They might also reduce your payment and people often tie themselves up in knots over whether to reduce the term or the payment, but in reality it doesn't matter if you intend to regularly overpay because you just keep sending money to the account until the balance is paid off. If they reduce your regular monthly payment, you have more money left in your current account so you just make bigger overpayments.

HOWEVER, to answer your other question, on that rate, DO NOT OVERPAY ANYWAY. Definitely save instead of overpaying. You can get nearly 4% interest on instant access and you can get up to 9% using regular savings account (albeit on small amounts of money). Overpaying on that mortgage rate would be silly.

So just save the money elsewhere and send the money to your mortgage at the end of the fixed term. Start by putting your overpayment in an instant access account and set up some regular savings accounts. When you build up lump sums, put them in fixed term accounts. As you might exceed the personal interest savings allowance (£1000 or £500 depending on how much you earn) also look at cash ISAs and Premium Bonds.

I’m not an expert but overpaying would be insane imo.

Hanley BS offers 4.5% “easy access”. Fixed bond are 5%.

Depending on the capital you have right now, you should be able to generate a fair amount of interest in 3 years time.

Thanks - that is what I suspected- I think I'll divert my £50ish a month in to a savings account with a decent return.

My app tells me I've been charged £410 so far in interest this year (last year was £1100).

I can pay off capital and/or interest off with repayments.

Just want to get it paid off quicker as I've had a health scare.

Is your mortgage a repayment mortgage or is it split between being a repayment and interest only ie two products.

if the latter, I would pay off the interest only part first.

It's the former (capital & interest).

I was hoping to be able to move again from this flat to a house, but I don't think that will ever happen now, as interest rates will mean my payments on the existing mortgage will be significantly increased, never mind taking out a new mortgage.

And I bought post-divorce in 2021 at the peak of the market so will likely lose money on this place.