Mortgages... how much does overpayment help

[mysparkleismissing]

Is there a simple way to work it out?
I know there are no fees upto a certain % but does it make a great difference and is there a better way to do it? Monthly or save up a lump
IF we can...
Our mortgage fixed rate ends next summer

[dew141]

I don't think the advice on MN is great on mortgage overpayments. Most of the time, you'd be better to invest the money elsewhere.

I have an interest only mortgage at 0.99%. I could get 4-4.5% just on savings and my ISA equity investments have historically made 20-30% a year (2022 aside).

[Mark19735]

There are other, sometimes better, reasons to make financial decisions than simply maximising a theoretical return.

Generally, reducing expensive debt and maximising all available tax efficiencies will result in the greatest wealth accumulation over time. Right now, this usually means the first spare £60k goes into a pension, the second £60k goes into a spouse's pension (if you trust them ... see Shawshank Redemption for context). The next tranche goes into paying down high cost debt, and once debt-free the remainder goes into speculative, risky investments like stocks and shares. But in this scenario, you a) already have a six figure surplus each year and b) probably don't need advice from MN

Each financial product will have its rules and charges. For example, you can only put £20k into an ISA each year. Miss that window, and you lose that tax-sheltered wrapper for that wealth forever. So it might be better to put £20k into an ISA than to overpay a mortgage, even if the mortgage interest is a percent or two higher than the returns you expect from the stock market - especially if you intend to build up your ISAs for 20 or 30 years. Alternatively your mortgage may have annual limits on overpayments or punitive ERCs, so again if you miss a window you may be exposed to greater risk from changes in interest rates or differing LTV ratios later on if you decide to move or remortgage. So it may be better to overpay when permitted, even if you are currently paying a relatively low interest rate.

But the biggest factor is psychological. Being debt free is much, much more satisfying than owning a share portfolio that is 20% higher or lower on any given day. Firstly, because that fluctuation is built-in and almost impossible to tie down to any decision you made, but mainly because reducing your mortgage to zero frees you from a liability entirely - whereas having a bigger or smaller stash is just a variation in an amount. I would always pay down debt as fast as I can, even if it isn't the optimum financial strategy. It is an emotional win when the balance ticks down to zero. That last £, when paid off, is worth more than even tens of thousands in the bank.

[user143777533]

Great post @Mark19735

I’ve been trying to figure out whether I am better to pay excess to pension or increase mortgage payments. My head knows pension is better (particularly as I’m in my 50s so not too long until I can access it), but my heart says to reduce the mortgage debt.

I think it is especially so for a mortgage, because it is the family home, and therefore the feeling of reduced risk and increased security when paid off.

[matthewstirling]

@user143777533

Why choose to overpay, rather than just setting the mortgage payment to the most you can comfortably afford (and therefore the shortest term) anyway?

So why would someone e.g. set up a mortgage paying £700 per month for 10 years and overpay it by 70 per month to try to reduce the term, rather than just upfront set up £770 per month for 7 years?

Is it because of the flexibility? So you don’t HAVE to overpay but just hope to?

We're richer now than when we took ours out and still have three years fixed term left. With two kids heading for uni, we didn't want a huge mortgage payment each month as we didn't know how much they would need us to give them. As it happens, they both work enough for us to pay hardly anything so it's turned out well and we can pay off more.

[Rainsdropskeepfalling]

You need to check with your mortgage provider. We can pay up to 3x our monthly payment every month as an overpayment and this reduces the term (although this is only updated in our banking app once a year) and then we can also pay off 10% of the outstanding balance every year which reduces the monthly payment. By doing both, I'm hoping to reduce our mortgage from 8.5 years to about 3 years by the time we come off our current (low) fixed rate in 2 years time, and fingers crossed find the means to pay it off at that point.