Overpay mortgage?

[CatteryCat]

Is it worth making small overpayments on my mortgage monthly? It’s at 5% fixed rate.

I invest every month in my S&S ISA (additional pension pot in hope for early retirement), which means I’m on Dave Ramsey’s Baby Step 4. I am able to afford to make small mortgage overpayments of £50 a month, but I’m not sure if it’s worth it?

I thought it was always worth it if your terms allowed it? Maybe I’m wrong

It is worth it if you cannot get a better savings rate and your mortgage allows it. (But you might be able to find a better savings rate). Look at reguar savings accounts which might pay more. Money savings expert has an overpayment calculator where you can compare it with savings.

What do you mean by "worth it"? If you can afford it then it's a good plan. If you can't afford it, it's a bad one. If you could get a higher rate in savings, then that's a higher value - but you might prefer the knowledge that it's going into reducing your mortgage balance. "Worth it" is entirely subjective.

Overpaying £50 a month (assuming your mortgage lets you do that) will save you money in the long term. Or you might prefer to have the money to hand, or use it for something else, or put into a pension (and get your tax back!), or just use it for fun money... All those things are worth it, to someone!

Yes. Overpay to shorten your term and you'll pay less interest to the bank overall. (Pretty sure Dave Ramsay recommends paying off mortgage early too.) A reason not to would be if you have other existing debt that also needs paying off or if you need the money to prevent incurring other debt.

It’s only worth it if you will save more by paying the mortgage off earlier than you would gain using the spare cash elsewhere.

I was in this situation so let my mortgage run the full term.

We're on a tracker and it's just dropped a bit but we've kept the DD the same. Use a mortgage overpayment calculator even a small mortgage overpayment is often worth it if you can afford it because of compound interest

Thank you. I already invest a certain amount each month, so I suppose there’s nothing stopping me from doing both!

My mortgage term is 35 years (now 33 years and 9 months), so it’s in my best interests to overpay?

There are lots of online calculators that will let you see much £50 a month extra will reduce your term.

We overpay and I'm always disappointed at how little difference it makes but I think I have unreasonable expectations driven by a desire to be mortgage free.

Yes.
Overpaying whenever you can is a really, really good habit to get into.

The difference seems minimal in the first few years, but it has a serious impact over the term of the mortgage.

Yes I would overpay

The things to consider are:

Are your savings earning less than your mortgage is costing, allowing for the tax benefits of ISAs and pensions?

Do you have other debts?

Do you sufficient savings for emergencies and a rainy day?

if all these are true, pay as much extra as you can.

I have some Emergency savings and no other debts at all. I was planning on saving further for emergencies alongside overpaying the mortgage 😊

How old are you?

That actually has an impact on what is wiser. If you are 25 with a 32 yr mortgage it is one thing but if you are 50 with same it is quite another.

@yesmen I’m 28

Just checking - if you're under 40 (and with a 35-year mortgage I suspect you might be!) is your S&S ISA a lifetime ISA (LISA)? If not, switch to that to get the 25% bonus payment from the government as well as the investment gains. Sorry if that's old news to you or you're not eligible - I just wish I'd found out about it earlier so now I tell anyone who sits still long enough!

I overpay by 1 mortgage payment a year. I just divide my monthly payment by 12 and add that amount on to the monthly payment. Don't even notice it.

Yessss do it! I've overpaid £66k in the last couple of years for my 2 bed - it's really added up, and my mortgage went from 1.93% to 3.99%, but it basically meant my payments didn't go up when I renewed to whatever the amount id overpaid for by then. I just work out my 10% each year then divide by 12, and aim to save that each month (I don't always succeed), where I don't I add it on to the end etc, but the pennies add up from top cash back money, interest etc too.

I have a mortgage plan to clear my mortgage in the next 4 years as I am single and living in the south, and dont want to be commuting to London forever for work but local jobs salaries are horrific. I figure nothing bad can come from me doing it - I dont necessarily want to give up my career, but I am 35 next month and would just rather have the "choice". By overpaying I figure I have either of the 2 options ahead of me by 40:

1. I meet someone and have more equity behind me to upsize with them for kids etc, and can potentially just get a local job/go part time.
2. I don't meet anyone and either be mortgage free where I am (more holidays) or upsize, and eventually give up corporate just needing to pay the running costs.

For me, as I live alone it's the security of knowing I have a house no matter what which is why I do it long term for my future.

You’ll be very happy you overpaid in a few years!

@BeautyPageantDropout Why that amount (One mortgage payment)?

Is it to keep it under the maximum you’re allowed to over pay?

Then I would try to do one full mortgage payment a year extra.

You will save a lot on interest. There is a MASSIVE difference between paying 30 years and paying 15 or 2o

In terms of interest paid.

One final things from me - check with your bank to make sure you do not pay a penalty

purely a mental trick. it's still effective in the grand scheme of mortgage payments but my pocket doesn't notice it.

I think that's a great summary from @DadJoke. The advice is usually to have the equivalent of 3-6 months salary in an emergency fund so it might be worth thinking about how much you think you would need for emergencies. Of course if you have a flexible mortgage it makes overpaying much easier. The other thing to check is whether any overpayment is applied immediately or is applied at the end of the term as that will make a difference as to the savings you could make by overpaying.

If your mortgage is at 5% interest, and you over pay £50/month, you are benefiting in 3 ways.

Firstly, that is £50 less on your overall mortgage you need to pay at the end. Over a year that is £300, over two years it is £600 which (depending on the amount of your repayment) may mean you repay your mortgage 1 or 2 (or whatever) months earlier than the current final date.

Secondly, any extra repayment you make goes to the principle you owe, and reduces that. Meaning the interest calculated each month is less. £50/month at 5% is a reduction of approx 21 pence in interest payable each month. Meaning this 21 pence also, comes of your principle loan, meaning it isn’t just the £50 above, but now an additional 21p.

These amounts might sound small, but the power of compound interest means they add up significantly over time.

Thirdly, by making these extra repayments and reducing your overall principle loan amount, you own more equity vs the loan in your home, and puts you in a better position to renegotiate loan terms and rates in future, if needed (ie getting a lower interest rate).

I say do it! From little things, big things grow!