Mortgage - what am I missing?

[Snoopysimaginaryfriend]

Our fixed rate is up in 12 months. We have been overpaying by about a third of the monthly payment each month but with interest rates the way they are, most of our current overpayment will be swallowed up into regular repayments.

I have been playing with the mortgage calculators and if I extend our mortgage term by 2 years (still before retirement age) our monthly repayments are of course lower. We would then be able to continue higher overpayments. If we then continue overpaying we will save more in interest and pay off the mortgage more quickly than if we just keep the term as it is and make a much smaller overpayment.

Am I missing something very important here or is this a good idea?

It's one way to cut your cloth. These market conditions are difficult and if that is what you need to do then go for it.

It sounds a sensible idea to me.

Prior to interest rate rises I was going to remortgage, get an extension and buy a volvo v90! Now I'm paying of lump sums of the mortgage and making do with a patio and getting rid of the car!

I might be over reacting, but we are trying to keep a buffer so we can afford the mortgage and bills if inflation and interest rates keep going higher. Once inflation and rates start dropping it will be a welcome relief. 🙏

Extending the term by two years will also provide more of a buffer if something unexpected happens and for whatever reason we can’t overpay.

im just wondering if the calculators are missing something because it seems extending the term and keeping the overpayment higher saves much more in interest in the long term.

Yes that’s right and seems sensible. We’re getting a 33 year term on a new house, as would rather have lower payments and over pay if we can. We won’t live there for 33 years though!

I've not done the maths but its perfectly plausible if you are overpaying the capital monthly.

I did watch a You Tube video once where someone explained how they used their 0% credit cards to overpay their mortgage capital. I think they spent their living expenses on it and used their income to make capital repayments. Over years of mortgage payments it saved them a fortune in interest. You can You Tube these things and see if they might work in your situation.

Let me see if I can find it

Just keep an eye on your overpayment limit if you still go for a fix.

There are mortgage spreadsheets which might help you with the maths and sanity.

If you don’t extend the term you will have those two years at the end to boost your pension. What age will you when the mortgage is paid off if you extend the term?

Sounds sensible. I would probably try to go for a three year fix, by which time, hopefully rates will have somewhat dropped.

Can you make your overpayments into a savings account that pays more than the mortgage interest rate, then pay off a lump sum at the end of the fix, or if and when the balance tips and this is not possible?
e.g instead of overpaying my 2.39% mortgage I’m paying into monthly savers earning 5.5% and 7.5%

We can’t pay more into my pension as they are part final salary, part career average.

we are still saving for kids etc. The overpayment is separate to savings.

If we extend the term but continue overpayments the calculator says I’ll be 59 but as our repayments continue to go down we increase the overpayment so we’re roughly paying the same amount for ‘housing’ until it’s gone. If it reaches the point where it exceeds the overpayment level we would put in savings and pay off lump sums.

You "save" more interest on the extended term, overpaid as there was more interest due.
If the interest rate is the same, and you pay the same amount each month, it doesn't matter if it is <just paying what's due> or <overpaying on a longer term> it will cost the same amount.

Bear in mind that you can only over pay by a certain amount, without incurring a penalty. Usually it's 10% of the balance. So by extending the term, thus reducing the payment amount, your overpayment might take you in to the >10% zone.

Sorry, didn't explain that very well! By extending the term, your monthly payment amount comes down, so your overpayment element is larger, meaning that you could go over the allowed 10, and incur a penalty. Does that make sense?

10%

Yes it does BeachBlondey, thank you

If you BBC are on fixed it’s normally capped at 10% overpayment. Beyond that stock the over payment in a stocks and shares ISA

If you find you're able to overpay more than 10%, but don't want to incur the penalties, look into an offset mortgage. The money you save in the offset account acts as a sort of temporary overpayment on your outstanding balance, so you're paying interest on less of the capital. Hard to explain well here, but there's more info on moneysavingexpert etc.