Mortgage overpayments

[sleepsforwimps1]

Ok, so I'm panicking a bit prematurely, but that's just the sort of person I am... I took on a mortgage two and a half years ago on a ten year fix, obviously really low rate, about 2% I think. With everything going up so much I'm already worrying about increases when the time comes and wondering how overpayments work? I would have a good seven years to try and over pay and get the figure as low as possible but don't know where to start. I've also had two children since I moved so obviously finances will be different when it comes to remortgaging. It's not (comparative to SE prices) a big mortgage but I'm public sector and my wages are not increasing anywhere near where inflation is likely to sit for a while to come yet. Anyone know how to start with overpayments?

first check your mortgage agreement on what and how much overpayment is possible without penalty. often it's something like 10% of the overall or outstanding amount.

your mortgage provider is also likely to have a calculator on their website.

if you or your partner receive a work bonus then it might make sense to use that as a chunk per year. alternatively pay off a certain sum each month. whatever suits you best.

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

Try this and putting different figures in.
Also check how much you can put in each year without a penalty.
I have changed my direct debit so that I can forget about it each month, I can't afford much but every little helps.
7 years is plenty of time to pay down a few years worth then if worst comes to worst you can always extend your term (but hopefully in 7 years things will have settled a bit).

You need to check the terms of the mortgage to see how much you're allowed to pay-off as an overpayment each year without penalty. It's usually 10% of the outstanding balance.

The easiest way to overpay over the term of the mortgage is to pay the same amount every moth that you paid for the first year. Usually you get an annual mortgage statement, they recalculate, and the monthly amount drops slightly for the following 12 months. This doesn't apply to every mortgage (it's to do with how the interest is calculated), but it's how every fixed rate mortgage I've had in the last 20+ years has worked.

So if you've taken out the mortgage with a monthly repayment of £727.77 or some weird amount like that, round it up to an amount you can afford. Say, £730 or £750, or even £800 if that's affordable for you. Set that repayment with the mortgage company to over-ride the actual amount and repeat this every year. Instead of the monthly repayment dropping by £20/month or so every year you keep up the same repayment. It doesn't seem like a lot, but the effect of the overpayment accelerates over time. We've done this when our current fix ends (18 months or so) we'll be 5-7 years ahead on repayments after 15-ish years of mortgage and we've had to recently drop our repayments to avoid the overpayment charge.

Thankyou so much for the comments and advice. I will have to look at the paperwork and give the mortgage company a call but certainly rounding it up would be easily doable and just help pay it off a bit

Why on earth would you overpay when you can save the money separately and earn more interest while building up a lump sum that can be paid off the mortgage when you do remortgage?

You're paying 2% and you could get up to 7% on various different savings accounts, depending on who you bank with.

You've effectively won the lottery as far as mortgages are concerned and you're talking about tearing up the ticket.

As PP says, if you are on a 2% rate, you would be better off to find the highest savings rate that you can, there are several at 3% or over, especially if you do a fixed rate monthly saver. Save the mortgage overpayment into there and earn interest on it which gives you even more to pay off the mortgage in due course.

I am currently getting 5% on my Santander one and put away £200 a month into it.

I also repay my mortgage, I can repay up to 10% a year, and I am currently overpaying by £200 per month, and will do a lump sum in December, so I do a bit of both, but that is because I am trying to not be mortgaged til I am 67 (thanks to divorce at 40).

I have overpaid for years, and currently have 11.4 years left out of a possible 15. I rounded up the monthly payment initially to the nearest hundred, after taking payment breaks during covid, then as I earned more money, I added on another hundred.

The mortgage rate change is so annoying, I was paying £100 in interest and now it is £179 on much less mortgage than it was 5 years ago, but nothing I can do about it.

If you do overpay then you do need to check your mortgage terms allow it, and even just rounding up by a few pounds will have an impact over the years.

It's not as straightforward as directly comparing your mortgage rate to the savings rate. Fortunately there are online calculators to help:
https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

One of the important considerations for me when choosing to overpay is that I will be paying interest on a much smaller loan amount once the fix comes to an end. Cash in hand from savings is nice, knowing that my mortgage repayment will be significantly lower regardless of the prevailing interest rate at the time is peace of mind.

you need a calculator.

compound interest (or the reduction of those by overpaying) are usually a bit higher than the same interest on savings.

but a mortgage & savings calculator can help with that and with deciding what to do.

I was just about to post what the previous two poster said. At 2% you are better off putting spare money into a savings account. Then when your fixed rate ends you can pay that money (plus interest) into the mortgage (assuming rates are still high then)

The other thing to bear in mind is if you are putting the money into savings you have access to it in case of emergencies