Mortgage Overpayment?

Depends on a lot of things but (while I'm not an IFA) overpaying will go straight into repaying capital and will ultimately reduce your payments when the interest rate goes up.

Depends on a lot of things

This.

Can you get overpayment back?
Are you worried about not physically being able to pay, or just want to do the right thing snd reduce it?
If no, yes, no then perhaps bank the money and then use it to soften the monthly blow.
Else just overpay now.

If you overpay now, you'll save money over the longer term, but it might not make that much difference to your new monthly repayments. It'll depend on the remaining term of your mortgage.

You also need to consider that generally, once you've used that money to overpay, you wont be able to get it back.

Plenty of online calculators to use, to see what the various options will give you.

There's not much benefit in overpaying while your rate is low. There might also be a penalty if you overpay too much. Personally I'd stash it away into a separate account (you can get some with actual interest now) and then pay off some capital when you re-mortgage. That's 12 months away so a lot can change, either with interest rates or your own circumstances. Its easy to pay off some capital just before re-mortgaging once you are out of a fixed deal.

If you lost your job would you regret not having the cash to pay mortgage until you got a new job and/or the social kicked in?

If it doesn't leave you stretched elsewhere, IMO, overpaying makes a lot of sense and can save you thousands in the long run.

There’s not much benefit in overpaying while your rate is low

Yes and no, we overpaid consistently (in part by keeping the payment the same when interest rates fell) and it drastically shortened our mortgage term.

Even on low interest rates, with compounding it can make a big dent down the line.

There’s not much benefit in overpaying while your rate is low

I'd strongly disagree. Our mortgage interest rate has been 1.x% for the previous 5 years mortgage period. We calculated what our mortgage momthly would be if it were the historic average of 5% and made the difference our monthly overpayment - first direct, no penalties for overpayment.

Doing so has paid off a very significant lump of capital of the mortgage over the last 5.5 years. Now interest rates have gone back up, when we remortgaged at 3.x% it was a non issue, we just reduced the amount we overpay by the commensurate amount. Added benefit was that we went from 85%LTV to <50%LTV to get the best rates.

Even on low interest rates, with compounding it can make a big dent down the line.

With super low rates the compounding is a much smaller amount than the actual overpayment, eg by overpaying on a 25 year mortgage you may save 5 years in total, but 4 years are due to the actual overpayment amount and 1 year due to saved interest. As rates go up the proportions move substantially though. Over 12 months on a low rate it'll be negligible.

I’d strongly disagree. Our mortgage interest rate has been 1.x% for the previous 5 years mortgage period. We calculated what our mortgage momthly would be if it were the historic average of 5% and made the difference our monthly overpayment – first direct, no penalties for overpayment.

Doing so has paid off a very significant lump of capital of the mortgage over the last 5.5 years. Now interest rates have gone back up, when we remortgaged at 3.x% it was a non issue, we just reduced the amount we overpay by the commensurate amount. Added benefit was that we went from 85%LTV to <50%LTV to get the best rates.

Well yes, but most of that will have been actual capital repayment not interest savings. If you spent that 5 years putting that extra money in a savings account then paid off a lump sum just before re-mortgaging the result would have been about the same.

I’d strongly disagree.

I think you should read nicks post again, a bit more fully and slowly. He's right.

Do you have any credit card (or other expensive) debt? Go after that first, maybe.

Well yes, but most of that will have been actual capital repayment not interest savings. If you spent that 5 years putting that extra money in a savings account then paid off a lump sum just before re-mortgaging the result would have been about the same.

Mortgage interest rate was higher % than any other cash savings account (most been 0.01- 0.1%) over the last half decade so gave much better returns paying off the mortgage capital.

Edi - Just ran the numbers through a compound interest calculator. Doing methodology has me >£2k up compared to using a cash savings account available for the last few years.

If you spent that 5 years putting that extra money in a savings account then paid off a lump sum just before re-mortgaging the result would have been about the same

Exactly this.

Mortgage interest rate was higher % than any other cash savings account (most been 0.01- 0.1%) over the last half decade so gave much better returns paying off the mortgage capital.

You cant have been looking hard enough, as higher deals were available.

If you're sat on a fixed rate from a few years ago at 1-2%, you can easily achieve 3-4% on savings currently, so its better to sit on the savings.

For my situation the MSE mortgage overpayment calculator has always had overpaying beating savings.

If your current mortgage rate is low I would put spare cash aside in a deposit account for flexibility and safety for the next 12 months with the preferred view of using some or all of the spare cash to reduce the amount I borrowed on the next deal.

Thanks all. Fortunately there's no debt between us. Any modest saving go into premium bonds which return very little in our experience. I appreciate that I'm taking a short term view when the mortgage will actually have us working into our mid 60's, assuming we don't change careers. It's the uncertainty of what's to come which has made me ask the question.

If you’re sat on a fixed rate from a few years ago at 1-2%, you can easily achieve 3-4% on savings currently, so its better to sit on the savings.

Using this scenario, the MSE calculator still suggests a net gain from overpaying. Sorry if I'm being dim, but what am I missing as I tend to trust the MSE content?

Have you got 6 months worth of living expenses in cash in an easy access savings account? if not, do that. If you have, then overpay your mortgage or put the surplus in a high interest savings account ( you can get 4% pa for 12 months fixed) if the mortgage interest rate is lower than the savings rate.

Using this scenario, the MSE calculator still suggests a net gain from overpaying. Sorry if I’m being dim, but what am I missing as I tend to trust the MSE content?

Generally you will, as you'll always pay more in interest than you can earn on risk free savings.
However theres the timing aspect.

So as an example I locked myself into a fixed deal at 1.34%
Cash savings are at an average of 2.8%

So today theres no financial benefit from overpaying

When my deal ends, it will be worth overpaying a lump sum, but i'll worry about that then.
(guessing the OP is in a similar situation)

Dummy figures:
100k mortgage, 20 year term, 1.75% interest rate, £1k overpayment per month. Available savings rate of 4%.

Plugging those figures into MSE overpayment calculator and comparing to savings:

COMPARED TO SAVINGS

If you had instead put the overpayment amount(s) into a savings account paying 4%, you'd have made £9,220 in interest over the same period (ie 5 years and 11 months).

Taking this into account, there is a net gain from overpaying of £4,040.

My Wife is the brains of the outfit! so just the little I know to add to the thread. We overpaid regularly. We paid off the mortgage significantly quicker. There was a maximum overpayment allowed. The money was ours to take back or use to pay the mortgage if we ever got stuck, thankfully we never did. We maxed out the overpayment as much as possible. This was with the Nationwide, not sure you can still do it like this.

But he is only overpaying for one year. If you overpay today that is modestly less debt to pay interest on for a short-ish period. Given the deposit rate on saving’s probably exceeds the interest cost, I would rather carry the slightly higher debt for the twelve months balanced by the cash in the bank; money used to pay off debt now is gone and can’t be accessed, money on deposit can be used for emergencies, to provide some flexibility on a new deal, or freed up if the debt level is rolled over.

COMPARED TO SAVINGS

If you had instead put the overpayment amount(s) into a savings account paying 4%, you’d have made £9,220 in interest over the same period (ie 5 years and 11 months).

Taking this into account, there is a net gain from overpaying of £4,040.

Thats completely wrong.
Using that example if you paid off £1000 per month you'd save £105 on your mortgage in that year.
But you'd earn £240 in interest that year.
Compound that up the savings at the higher rate would produce you a greater benefit.

I'm assuming its not factoring in the savings balances, after the mortgage is paid off.

Thats completely wrong.
I’m assuming that its not factoring in that you could save £1000 per month + the mortgage payment for the months after the mortgage was paid off, which offsets the reduced term of the mortgage.

I don't know. I'm more confused than when I started. I'd just expect the MSE calculator to be correct.

Put it in a savings account that has a higher interest rate than your mortgage.
If you need the money, you have it.
If you don't need the money, you will earn more interest than you would have saved against the mortgage.

If in 12 months you still don't need the money, then you can decide what to do with it...
mortgage rate > savings rate = pay a lump sum off the mortgage then
savings rate > mortgage rate = continue to earn more from savings than you would save from mortgage overpayment.

Actually, the premium bonds are probably as good a home as any because the “winnings” are tax free whereas you could pay tax on interest earned from a deposit (unless in an ISA which is tax free.

just expect the MSE calculator to be correct.

I'm intrugued. Gotta link?

I’m intrugued. Gotta link?

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

This comes up on here fairly regularly.

It's important to understand that there is no single 'right' thing to do. There are many things that you can do with your money.

Many people like to actively manage their finances, to varying degrees. For these people, overpaying a mortgage is just one of the things in the financial armoury, and it's pros and cons with respect to all the options can, if you're interested, be discussed at length, and they're the people that typically pitch in on these kind of threads.

However, many, many people don't have the time or inclination to get that involved, possibly because of competing priorities for their time, lack of expertise, or, frankly, disinterest. Threads like these either bore them or baffle them, which is a shame as they're often the people that ask the initial, what they think was a fairly simple, question.

So, for clarity, for that latter group, if you have the money to do it, overpaying your mortgage is a simple, set up and forget, way of doing a beneficial thing. There are other things you could do, sure, but mortgage overpayment is never(*) a bad idea.

* there's bound to be scenarios where it isn't wise, but they're vanishingly few for anyone with a fairly 'normal' financial situation

I don't think the calculator is wrong, I think I've interpreted it incorrectly.

Taking this into account, there is a net gain from overpaying of £4,040

I read this as there is a gain to be had by overpaying, whereas I think it's saying there's a gain (by saving) from overpaying?

I'm on MSE side when I did numbers savings would have to be significantly higher rate to be better than paying off mortgage with cash. Mortgage interest savings compound and reduced mortgage term was a factor too. I just plumed figures into Excel but I'm not going to calculate it again as I paid mortgage early off years ago!

... We overpaid regularly. We paid off the mortgage significantly quicker. There was a maximum overpayment allowed. The money was ours to take back or use to pay the mortgage if we ever got stuck, thankfully we never did. We maxed out the overpayment as much as possible. This was with the Nationwide, not sure you can still do it like this.

This is me, 21 months away from no mortgage. I confirmed with Nationwide 2 weeks ago we can have mortgage holidays - which consumes the overpayment in lieu of a real payment - but can't borrow the money back.

MSE calcs don't use the same assumptions from what I can see.

Using your example above (1k, 1.75% etc), after 5 years you have:
£15,520 mortgage with overpayment
£78,170 without

But 5yrs at 1k a month is £63,152 so paying off that as part of a remortgage at the end of the 5yr period leaves £15,018 so you are better off saving.

This tallies with what I've always understood which is that assuming all else equal, you put your money towards the higher interest rate.

Some reasons to not do this would be tax on interest, lump sum overpayment charges, personal behaviours around savings.

Much as it pains me to say it, I'm not sure the following is a very accurate or useful thing to write on a thread where someone specifically asks for info on the details behind it all:

So, for clarity, for that latter group, if you have the money to do it, overpaying your mortgage is a simple, set up and forget, way of doing a beneficial thing. There are other things you could do, sure, but mortgage overpayment is never(*) a bad idea.

* there’s bound to be scenarios where it isn’t wise, but they’re vanishingly few for anyone with a fairly ‘normal’ financial situation

Especially when the OP is actually in one of your vanishingly rare scenarios where it doesn't appear to be the best approach?

.

Looks like MSE are assuming as most people end up doing that you'll spaff your newly amassed savings on a new kitchen ,an SUV or possibly a 6 pack of tomato's and a bell pepper or something equally as dull.

They are not assuming it'll be used to pay the mortgage hence why it's skewed in favour of paying down the mortgage.

It's a fair assumption for the UK general populus.

As soon as you dump the savings into the mortgage it flips the figures.

For many that lack of will power alone makes paying off the mortgage directly a better option

Having gone from barely being able to pay the mortgage around 2009 (turned down by lenders), then a low rate fixed for another 5 years or so
It's actually a quite a cosy feeling to have the headroom to overpay, even just a small amount, compared to the anxiety of playing 'what bill can I put off this month?'

I looked at this - my rate is fixed at what now seems a very low rate until 2026 (laziness not foresight), and any lump sum payment doesn't reduce what I pay, just makes the term shorter. I can only pay a maximum of 10% of the outstanding sum each year. I have decided to save the money I would have used and see what happens in 2026. We are not talking millions here for the record!

It's marginal. You'd need to know how much interest you'd save by overpaying for the next 12 months and by how much the overall capital amount would decrease before you remortgage.

It would also depend on whether you had a lump sum or were funding it from monthly income.

After saving <span class="tool-results-selection-style">£500</span> a month at 4% for <span class="tool-results-selection-style">1 year and 0 months</span>, you'll have a total of <span class="tool-results-selection-style">£6,129</span> including <span class="tool-results-selection-style">£129</span> in interest in a savings account.

At low interest rates (compared to savings account) the headline figure suggests you'd be better off saving rather than overpaying, but as each overpayment reduces the capital a bit then the overall interest payment on the mortgage also decreases so that might swing it in favour of overpaying.

There are a few mortgage repayment sprradsheetsc that you can you use to forecast monthly payments for the whole term, including interest rate changes,I I'd plug your figures into one of those

Especially when the OP is actually in one of your vanishingly rare scenarios where it doesn’t appear to be the best approach?

What makes you say that? Nothing the OP has written suggests that their finances or situation are particularly unusual.

Edit - sorry, just reread and seen the overpaying for one year thing before a rate hike. Yeah, that won't make much of a dent, but then neither will the extra he might get by putting the money in savings. There will be very little in it.

Plus, again, you're talking about the 'best' approach. I'm not saying that overpayment will always be the best thing to do, there may well be other things that will give a marginally greater return.

What I'm saying is that it is never (or very, very rarely) a bad thing to do. If someone wants to do something financially beneficial, but has neither the time, knowledge or inclination to investigate the available options (most if which will need some ongoing management), mortgage overpayment is a simple and easy answer.

What I’m saying is that it is never (or very, very rarely) a bad thing to do. If someone wants to do something financially beneficial, but has neither the time, knowledge or inclination to investigate the available options (because, I think we can agree that it can quickly get complicated), mortgage overpayment is a simple and easy answer.

The problem is that applies to most sensible financial things. Overpaying the mortgage, obviously, compound interest. Paying extra into your pension, no brainer, tax free money. Spending money on the house, It'll add value when you sell and you get the benefit living there. Having some cash savings, well of course, rainy days ahead. Etc.

Yes overpaying the mortgage is usually a sensible thing to do but it is just one of many sensible things and in the OPs case probably isn't the right choice

Agree with IHN. I’m one of those that are either too lazy or just don’t have the time or desire to manage my finances to that degree.

Our 5 year fix (~1.5%) is due to end in November this year, we have a lump sum in the bank that’s enough to pay off about 25% of the outstanding loan. We are earning enough that we can continue to put money aside for now. I changed jobs last year so rather than overpay the mortgage we’ve left the lump sum in the bank, in case things don’t work out at work. But, it’s just sat in a current account earning the same or less interest as the mortgage is costing us. We didn’t move to a higher interest account because we’d rather have the flexibility, locking the money in for a period doesn’t fit with us just now.

My point is that yes, there are higher interest accounts available but for some paying a lump off of the mortgage might be the preferred option even if it’s not the most financially correct option.

So you are receiving qualitative replies to a quantitative problem, or quantitative replies but based on other peoples circumstances.

This is easily solved with some maths.

We need:
Sum outstanding
Current rate
Fixed or variable
Deal period
overpayment options - eg some morts limit to 10% per year.
balance sweeping (offsetting, less likely these days but there are some about)
Redemption penalties
Value of property
Income
Savings

we can then plot over time your financial status vs the error margins of predicted interest rates for borrowers and savers, and as a third option - if you could invest the money what might be the variability of the growth there.

Obvs this may all be too personal to post here, but get excel up and running, do some maths and you will have an answer.

Paying extra into your pension, no brainer, tax free money

its a no brainer if your only concerned with making a spreadsheet number look bigger and/or your approaching pension age.

from where im sat with 30ish years to pensionable age - the ladder is slowely being pulled away to when i can even begin to draw down that pot would have me saying approach that "no brainer" with caution. dont put all the eggs in one basket.

......... get excel up and running, do some maths and you will have an answer.

Good advice. And once you have those numbers, consider any other factors such as locking money away for 1+ years to get a higher rate of interest. If you only gain £50 per year, is it worth losing that flexibility?

This is easily solved with some maths.

We need:

We ( not really "we", more the OP) also need to know how close OP will be to his financial limit once the new rate kicks in. His childcare costs will plummet in 2 years in a way that will make his mortgage increase seem like peanuts. But for those 2 in between years he may well be right on the limit.
In which case the best idea may well be to bank the next 12 months spare and then use it as a monthly top up for the tricky 24 months to keep his head above water.
Using that 12 months cash to lower the mortgage balance will make comparatively zero difference to keeping him afloat for the 24 months tricky period.

He could then start chucking the £2,500 a month saved childcare costs into the mortgage and be mortgage free in no time at all 🙂

from where im sat with 30ish years to pensionable age – the ladder is slowely being pulled away to when i can even begin to draw down that pot would have me saying approach that “no brainer” with caution. dont put all the eggs in one basket

I think you can still draw down on private pension plans earlier though? Everything is a risk, and pension pots could potentially lose money I know, but 30 years to go isn't a bad time to start thinking about these things. I've been paying decent amounts into various pots for the last 20 or so years through various employer provided plans (no final salary unfortunately!), but I only really started paying attention in the last year or so. I'm 51 and am now doing what I can to stuff as much as possible into a private plan and paying the mortgage down.

I thought I'd never retire, but last year I took 4 months off work and decided that actually I'd quite like to retire, especially while I'm still healthy and ideally with some money to spend. I wish I'd paid more attention in my 30s.

For what it's worth, this country is in such a financial mess that by the time I hit retirement age I am not expecting the state to provide me with very much at all. By the time you get there hopefully things will have reversed a little but I wouldn't count on it.

its a no brainer if your only concerned with making a spreadsheet number look bigger and/or your approaching pension age.

from where im sat with 30ish years to pensionable age – the ladder is slowely being pulled away to when i can even begin to draw down that pot would have me saying approach that “no brainer” with caution. dont put all the eggs in one basket.

That was the point. Mortgage thread - over pay, pension thread - stick more in, savings thread - save, save, save. Its good advice in general and way better than doing nothing but there isn't a one size fits all solution. It's not even a one size fits one person solution as circumstances change over time.

Even the "maths" solution isn't totally correct. Yes, one answer will have the best numbers so wins but you may lose other things like flexibility. Also things like the feeling of having less debt hanging over you have to be factored in. Its a quantitative and a qualitive issue.

I think you can still draw down on private pension plans earlier though?

not from 2028

It was 50 when i entered the workforce.

its currently 55

its rising to 57.

State pension age was 65 - its now 67 to go to 68 in the 2030/40s.

ITs far from a no brainer - that said i do have a private pension - it would be foolish not to but to use that as your only savings to get the tax break is only a no brainer if you are planning to be forced to work to the bitter end. Hence why one of my "savings pots" is to have no mortgage/ low living costs.

Yes, one answer will have the best numbers so wins but you may lose other things like flexibility. Also things like the feeling of having less debt hanging over you have to be factored in. Its a quantitative and a qualitive issue.

Of course, but the information exists in the ether to have both outputs. OP probably already knows the qualitative, what they "want" and has a desire to make the best decision. Best decision comes from using the maths to inform of possible outputs.

Hang on trail_rat, are you only 37?

One final chip in from me then I'll leave it.

Whilst there's a lot of good advice on here, all of it well intentioned, most of it well informed, threads like this can be counterproductive.

Someone in that group of, let's call them 'financially less literate', people I've been talking about may well see the thread title and think "Hmm, I've been wondering about that".

They then open the thread and see the talk of websites, calculators, spreadsheets, qualitative and quantitative assessments etc. It's quite natural that they might think "f_k me, that looks complicated", close the thread, move on and end up doing nothing. And, yes, the same could be said for similar threads about pensions, but let's just stick to mortgages for now.

So, again, for those people, if you're thinking about overpaying your mortgage, and you have the money to do it, it is very, very rarely a bad idea.

Hang on trail_rat, are you only 37?

not even 😉

i may have missed in the above so i will state it anyway

a lower LTV under 60% will 'always' ** offer better rates, hence if you have ltv of 65% ie you have £65k loan against a house worth £100k (ie 65k mortgage left and 35k of equity) then getting over the 60% LTV threshold will almost certainly lower your rate.

rates will likely peak and then drop back a little within 20m i reckon..

i just set up a bog standard bank account bonus saver hsbc 3% upto £10k, current mortgage rate 1.25% expires next summer.
so will lump it then.

then getting over the 60% LTV threshold will almost certainly lower your rate.

Under?

yes @thegeneralist definately under, I'm thinking get over the 60% barrier for better rates, definately under 60% ltv

with reduced risk to the bank comes better rates for mortgage customer
example: todays 2 year fix, fee free @ hsbc
LTVs Interest Rate
60% 4.54%
70% 4.64%
80% 4.99%
85% 5.04%
90% 5.34%
95% 5.74%

Just an update on the MSE Mortgage overpayment calculator. I emailed MSE off the back of this thread discussion, and they have altered their results wording.

As it currently stands, the mobile site isn't showing the updated results wording that you get from the desktop site. But I've pasted both below for comparison using same dummy figures in calculations obvs, and the new desktop wording is much clearer to me.

Desktop results wording (NEW):

COMPARED TO SAVINGS

If you had instead put the overpayment amount(s) into a savings account paying 3.5%, over the same period (5 years and 11 months), you'd have made a net gain of £4,360.

That's because your remaining mortgage balance would be £74,630, while your savings would be worth £78,990. You could potentially use this to clear your mortgage and still have £4,360 left over, though this doesn't account for any early repayment fees charged by your lender - so check this first.

Mobile results wording:

COMPARED TO SAVINGS

If you had instead put the overpayment amount(s) into a savings account paying 3.5%, you'd have made £7,990 in interest over the same period (ie 5 years and 11 months).

Taking this into account, there is a net gain from overpaying of £4,870.

Edit - So, confirmation that I had misunderstood what the results were saying before, but if I'd have seen the results text as it is now, there would have been no confusion. Time to alter my overpayment/savings approach!

Have to say, I still don't understand how the old (mobile) results wording is saying the same thing as the updated (desktop) results wording! 🙂

Well done for getting them to change it

As it currently stands, the mobile site isn’t showing the updated results wording that you get from the desktop site.

All updated on mobile site now. Good work by the MSE team on the improvements to their calculator.