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Is there a formula or calculation or website that shows if it's better to overpay or save? Thanks
Yes.
If mortgage interest rate >( savings interest-tax) then overpay mortgage
I can't imagine it's more cost effective to save at the moment.
Isn’t this a comparison of compound interest with repayments vs repayments and lump payments vs savings vehicles?
If the mortgage interest rate is low then you might want to compare against pension savings.
Thanks all. Ice been overpaying over the first 7 years of the loan so it's now approximately a seventh of the property value. I've recently remortgaged so rate is below 2%. I was thinking of porting the outstanding balance to next home but just wanted to check if I was missing something obvious in terms of benefit. Thanks again.
It's extremely rare that you will make more on your investments than you pay on your debts. If you are there is a financial institution out there makjng a loss. Pensions are different as you don't pay tax so your contribution is 20% to 40% greater than the take home pay you could invest.
Overpay, as (like most borrowing) the loan is 'interest front-loaded'. This means you pay more interest at the start of the term than the end.
I'm not sure I agree with Stumpyjon. If you invest long term in a broad portfolio of shares, you ought to get a roughly 7% gain. That's a bit more than your 2% mortgage rate. Moneysavingexpert might give a real informed view on this
Mild hijack alert:
How does everyone practically do their overpayments?
With my mortgage provider it’s an absolute mare involving a call to a call centre and ages on hold. I’d love to make regular overpayments. Am I missing something?
I’m not sure I agree with Stumpyjon. If you invest long term in a broad portfolio of shares, you ought to get a roughly 7% gain. That’s a bit more than your 2% mortgage rate. Moneysavingexpert might give a real informed view on this
Um. Isn't this essentially what those 'recently' hugely discredited mortgages that absolutely nobody uses any more are?
Endowment or something like that...
Overpay, as (like most borrowing) the loan is ‘interest front-loaded’. This means you pay more interest at the start of the term than the end.
Bollocks. You still need to compare the interest rates. What you're talking about is essentially exactly the same as ( or the opposite of 😁) compound interest.
It’s extremely rare that you will make more on your investments than you pay on your debts.
I don't think so. It's pretty common to invest borrowed money and pocket the difference. Mortgage rates are so low it's easy to beat them investing even for a novice investor.
How does everyone practically do their overpayments?
With my mortgage provider it’s an absolute mare involving a call to a call centre and ages on hold. I’d love to make regular overpayments. Am I missing something
Offset mortgage for me. But only because we were planning to use chunk of the cash, but never did.
Downside is a slightly worse interest rate.
And prior to that just a bog standard Nationwide one. We just set up a standing order to pay an extra few hundred a month. Didn't have to contact them at all ( kept below 10% of the Balance natch, so we didn't incur early red fees)
Overpay, as (like most borrowing) the loan is ‘interest front-loaded’. This means you pay more interest at the start of the term than the end
And investing is compounded. You get interest on your interest so your initial investment multiplies.
True, nickjb. But bigger returns mean more risk (usually).
Plus, the OP said save, not invest.
The breakdown between interest and capital is way more in favour of paying the interest off first.
How does everyone practically do their overpayments?
Log onto bank app.
Change monthly payment.
Log off.
The generalist makes a point to consider. If you might need a chunk of cash at short notice e.g pay for surveys/deposit in exchange etc then having this in savings might mean you earn less in interest On the sum than you pay in mortgage interest but you do have it there when you need it. As far as I’m aware Unless you have an offset mortgage once you over pay you can’t get it back. Check your mortgage t&cs. You might also have an early repayment charge if you overpay more than a certain amount. Again check the t&c.
You could take out a separate loan if you did have a need for cash but that might take some time to put in place I assume. Also as loans tend to be unsecured then rates can be quite a bit higher than mortgage rates I think. Obviously, you need to weigh up convenience of available cash Vs your mortgage rates vs savings rates vs expected return on a more risky investment. It then Depends on your attitude to risk and financial goals as to which option you should pick.
Unless your mortgage rate is much better than those on the market now and/or you have redemption penalty, you might find it more cost effective to repay on sale of your current property (again check your t&cs) and take out a new mortgage as like lots of things you may find there’s a certain amount Of new customer good terms e.g. free valuation which you might need to pay for to move your current mortgage.
Porting might make your mortgage journey simpler but they still might ask you a lot of questions, particularly if you want to increase your borrowing, so worth checking with them.
I'm not disputing the returns to be made by investing, but this favours having a chunk of cash in the first place. I'm in favour of overpaying whilst interest rates are low, if you can afford it.
Reduce the balance and if rates go up, you may be able to reduce the monthly payments (if you need to).
My Dad once said, "inflation paid for my house".
Always better to have a bigger pot of cash than a slightly smaller mortgage IME.
I've experienced mortgage rates from a high of 16% (in reality it was 10% for ages) and down to 0.5% (with a base rate tracker). Never overpaid, we just let it 'run'.
Saved about a years worth, the rest I overpay on the mortgage and pensions.
Wack it into your pension. I did the sums and overpaying was going to save me £40k off the mortgage, investing the same in my workplace pension was going to net me a conservative £120k… I figure I’ll retire earlier and pay my mortgage off with a lump sum withdrawal and still have money left over.
In terms of how to overpay your mortgage, your mortgage provider should have a regular bank account/sort code, just make a monthly payment (by S.O if you wish) as you would any normal payment, using your mortgage no. as ref. (Check with the bank as YMMV etc.)
Depends on your attitude to risk as well, personally I'd rather have smaller liabilities/outgoings in the event of a problem and would pay down the debt but YMMV
And investing is compounded. You get interest on your interest so your initial investment multiplies.
And on a mortgage you pay interest on your interest.
As with all these things, the Wolves of Singletrack Street always come out and say that you (they) can better returns investing, blah blah blah. However, for most people who are not 'active' investors, do not really understand (or want to understand) investment strategies, attitudes to risk, pension lump sums etc etc, it's basically massively overcomplicating things.
Generally, for average Joe Punter, if you can afford to overpay your mortgage, do it. It's that simple.
It’s pretty common to invest borrowed money and pocket the difference.
It's not very common, it's hugely risky, and for aforesaid Joe Punter it's a (generally) a hugely stupid idea.
Wack it into your pension.
Unless this takes you over you max contribution level.
As with all these things, the Wolves of Singletrack Street always come out and say that you (they) can better returns investing, blah blah blah. However, for most people who are not ‘active’ investors, do not really understand (or want to understand) investment strategies, attitudes to risk, pension lump sums etc etc, it’s basically massively overcomplicating things.
I think there is an idea that to be "an investor" you need stripy shirt and to be constantly yelling "buy!! - sell!!!" down the phone but it really is very accessible for the average joe punter these days. There is certainly no need to be active investor. I apologise if I come across evangelical, it's just that I've been there and been financially illiterate doing the normal cash savings and paying off debt then a while back had a bit of a dabble in investing, then a a bit more. I now have enough in savings and stocks to pay off the mortgage if I wanted to, or just keep it there, steadily growing, and have a nice pension pot. I really wish someone had given me a nudge to get more interested in my financial future long ago, I'd be retired by now 🙂 . I still find it dull but at least I understand it a little more, have more control and am not (that) scared of it now.
There aren't simple answers and there is a one-size-fits-all solution but I would urge anyone to take an interest and look at all the options out there.
Don't forget the psychology of being mortgage free. For us overpayments do not make sense (we could get more interest by saving) but we make overpayments and will be mortgage free by the end of this year. That is then a big weight lifted from our shoulders, my wife can retire etc.
Don’t forget the psychology of being mortgage free
+1
And the ability to weather things like a cost of living crisis. Long term investments are great if you can, but making the month to month a bit easier counts for a lot. 30 years of effort, but right now, so glad we finally got there last year.
http://www.vertex42.com/Calculators/home-mortgage-calculator.html
I use the above (gubbins about not being responsible for external content), you can literally set it up to show how much over paying by whatever amount a month for every month of the mortage saves you over the lifetime, both in interest saved and date of it ending.
My learnings are as follows:
Best advice, which came from nationwise, was wait to go out of 'deal' at which point there was no over payment/repayment penalties so you can throw a lump sum in with no impact, you just have to suffer a month of being on the standard rate and then arrange a new deal. We did this, threw all my savings and little share payout at it. Arranged a new deal starting the month after, this was now reduced in terms of the montly required repayment amount so we just setup direct debit to overpay up to the amount we were paying previously. took 13 years off my overall term.
I think there is an idea that to be “an investor” you need stripy shirt and to be constantly yelling “buy!! – sell!!!” down the phone but it really is very accessible for the average joe punter these days. There is certainly no need to be active investor.
Just to back this up a little, I am very much a passive investor as I have a Vanguard stocks and shares ISA. It's incredibly easy to manage (I use their LifeStrategy funds), I've got a monthly direct debit setup and I just ignore it now. I wish I'd got it started sooner.
The Google calculator will show stuff like this, it's so simple and does everything the ad-filled ones from comparison sites do
my take is pay off the mortgage. Investments can go up as well as down. reduce your debt. im down to pay mine off at 62 years old!!!!!
“Unless this takes you over you max contribution level.”
Of course. I’d be taking advice from an IFA at that point too.
I’m in favour of overpaying whilst interest rates are low,
I think that's the wrong way around of looking at it.
When your cost of borrowing is low, it doesn't make financial sense to overpay.
Just to back this up a little, I am very much a passive investor as I have a Vanguard stocks and shares ISA. It’s incredibly easy to manage (I use their LifeStrategy funds), I’ve got a monthly direct debit setup and I just ignore it now. I wish I’d got it started sooner.
I started a Vanguard S&S at the end of 2019. The recovery from the Covid dip in 2020 was pleasing, and at the end of 2021 it was pushing 20% up - not bad for two years. The subsequent tanking over the course of this year is painful - I feel like I can't/shouldn't take anything out of it until it recovers a bit, but who knows how long that will take.
I still think it's better to have the cash sat in something like a S&S ISA rather than paying off the mortgage as long as the ISA rate is greater than the mortgage - but you have to be flexible enough to ride out the dips, and hope the dips do eventually recover.
Based on what I've over payed into my mortgage that has saved me X in interest according to the calculators.
Based on the % increase of my s+s in passive vanguard funds over the period of over payments .... The same value of payments into that would have netted me slightly more then 1/2 of X.
But then my calcs had that outlined before I started saving in the three directions.
1-easy access
2- mortgage over payments
3- s+s in broad funds
And tbh firing solar panels on the roof of my house at current energy prices is proving best ROI.....
No one strategy is fundimentally better than the other. They all have their place ....don't put your eggs all in one basket etc (fyi depending on your mortgage you can often take your overpayments as a payment holiday which makes it almost as good as cash in the bank if you run into redundancy head on etc)
Don’t forget the psychology of being mortgage free. For us overpayments do not make sense (we could get more interest by saving) but we make overpayments and will be mortgage free by the end of this year. That is then a big weight lifted from our shoulders, my wife can retire etc.
For most folk by the time they've got near retirement their monthly mortgage payment is usually low - based on that they bought the house years ago. How much are you paying vs your wife earning?
I found this site at the weekend as we're currently debating the stay on a tracker or fix our mortgage conundrum. It's really simple to see the calculations and little advertising and other guff of some sites:
https://www.mortgagecalculator.uk/
With overpayment we used to do this, and doing so allowed us to draw down the money later to move to a house with a garden which was great. Unfortunately the teams on our mortgage changed after the move and what we overpay can't be drawn back down to we've saved money instead (new house needed building work). I'm glad I kept a chunk of the savings available as we've had roof repair bills of about £10k in the last 18 months and if we'd overpayed into the mortgage we would have had to get a large loan for this. Definitely worth considering how accessible a rainy day fund for this type of thing might be.
This is something I read when searching answers for that same question:
Would you take a low interest loan in order to invest it?
Would you take a low interest loan in order to invest it?
I answered that up there ^
Would you take a low interest loan in order to invest it?
For sure, why not? It's very common and with current interest rates makes good financial sense. Obviously there is a degree of risk so it isn't for everyone.
Would you take a low interest loan in order to invest it?
Well that is what 90+% of businesses do.
why not?
Because your investments could perform more poorly than expected, or indeed tank, leaving you with a loan to pay off by some other means.
As someone said up there, that was the whole (well, a major part of the) problem with endowment mortgages.
Investment = gamble. I'm not anti-investment per se, it absolutely has it's part, but, as with gambling, you should only use what you can afford to lose. Would you take a loan out to bet on a horse?
Well that is what 90+% of businesses do.
Many people confuse investing with speculating. A business taking out a loan to invest in new equipment, say, is very different to someone taking out a loan to buy some shares.
A common benefit of overpaying not already mentioned is when your fixed rate expires (and assuming no big downward shift in property valuation), is you will probably be at a lower LTV (loan to value) and pay a lower interest rate on next product. Although the difference in high vs low ltv products has reduced this still holds true, particularly if you were previously a first time buyer.
. A business taking out a loan to invest in new equipment...
Whilst I don't actually have a clue what limited company actually means I'm going to go out on a limb and guess it means the Business owners house won't get repossessed if it all goes tits up.
yes, that's a benefit of a LTD company. When the OP said 'saving' I interpret that to mean a standard savings account, where the capital is not at risk, ie FSCS guaranteed. In that scenario, the rates for mortgages and saving will be about the same. We all know atm a good mortgage rate is around 2-3% and good savings a/c around 1%.
Investing that money for a better return is different. Agreed, you don't need to be a stockbroker anymore but please appreciate the risk involved. My advice is invest what you can afford to lose.
A stocks and shares ISA or pension is a good place to start
Whilst I don’t actually have a clue what limited company actually means I’m going to go out on a limb and guess it means the Business owners house won’t get repossessed if it all goes tits up.
Depends. Lots of small business owners rasi money with a mortgage of their house and either invest or loan the money into their company. If the company goes bonk they don't loose their house persay but if the ltd company is there only or main income the. They will not be able to make the repayments.
What's that standard disclaimer added to the bottom of every web page and form about investment value can go up and down, and past performance being no indicator of future values????
I think anyone with "spare cash" would be better off paying off debt at this point. Seems like inflation is running rampant and the usual tool for controlling this is to ramp up interest rates. Of course, if you have managed to lock yourself into a long term low interest rates, you should be ok...
Depends on your timelines to retirement I guess, but my pension pot has been hammered the last couple of weeks and it's making me re-think when I can retires (I'm 58) but at least I've paid off my mortgage (yes, I HEAVILY overpaid my mortgage)
The psychology of being mtg free appeals, but we can only overpay by 10%. When I used the calculator to see what that saves over the term of the mortgage, its relatively peanuts.
When your cost of borrowing is low, it doesn’t make financial sense to overpay.
And this. Think it was my boss who once said your mortgage is the lowest interest debt you'll have so pay the minimum, let it run, and do better things with any spare cash (invest, save, c&h).
So I'm saving & investing with a view to paying off a lump some closer to retirement.
Of course, if you have managed to lock yourself into a long term low interest rates, you should be ok…
*Looks smugly at his 5 year fixed at 1.07%*
*Looks smugly at his 5 year fixed at 1.07%*
*Looks smugly at his 5 year fixed at 1.03%!*
A masterfully timed house purchase if I do say so. The transaction included removing a large sum of money from our Stocks and Shares ISA _just before_ the market went totally to shit.
Total fluke, obvs.
There is a slight but important difference between debt and liquidity. If you have (say) £5k “spare” there is a difference between lowering your debt with an over-payment which, unless you have an offset mortgage, is gone forever and simply putting that money on deposit “just in case”. You can always use the latter in an emergency, you can’t if it is paid away to the mortgage provider. Investing it exposes you to the risk of losing it. I would accumulate a modest “just in case” pot before paying off the mortgage unless it was an offset. I am not a financial advisor and YMMV
unless you have an offset mortgage, is gone forever
And at that incorrect fact I tuned out.
I think anyone with “spare cash” would be better off paying off debt at this point. Seems like inflation is running rampant
If inflation is running "rampant" then your debt is reducing too, especially as the vast majority of us will have our incomes increasing. Note my earlier comment about my Dad saying "inflation paid for his house".
The psychology of being mtg free appeals
I’m now retired but still have a mortgage of around £60k I need to deal with. The psychology of having all that free money via tax relief on pension contributions appealed at the time I was doing it and has paid off handsomely.
Intheborders that only works if wage rises keep up with inflation, then the real value of your debt reduces vs your increase in wages. For most people they clearly are not, average wage rises are around 2 to 3 percent, inflation over 7 percent. And when you get inflation you usually get interest rises.
That's how people in the 70s and 80s managed if they didn't move too often, wages and inflation relatively speaking kept increasing together, that's absolutely not happening.
At the moment the prudent move is clear as much debt as you (starting with the highest interest rates so your mortgage is probably the last one to tackle).
I'll repeat my statement earlier, in general you will always pay more for debt than you will make in investment. If that was not the case why would the banks use their capital to fund your credit when they could actually invest safely in the same incredible investment opportunities open to the public as they would get a higher rate of return. It's gambling, if you can afford to lose it fine, but borrowing to invest is not a prudent move for Joe public. For businesses it is different if they done their business case correctly.
in terms of overpaying, hsbc allocate a sort code and acct number to each mortgage, send a faster payment nice and simple, excel to keep track of 10% overpayment ..
i've heavily paid down spare cash so as to avoid temptation of stuff i dont need.
to be honest i wish i'd invested in stock markets, up 30-35% on current cash balance in just over 2 years, (although i bought low during covid crash so was easy money, feels to be geting tougher now)
I timed a remortgage to perfection, by sheer fluke, 1.86% for five years from March.
I'm paying into savings rather than overpaying as
A) instant access if I do need it for an emergency
B) The rate is lower now but its only going to go one way, in two or three years time the savings rate probably will be higher than the mortgage rate
That works for me
Intheborders that only works if wage rises keep up with inflation, then the real value of your debt reduces vs your increase in wages. For most people they clearly are not, average wage rises are around 2 to 3 percent, inflation over 7 percent. And when you get inflation you usually get interest rises.
But the debt still falls by inflation, whereas your income doesn't fall 'fully'.
We didn't worry about paying off a mortgage, it just got paid off - it's what happens as you get older and tbh the monthly payment at the end was about what we'd spend on a nice lunch for the pair of us.
I’d love to make regular overpayments. Am I missing something?
It is better to make a lump sum overpayment if you can.
We, well my SO, just rang up nationwide and asked if we could overpay by a fixed amount each month: yes we could. When we had a wedge of cash my SO rang up and asked if we could overpay with that: yes we could and it would reduce our regular overpayments back to the regular payment level as well as cutting the interest over the term.
One thing to consider in mortgages, as any long term lending, is the effect of inflation. The money you pay at the end is worth less than that at the beginning but still pays off the loan all the same.
I timed a remortgage to perfection, by sheer fluke, 1.86% for five years from March.
I’m paying into savings rather than overpaying as
A) instant access if I do need it for an emergency
B) The rate is lower now but its only going to go one way, in two or three years time the savings rate probably will be higher than the mortgage rate
Similar here, but what you need to do is work out what your Mortgage payments could be at the end of that term (lets say +3%).
Lots of people are going to get a nasty shock when they roll off their current deal and have to find a new one, which could easily double their monthly mortgage payment depending on their LTV.
If you pay off your mortgage your monthly saving effectively becomes a pay rise. That and actUally owning your property outright feels particularly good.
I prefer to sink money into property as it seems less volatile than a pension, although the return on my pension has been ~5% over 10yrs (up to 15%, down to -9% in between), compared to a steady 2% for the mortgage. Having said that, I should probably up the pension contributions if I want more than baked beans for lunch in the future.
If you pay off your mortgage your monthly saving effectively becomes a pay rise. That and actUally owning your property outright feels particularly good.
And sticking it in a pension might mean you can retire early. That would feel particularly good too. Not sating either is right or wrong, just that there are options and there isn't one solution for everybody.
I prefer to sink money into property as it seems less volatile than a pension,
Unless it's your main residence, you'll pay a fairly whopping CGT charge when you sell it.
And sticking it in a pension might mean you can retire early.
just that there are options and there isn’t one solution for everybody.
This is absolutely true, but the problem is that the many options have the capacity to bamboozle people into actually doing nothing, as they're not sure what the right thing to do is.
So, I'll say again - if you can afford it, overpaying your mortgage is never* a bad idea. There are other ideas, sure, but that particular one is never* bad, and it's incredibly simple. No financial adviser is ever going to say to you "you idiot, why did you overpay your mortage?"
*okay, very, very, very rarely
We didn’t worry about paying off a mortgage, it just got paid off – it’s what happens as you get older and tbh the monthly payment at the end was about what we’d spend on a nice lunch for the pair of us.
You also Held a mortgage through the boom times by virtue of nothing more than the luck of being born earlier.....
Some of us are still young and didn't have that advantage....
Don’t forget the psychology of being mortgage free
+2
Been mortgage free for a few years now.
Work was getting shitty so handed my notice in without a job lined up. Within a couple of weeks, I had an offer I liked and the benefit of having shortened my notice period.
That's where we are too.
In my equation there's also any mortgage protection/ 'insurance' too you can save paying as well, if that's part of your mortgage. For us it'll save a couple of K for that . Every little helps.
For the 'how do you over pay' I've done all of the following :
- phoned and sorted to make a big 1 off payment.
-phoned and set up a regular min payment that was higher that needed
- paid directly via my banking app. There was / is a bank account number to do it on my mortgage documentation.
Similar here, but what you need to do is work out what your Mortgage payments could be at the end of that term (lets say +3%).
Lots of people are going to get a nasty shock when they roll off their current deal and have to find a new one, which could easily double their monthly mortgage payment depending on their LTV.
This is true but I will reevaluate at the end of the five year term,see what the mortgage and savings rates are then, it might be worth keeping some savings or it might be worth overpaying a decent chunk of mortgage, who knows
At the moment with mortgage at 1.86% fixed and savings roughly 1% but likely to go up, it's costing me £8.60/year to have £1,000 sat in savings for an emergency rather than reducing the mortgage by that much
^ we are there.
I've 50% of our outstanding capital in cash. Hoping the investment ISA's will rise more than the 1.07% mortgage.
Plus we over-pay the mortgage every month by a reasonable chunk.
The plan in 5 years is to review where we are. In ideal world, we will be but a few payments left, worst case we are remortgaging at 10-15% LtV.
Fingers crossed.