Mortgage - overpay or save ?

[Snorkers]

Can anyone help advise on this please?

160k mortgage taken out in 11/22 at 2.48% for 23 years.

Standard repayment is £760 a month.

On top of that we can overpay max 10% of balance as it stands on Jan 1 each year.

So far we've overpaid quite a bit and current balance is £133,451, but now interest rates are high I'm wondering if saving in a fixed term cash ISA would be a better bet?

I can lock away for five years at 5.26% but obviously then cannot repay the mortgage so it will accumulate interest.

Next year our max overpayment will go down, same following year etc.

Is anyone good enough with sums to show me overpay v save figures, or share a website/tool that calculates it for me?

Thank you!

P.s sorry - fixed mortgage rate for 10 years and always intended to pay off within 10 years so want to overpay max each year.

Here is a calculator that tells you the best thing to do!

scroll down and there is the option to compare to savings.

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

Thanks so much, but this won't allow me to change the regular repayment amount tho - so my 10% overpayment changes each year. I need to be able to calculate long term too - so overpay mortgage this year and how much that will save over 5 years v pay into cash isa for 5 years.

Marcus have instant access at 4.25% currently so you'd be better saving with the intention of lumping off a chunk when the fixed rate is up.

If you look at atom bank and a couple of others - they have 6.05 % and the option to have interest paid monthly.

How much have you go to put away presently to start in a high interest account?
How much are you overpaying each month, quarter or annually?

£133.5k left over 22 year and 10 of that with a fixed mortgage rate of 2.48%

Your max overpayment is reducing as your loan reducing - as its set at 10%

So maximum overpayment would be £13.350 this year - is that correct?

If you placed £0 into a savings account earning 5.5 or with two of you split the amount.

The each month put away £700 in 10 years time you would have £111.655 You'd have saved £84000 and accrued interest over the 10 year of £27,655

I would pay of a recurring £300 each month from the mortgage or weekly if its allowed. This would over 10 years reduce your mortgage to £40,930 in 10 years The 10% overpayment would be allowed continuously as the amount would be a total of £3600 - your mortgage wouldn't be below £36,000

Then I would set up a savings account paying 5.5% and save £275 every month

There are bonds with Atom bank paying 6.05% for 2 -3 years etc
I don't know what your income tax situation is though, you can only earn £1000 per year tax free - so I guess thats why you've picked an ISA

But you could both have £10k in a higher interest account and filter that into an ISA

Keep saving the £275 for 10 years and paying interest at 5.5% or above if you can get it would give you £43.864.69 (that breaks down into £33.000.00 saved and £10.864.59 interest at 5.5%)

The savings would pay the remainder of your mortgage in 10 year time.

If you didn't off set anything on your mortgage for the next ten years you'd have £81,780 left to pay in 10 years time.

If you place the £300 + £275 into a savings account every month for the next ten years and can earn 5.5% on that money with a zero balance to start. In ten years time you'd have £91,716.86 that breaks down to £69,000.00 saved and £22,716.86 interest

If you place £515 into a savings account and earned 5.5% interest over 10 years you'd have £82,146.40 That breaks down to £61,800 saved and £20,346.40 interest

It is more effective to save the money in a savings account paying 5.5% and pay off your mortgage in 10 years time than pay extra from the balance on the mortgage

It saves you £9,570.45 if you save the money and pay off the mortgage at the end rather than paying off the mortgage as you go along.

I hope this makes sense, I have had one small glass of wine

Pay into an isa / savings and then use this to pay off mortgage when it matures. This assumes you get a higher interest rate than your current mortgage rate of 2.48% which you will presently. Not as satisfying as directly overpaying I know but more worthwhile now rates are higher.

Wow @MikeRafone can you sort my finances out for me too! I will buy the wine.🤣

Wow, you've hit the jackpot. Don't throw it away by overpaying a penny more.

Save as much as you can in separate accounts, but be mindful of tax - ISAs and even premium bonds can mitigate this.

According to the MSE calculator, you need to pay/save an extra £500 pm on average to clear your mortgage in around 10 years.

This is what the calculator says about saving the £500, which you could get around 6% interest on in regular savings accounts, which you could then move into fixed rate accounts as they mature. But using 5% as an average savings rate:

You would be £11,690 better off if you saved at 5% rather than overpaying the mortgage for the 10 years and 9 months it'd take.

This is because if you saved the money, after this time you would still have £73,840 to pay off to clear the mortgage, but you'd have £85,530 in savings, more than enough to clear the balance and still have £11,690 left over.

Obviously keep an eye on relative interest rates as you go along, but I'd never overpay on that rate, it's madness.

The other thing I'd consider is investing some of the money in a S&S ISA tracker fund instead, as you'd likely exceed cash rates over time, but obviously subject to risk and volatility.

these questions are frequently asked on Mumsnet and are nearly always understood purely as a financial matter of calculations. However ..

Trickling money monthly into overpayments means that that money is gone from sight and cannot be dipped into when … boiler breaks…. Car needs replacing and for “just this month” one dips into savings…

Also you mention locking away but presumably OPs were being made monthly and you’d save monthly too? A fixed saver won’t allow that. A restricted access one might.

regardless consider the softer human aspects of having money available sat in a savings account when the going gets tough and it’s invariably eaten up or nibbled at..

Yes, this is my approach too. It depends how disciplined you are etc but for me, locking at least some away in overpayments is worth while even if mathematically it's the less profitable option

I also recommend the money saving website calculator - at the end it show you how much you’d save if you paid it off your mortgage compared to putting it in savings.

Im similar to you. Our 5 year fix ends next year, we started off with a £280,000 mortgage and due to over paying it now stands at £160,000. Once you have, six months of bills in savings and a few grand in your ever day savings, with such a large mortgage amount you’ll save more money by overpaying the mortgage.Don’t forget that overpaying brings your monthly interest amount down significantly and this is more that the % interest you’d get in a savings account.

Let me use an illustrative instance of US!

MSE website clearly shows that - over a period of X years - saving at 5% would leave us £47k better off than overpaying the mortgage (2.7%) by the same amount each . That’s a huge amount. So, in X years we could clear the mortgage with the savings and have 47k left over.

HOWEVER -

1. We know we wish to move house and significantly upscale/upsize in 3 years. In the 3 year short term - savings don’t return anything comparably more than overpaying. So - consider your overall plans.
2. Second - we know, crises happen. Stuff happens. Illness, job losses, pandemics, breakages - the temptations of money sitting in a bank for “just this one thing” would for us be too high a risk

With these in mind we are currently overpaying significantly. Once upsize move is made all being well we can then revisit the decision once again.

Wow thank you everyone and in particular Mike - wow! I'm going to try and digest all that. Yes PP I have indeed hit the jackpot and I thank my lucky stars every day. Of course we have no money for renovations tho!

Yes I'm higher rate tax payer and husband will be soon, and also have easy access rainy day/emergency/house savings hence ISA.

Would it make sense to mirror the front-loaded overpayments into a high paying savings account so that the money can make more over time, and reduce that down, or just pay a consistent £xx into it over 10 years?

Balance at beginning of year was £143,555. We've paid our regular £760 each month and overpaid too until about April when rates started shooting up - currently putting the overpayments at £1200 ish a month into a 32day fixed save account but not an ISA and also not such a great rate any more.

We overpay but won't be close to paying off our mortgage when our current 10 year fix expires. We overpay because I can't be trusted not to spend available money on the house/car upgrade/holiday instead and we will really struggle to pay our huge mortgage when we renew as things stand. We do have a bit of savings for emergencies though.

you’ll save more money by overpaying the mortgage.Don’t forget that overpaying brings your monthly interest amount down significantly and this is more that the % interest you’d get in a savings account.

im really sorry but this isn’t correct, I’ve outlined above as much as possible to show why with a savings rate based on 5.5% and a mortgage rate of 2.48 % you’ll be financially better of saving the money regularly and it’d actually make around £9k - £11k difference

Would it make sense to mirror the front-loaded overpayments into a high paying savings account so that the money can make more over time, and reduce that down, or just pay a consistent £xx into it over 10 years?

id front load it, but that’s how I work. I’d max out both your cash ISA first as tax free return and with you both being in higher tax band that’s worth while

If you save £1200 for 60 months in a savings account and transfer each March into ISA you’d be looking at £80.5k
then leave that money ready for 5 years time to pay off the mortgage you would have £100k and have earned £20288 interest in 5 years. The equivalent of £308 a month

if you continued to save £500 per month which would add to the £80k you’d after 10 years have £134,342. Leaving you £54k which would earn if interest rates were 4.5% £2480, so a couple of hundred pounds a month

if you matched your mortgage repayment at £760 for 10 years. You’d have £114,190 of which £23,710 is interest over the 10 years. You’d have £34k left over after your mortgage was settled.

All the above was calculated at 4.5% to allow for ISA rates being lower than higher interest rates

Out of curiosity I calculated the same with staying at £1200 for the 10 years

This would amass £181,437 over ten years of saving £14,400 each year. The interest over the 10 year period at 4.5% £37,437 and you'd have £100k left after settling your mortgage or the money as a deposit on a new home if you wished to move at this time

Mike thank you again. This is what I was looking at too. I'm hoping our salaries will go up so if we can just have a bit of pain now in a year or two the 1200 repayments won't have much of an impact.

Yes to the previous PP - Mike is absolutely correct. Repaying to save 2.48% or saving to get 5.26 is not even comparable. In the last few years when interest rates were so low there would be no point saving and you are correct - repaying the mortgage would be top of the agenda. But things have really changed now and if anyone was lucky enough to lock their mortgage in at a relatively low rate like us, they are probably better off saving rather than overpaying.

I found/opened a 5 year fixed ISA with Zopa at 5.26% which I hope to to chuck the maximum into or near enough (most of my savings). That will repay around £6k in interest after 5 years.

We'll then repay my savings in earnest for 6m to bulk up again and then gradually top up the rest over a longer period time, as well as save for next years ISA. I've left enough in savings in case of dire straits and a few project bits for the house, and I have a shedload of stuff to declutter and sell so added impetus to do that.

How amazing would it be to not only pay off the mortgage at year 10 but also have a massive chunk for something else? Obviously I realise this is a very privileged position to be so again am feeing very grateful. After years of scrimping I'm not quiet sure how this has worked out but glad that it has.

Thank you again all.

Wow that sounds good. I need to look at doing these sums for myself as currently overpaying, but now see I should actually be saving!

Do it Starseeking! Once you see how much you are throwing away it makes you feel a bit sick - I've basically been donating my money to the Halifax !

This is a very interesting read as i'm currently overpaying my mortgage & will also have a lump sum to pay off. Have 9 years of mortgage left but have a fixed rate for 5 years so want it paid off before then.

Im rubbish at maths so maybe need to get some advice from somewhere as to what's best to do.

@FannyFifer start your own thread in money and put up your details and id be happy to put up some figures for you. Need to know what loan is left, both monetary and years, what interest rate, what you overpay etc

@MikeRafone what if your interest rate is 5% which is ours is?

We have a lump sum which we're planning on using to pay off the mortgage 8 years early. Our dilemma has been whether we should invest the money instead as we have until 2032 to pay off the capital as we're on interest only.

It could be risky as it's probably not a long enough time horizon for equities and we risk the markets being down when we need the money.

Alternatively if we do pay off the mortgage we'd have more disposable income every month which we could invest in equities with a much longer time horizon as we wouldn't need the money in 8 years time. So it wouldn't matter if the market was down.

Would you say this made sense?

Amboseli if your mortgage is costing 5% then it’s going to depend on your rate if return in the 8 years. With that as an unknown there isn’t an answer unfortunately, but like the 3.20 at kempton this afternoon it’s a gamble