Live frugally to overpay mortgage 5yrs

[ElleDeeCB]

My DH and I are (hopefully) about to take on a mortgage as first time buyers. We have been renting and are quite old for this first step, being age 50 and 42. We have a 13yr old kid.
I’ve looked at our expected repayment figures and we will start off with paying £2.2k per month. This represents 30% of our combined monthly take home salary.
I’m wondering about massively over paying in the first 5yrs of the mortgage to 60% of our take home income, which would mean that after 5-yrs we could remortgage and our monthly payments would be much lower. It would mean that I could comfortably cover the monthly payments from just my own small salary, instead of relying on DH in a high paying but less stable field of work.
At the moment our outgoings are very low, and it seems this would be a good way to get ourselves in a much more financially secure position. But it would mean living very frugally for these years, and it would be interesting to have people’s opinions on this approach.
Besides mortgage our outgoings would be:
350 food
180 Council tax
70 water
200 electric (no gas)
100 dental
250 SIPP (we also have workplace pensions)
150 kids Uni fund
= £1300

Taking the above into account, and going up to 60% income as mortgage would leave £1,000 per month which DH would share between us for other costs and for personal spends.

We wouldn’t be saving much during this time, but DH usually gets a bonus around £5k per year which could go into savings instead of the SIPP for a few years, so that we have more of a cushion. Or spend on holidays.

Is this a daft idea, or does it sound sensible? I feel like a huge mortgage will be more stressful (psychologically and financially) in the longer term and am keen to pay it down whilst we have a pretty decent income and low outgoings.

Thanks for your help.

You could start off with that and assess where you are after 6 months. When it’s time to remortgage you may be comfortable with the higher payments and can reduce the term.

1. Is there an overpayment limit
2. Have you actually accounted for everything... what about phone/Internet, insurance, transport, school cost, extra curricular...

Overpaying is good, but you need to live as well.

Thank you very much @Radiatorvalves and @TheNightingalesStarling
in answer to the questions:

1. up to 10% of the balance per year so it’s within that
2. There aren’t any school or transport costs as we are walking distance to work and school and don’t keep a car. Extra curricular activities are £20 per month (used to be £hundreds a month but afterschool clubs are now free at secondary). My weekly fitness classes are free thanks to employer. But yes should allow for house insurance and internet. Phones and other insurance paid for by employer.

My husband is thinking of moving from a 90% to 100% role for this time which would give us an extra £300-400 month.

I’m reading about mortgage overpayments and I think it can be done at points in the year, rather than committing every month. So perhaps we can try it out as @Radiatorvalves suggests and put the money in our Cash ISAs and just move it over every 6-months or so, so that we have access if we need it.

Try it; you seem like you will feel happier with that plan.

Congratulations on buying the house.

@ElleDeeCB absolutely makes sense to overpay especially as regular savings interest rates (exc ISA of course) are lower than average mortgage interest rate. I live alone and have been living frugally to annually overpay by 10%. I took out mortgage at 48 for 20 years in 2020. My first 10 years are fixed at 2.2%. I’m on track to have it all paid by end of that first 10 years. Huge relief when bills are soaring and you only have your own sole income with no family support if things go wrong!

Well done @MoominMai that’s very impressive! Theoretically we could pay it off in 8 years if we stuck to 60% but I just want to get it down to a level where monthly repayments are very manageable.

Congratulations on buying your first house !

Yes, it makes SO much sense to overpay your mortgage at any point, but so much more so given your ages.

From the figures you've given, it doesn't sound like the over paying is going to leave you short.
Before the numbers I'd have said to remember that your teenager won't be wanting to come on holiday with you for that many more years, so I wouldn't sacrifice holidays and live that frugally, but it sounds like you have a reasonable figure still to be flexible with.
The advantage of this being overpayments is that it is entirely up to you, month by month, so if you need emergency money one month (fridge breaks or boiler playing up), then you just reduce or don't make the payment that month then pick up again next month. Same with if you want to book a holiday - you can not overpay for a couple of months whilst paying for that.
Anything you overpay is going to help. It is just getting the balance right.

I would overpay, but balance it with adding to your pension. You get tax relief on your contributions and that plus investment gains should mean you are better off overall. I do appreciate that with your first mortgage when one of is 50 you do need to get the mortgage paid off as soon as you can, but I would have an eye to retirement too.

Ultimately by the time you hit 57 if you need to, you can get a lump sum from your pension to help pay down the mortgage.

I'd overpay but not as much as you first proposed.
Enjoy your teen while he's still at home - don't you want to take him on any nice trips for example?
Life is for living, albeit not at the expense of saving/paying more off, but a balance is preferable.

Can't you use the bonus payments to pay off chunks as and when?

I would save that amount and overpay when you move to a higher interest rate

We're seriously overpaying with a view to clear our mortgage in 2yrs. We are on a cracking rate and begrudge having to pay a higher rate when the fix ends.

However our overpayments are sitting in a Cash ISA ready to repay at the end of the fix.

I voted yes overpay. I'm a single mum. Since divorce 12 years ago, needing to buy a house on my income, putting two children through university on my income it has been a frugal old time. I could only afford a mortgage by getting one which would run till I was 70. I have scrimped and saved and overpaid where possible. I am about to make my final payment next month, 11 years early.

I cannot say the relief. There have been lots of times when I've thought, is this the right approach? My ex has had nice holidays abroad, and I've had simple ones in UK, nice, but simple. But you can't know what life has in store, and this has been the right decision for me. Good luck to you whatever you choose.

Thank you @GOODCAT I think you make a very good point about the pension lump sum. If we could save more that way then it would probably make sense as DH is a higher rate tax payer. I’ll look into it.

Before even considering overpaying, do you have a sufficient emergency fund in an easily accessible account? Just in case boiler / roof needs replacing, car breaks, one of you gets made redundant, etc? I'd recommend three months worth expenses.

If / when you have that, I would overpay but perhaps not quite as much as you are suggesting. Before you come to an overpayment amount, make sure you sufficiently account for ALL expenses -

• Utilities and mortgage
• Internet
• Home insurance
• Car expenses (MOT, insurance, general upkeep)
• House expenses (need a new shower head, window pane breaks, toilet leaks, oven breaks, etc etc). As new homeowners, don't underestimate this category!
• Presents
• Christmas
• Child's school expenses (trips, uniforms, books, notepads etc etc)
• Electronics (new phone, tv, laptop to replace old)
• Haircuts
• Transport (work / school/ leisure). Even of your child does get free school transport now, may not get for college
• Health
• Travel / holidays. Even train tickets to visit family etc
• Subscriptions (tv / music / learning for DC)
• Clothes
• Pocket money for DC

I think after you take into account all of these essential expenses, you may find that you don't that much left over to overpay. What I would do is set up a pot for each of these categories (and whatever other ones you may have), and put money aside each month, as some of them are occasional / annual costs. Then put the extra to your mortgage.

Good luck!

I would overpay 50% of the amount you have budgeted for & put the other 50% in savings for emergencies/home repairs etc, have an amount in mind that once your savings go over you can add to your overpayment.

I think @Nat6999 has a very balanced solution. Especially given your comments about your DH's employment.

I was a high earner but instead of paying massive amounts into my pension I overpaid my mortgage as I did not trust the government not to change the age of pension withdrawal rule or the 25% tax free rule.

I was a bit phobic about the pension rules as I feared for health reasons that I would not be able to work until pension age so my priority was to be debt free. Discipline meant I was able to retire early.

One point to mention is insurance for job loss may be a worthwhile added outgoing.

Good luck with it.

I could have written your post right down to greeting two kids through uni and out the other side. I'll make my final mortgage payment in October when I'm 56 instead of carrying that millstone until 67. Well bloody done to you!

Good luck in your new home, OP. Enjoy it!

My partner is 55, we pulled a tax free lump sum out of his DC pension to clear the mortgage. We then put about 2/3 of the monthly mortgage payment back into our pensions. It’s much more tax efficient to pay from salary into pension (vs paying the mortgage with salary taxed through PAYE… which means you only keep 58p / £1 after tax and NI if higher rate).

This will save about £10k in mortgage interest over what would have been another 5 years, means we have a bit more disposable income, and should be able to replace the pension cash relatively quickly (given we get 42p in the pound more value from it).

Hope that makes sense!

I wouldn’t do it while your son is a teenager. You are going to have school trips to pay for, he’a going to want various gadgets and lifts / money for public transport all over the place. As a young adult he may need help from you in uni / as he becomes established in a job. You won’t be able to do that if all your money has gone into the mortgage / into pension.
I would live sensibly but not frugally for the next 5 years. Save as much as you can. Then do the frugal living next time you remortgage (maybe fix for 2-3 years) and pay it down then. It will be easier when your child is 18 as presumably he will either have moved out or will be working at least part time and contributing to the household.

We massively overpaid our first mortgage. It was in the era of very low interest rates and we hadn't yet had children so we wanted to make the most of having low expenditure

We set up a monthly overpayment and then lived fairly frugally putting money into regular savings. Every 3-6 months we reviewed our finances and once or twice a year we made a lump sum overpayment. For us this was the right balance as there were the regular overpayments that were never considered part of our disposable income but by not committing all the overpayments with regular payments we still had that flexibility to have the odd week or month living less frugally which made it more sustainable and still had a cash reserve for covering unexpected bills etc.
I would calculate how much you can afford to overpayment each month living frugally. Set up a monthly overpayment for about 1/3 of that amount, set up a regular payment into a savings account for another 1/3 and then you have a buffer of 1/3 in your budget. Do regular reviews of finances and periodically move more money into accessible savings and do the odd lump sum overpayment. We kept enough money in savings to cover at least 6 months of expenditure and to allow us to replace the car if needed with another small second hand car without needing to take on loans

We currently aren't overpaying our mortgage as we got both mortgages fixed before rates started to really soar so we are getting more money in interest in our savings accounts than our mortgage is costing us. When our fixes come to an end we will make a one off lump sum payment.

I understand what you're saying. IME teens are not anywhere near as expensive as expected. We're also considering Uni where they expect parents to foot a lot of the costs so want to be MFree for then to be able to afford that.

I would have five frugal years once he's left home, not now while you still have him, you want to be creating lovely memories with him. He needs decent clothing too he's too young for a Saturday job

You have a mortgage but no building insurance? No life insurance? No contents cover? Spend £350 on food per month for 3 people? Never buy a birthday/ Christmas present, even if only for your child? No pocket money. No broadband, no entertainment. The 13 year old does not have a mobile? No money being budgeted for clothes/ shoes/ uniform/ school lunches. No toiletries or cleaning products unless the £80 weekly budget also includes that which then takes the actual food budget to what £60pw so £20 pp per week? None of this makes sense.

So Your net income is £7.3k plus excluding annual bonus with potential to earn more by working more hours? Is your £2.2k mortgage more than your previous rent? “Frugal” is relative. Personally, I would say that paying £4.4k on your mortgage which still leaves you approx £3k for living expenses won’t be that difficult to do. Plus you have a bonus and potentially more earnings for more hours.