Mortgage - best thing to do with overpayments?

[whatamithinking]

Hi
We are in a lucky position to be able to make overpayments on our mortgage, however I'm unsure of the best way to approach this, and now our fixed term deal is coming to an end we have the chance to change things, these are the options I have:

1, reduce the term on our mortgage to increase the monthly payment and pay off sooner
2, keep the payments as they are now (or similar!), then pay an additional amount each month as an overpayment (up to the allowed limit)
3, extend the term to reduce the contractual payment and keep the extra money in a savings account to throw into the mortgage at the end of this next fixed deal to reduce the balance

My thinking with option 3 is that this will reduce the amount of interest we'll pay each month?

Any thoughts? Is this something a financial advisor could help with? We would want to keep our mortgage with the same provider.

Thanks in advance :)

3 is only worth doing if you can get a savings account offering a better rate than your mortgage interest which is probably unlikely if you are remortgaging now.

2 would be beneficial if your circumstances change and you are unable to make higher payments, because you are committing to a lower payment whilst still paying the same amount as option 1. As you mention you will need to ensure that you can overpay and how much the limit is.

I would only choose option 1 if I really wanted to overpay but didn't think I would stick to it unless I had to, or you have restrictions on overpayment value in option 2.

A mortgage broker would be able to discuss your circumstances and options.

I wouldn’t pick 1 unless you were really sure you could sustain the overpayment. There was a time and a place for 3 but I think you’ve missed the point where people had low fixed rates and high savings where it was a no brainer.

Option 2, circumstances change. If the payment stays around the same when your deal changes, overpay each month, the following year your monthly payment will reduce slightly (because you’ve reduced the capital amount) and continue to overpay same amount. At the end of your deal, so 2, 3 or possibly 5 years, reassess x

no.3

If you have a lot of savings or want flexibility, have a look at an offset mortgage

If you do 2, isn't that effectively the same as 1 because eventually you'll have overpaid enough that you've reduced the amount owed and therefore the min payment will be very small. If you continue to over pay once a future fixed term is ended, you could still pay off the whole thing in fewer years.

But consider that offset mortgages are generally more expensive than standard ones so won't save you money unless you have a lot of savings.

Which of the options is right for you will depend on many factors like the amount of mortgage, amount you'll likely be able to overpay, whether your income or expenses are likely to change within the fixed period, eg promotion or if you have a child, risk of lost income due to illness or redundancy so being unable to keep up with a higher payment etc.

I think all mortgages allow you to overpay 10% a year but some might now allow 20% so it might be worth seeking these out and if all other factors are equal, going for one of these so you can overpay more without penalty.

As for the term, I'd probably discount 3 as you probably can't profit significantly from this any more especially if you're a higher rate tax payer so likely to pay tax on more of the interest earned on savings.

So maybe go with 2 but if the mortgage allows you 20% overpayments that's probably enough for most people but if it's not for you, then tend towards shortening the term as long as your disposable income isn't expected to decline during the fixed period.

For 1) this will be treated as a remortgage and you’ll need to go through the entire application process even iif sticking with the same lender so I’d only consider doing this if you’re moving provider anyway or if the level of overpayment isn’t allowed on the existing terms. For 3) you will have the same full remortgage scenario and do need to take into account you’ll be paying income tax at your highest rate on any interest earned over your allowance. You could do an option between 2 and 3 where you keep repayments as now but save the overpayments as a lump sum to go in in 2/3/5 years. Also worth noting that interest rates are probably higher than last time you fixed so your monthly repayment in 2) will increase anyway just to maintain the current term.

Either 2 or 3 depending on what your new interest rate will be v what interest you could get on savings in either an ISA or outside an ISA less tax.

We are doing a combination of 2 and 3 as we are on a low fix and have a high rate savings account in an ISA. So we put 20k a year in the ISA and then overpay the rest as I am in the top income tax band so it’s better to overpay than save outside an ISA.

I wouldn’t do 1, as I can’t see any benefit to it unless you can’t be strong enough to ringfence your savings to overpay.

We did option 2. Some months we overpaid more, some months less, some months not at all, depending on circumstances that month. It needs a bit of discipline to move the move the money each month, but it allowed us a lot of flexibility.

Thank you all for your replies, this is really helpful.
Very good point about paying the tax on savings interest, the margin between the mortgage rate and the interest rate is so small the additional tax will 'eat away' any benefit from option 3 I think...

See a financial adviser. It’s not sensible to make this decision in isolation. You need to understand long term affordability, other financial goals, other resources available to you (have you got any other savings or investments)? What does your retirement provision look like compared with your wishes for retirement?

I would reword your question as, you have additional income not currently required for your day to day living expenses. What is the best thing to do with it? Overpay mortgage, save or invest separately, or something else.

Not all financial advisers cover mortgages so won’t be looking for you to move, if that’s a concern. They can look at your overall position and advise you accordingly.

Tax isn’t necessarily an issue. Depends what allowances you have used, how much you have available.

Overpaying your mortgage often isn’t the most financially prudent thing to do with extra money. However, if it is emotionally important to you to be mortgage free it could be the best option for you. Ultimately depends on your goals so highly recommend getting professional advice. Hope that helps!

Extending the term of a mortgage if you don’t need to is not something that mortgage brokers recommend. The longer your mortgage term, the smaller the actual monthly repayment part meaning you will be paying more interest as you are not paying off the loan as quickly.

Option 2. Overpayment will reduce the term of the mortgage so you will pay it back sooner. If you plan on keeping the overpayments under the 10%/20% your mortgage provider allows this is the most sensible option. I wouldn't bother speaking to an advisor unless you want to pay off amounts that are higher than what your bank allows as part of your existing deal