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 am in my 50s and overpaid. However, now I realise that in my particular circumstances it would have been better for me to pay more into my pension and get the tax relief. 20% relief versus 5% is better. That said you have to live your life and if you are going to need to move again for any reason having slightly more equity in your house would make that easier. Also pensions are not accessible until much later so that emergency need before is difficult.

Being able to support yourself if circumstances mean you need or want to retire earlier becomes more important the closer you get.

Probably the best advice is to do a mix of both.

Given your current mortgage rate and length of term I would suspect it that will be in your interest to overpay. Yes.

If the mortgage rate drops significantly then you may need to reconsider.

What @3LemonsAndLime said, in terms of it isn't as simple as 'can you earn more in a savings account than the rate you are paying',

...although an extra £50pm would be £600 total for the year ....

If you put your figures in here it will show you how much earlier you could pay off your mortgage with £50 month

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

If I kept overpaying £50 per month my term would be reduced by 6 years and 5 months! Wow.

My mortgage would be paid off when I’m 56

It really does make a difference, especially if you start early on as you save so much in interest.

Thank you all!

@CatteryCat the current high interest rates for savings are creating a dilemma because mortgage interest vs savings interest is a factor. In both cases in one year pay it off the mortgage so either £50 per month or £600+interest.

I personally paid my last mortgage off in 13 years. I started by rounding up to the nearest £100 (or £50). Each time I received a pay award I enjoyed the first months net increase by treating myself. I then split the net increase in three - 33% increased my mortgage payments, 33% into my savings and 33% for day to day spending. You don’t miss the money, however the COL may mean you need to alter %. Even £10 a month makes a difference to a mortgage.

This has been our philosophy in overpaying our mortgage from day 1.

Getting yourself into a better loan to value bracket as fast as possible has huge opportunities to further cut the amount you will repay in interest overall, especially in an age of higher interest rates.

As mentioned upthread, the other strategy we have employed is keeping our mortgage payments constant, even as the amount we had to repay each month decreased. This meant that the amount we overpaid has constantly grown each month, even without sending any more money to the bank.

We will clear our mortgage next year having shaved our original 25 year term down to 15. The peace of mind, financial security and life options this offers us is priceless.

That’s incredible! Thank you @anibendod

Happy to help @CatteryCat. Another idea is to dig out you paperwork from when you first took out your mortgage. It might tell you what you would pay back if that mortgage rate were to run for the entire life of the mortgage. Our original mortgage was at a rate of 4.89%, and every £1 we borrowed would have cost us £1.82 on a very modest mortgage sum of 'just' £140K.

We've remortgaged onto lower rates since, but I've always hung on to that £1.82 figure. To my mind, each £1 I overpay is doing the work of almost £2. It might 'just' be an extra £50 leaving your account, but the impact it is having is worth far, far more.

Another benefit for us, albeit one we hope never to have to use, is regarding our life assurance. We have a decreasing term policy, which would pay off the mortgage completely if one of us were to croak it. It decreases on the expectation that our mortgage will run for 25 years. We've opted not to decrease our premium in line with our actual mortgage balance, as our monthly premium is comfortably affordable for us. The balance required to clear the mortgage is now just a fraction of what any payout would be, meaning that if one of us were to meet an untimely death the other would get the mortgage paid off as well as a modest lump sum.

There’s a rational thing to do, which has been set out a few times already, and then there’s what right for you. I say that because when I was younger I was terrible at saving…any savings that were accessible were effectively fair game when justifying spending!

I recognised that, and so consciously did things that while on paper weren’t necessarily ‘right’ meant that long term I was far better off as the money wasn’t spent along the way. So I overpaid the mortgage, saved into PEPs and Tessa’s (remember them?) which became ISAs in, I think ‘99, rather than build up the notional 6/12 months accessible cash first. I recognise that the fact I was always well paid gave a cushion that others might not have. The net result was that, despite moving several times, we’d cleared our mortgages by the time we were 40ish, and by 45ish had sufficient in pensions and other investments to wind down work. Had I just stuck the ‘the rules’ I would have spent a lot more money along the way and not have been in such a comfortable position.

Effectively I tweaked the old spend a third, save a third and spend a third on housing adage. I took the mortgage and pension payments off first, and then with what was left paid a further third off the mortgage, invested a further third and then spent a third. Until I was 40 we had almost no cash savings at all, and even now I only hold less than 1% of my total investments in available cash, because I know I’d still spend it 😂

As an aside, I seem to recall PEPs, which were tax efficient equity investment vehicles, only attracted tax relief on qualifying investments, which were UK/EU equities as I recall. It’s ironic, given the current governments focus on meddling with what our pensions / ISAs can be invested in, that it was Browns budget bringing in ISAs to replace PEPs that got rid of what they now are considering bringing back in some any shape or form! Which highlights the pointlessness of persistent pension / savings meddling by governments, and the negative effect it’s had on private sector pensions and retirement planning. They reap what they sow…

I don't know if someone mentioned it before me, but we had the same question and used Martin Lewis mortgage overpayment
Versus savings calculator.

We're on an older fixed rate for 2 more years and are better off saving it till our mortgage rate goes up.

Tick "compare to savings" and it'll tell you how much better off you'd be.

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

I'd just like to emphasise for all you young people that being debt free gives you a huge amount of financial security and flexibility and is definitely something to do your very best to achieve.

I paid off my mortgage in my mid-50s but it was a 1980s endowment where the investment didn't cover the final payment. I didn't do anything special, I was working abroad earning a lot of money so I could still afford it. But it would have been much smarter to pay off regularly.

I'd just like to emphasise for all you young people that being debt free gives you a huge amount of financial security and flexibility and is definitely something to do your very best to achieve.

This 100%.
You have no idea what life will throw at you, and how healthy, energetic, or anything else you will be later in life, so there is something very, very comforting in the security of having your own home paid for.

I completely agree with all the advice about continue to pay your old payment when rates drop; even when things are tight, put even small amounts into paying down your mortgage when you do have money spare; put pay rises or bonus payments towards your mortgage if you were managing fine before getting them.

We had an endowment and it worked really well, because we continued with the high payments we started with every time the rate dropped, over years and years.

Amazing. Thank you!

My mortgage is £45k with 13 years to go, on about the same interest rate. Based on that, I calculated that overpaying by £50 a month meant it would be paid off around two years earlier. So that saves £9,500 - less the monthly overpayment itself which would total £6,600. So net saving on interest is £2,900. While the interest rates are higher, the overpayments have more impact.
For me, this is worth it as my mortgage goes right up to retirement age so if I can be mortgage free by 65 instead of 67 that would help a lot, in case I can, or need to, retire early. If I was younger and I would be mortgage free by 55 I might think that it as more important to grow savings.

Hope that helps!

There are mortgage overpayment calculators online too.