Viewing 23 posts - 1 through 23 (of 23 total)
  • Mortgage Interest Question
  • stingmered
    Full Member

    Bear with me… and I’m using artificial figures for ease.

    Mortgage balance is in two parts – normal capital owed (100k) and an over-payment balance (25k, which is increased by £500/mth) Daily interest calculated is based on the two together, so currently £75k.

    Just re-mortgaged, and have an option to formally include the £25k as part of the capital, so the proper balance would be £75k, the effect of this is that it would reduce the monthly payment.

    Alternatively as it stands (and doing nothing), the monthly repayment remains as is, but the repayment term will reduce because of the building up of an overpayment balance in the background (currently estimated at reducing the term by 8 years.)

    My preference is to be mortgage free earlier, so reduce the term.

    However… if I went with the formal acknowledgement of the capital and reduced the monthly payment by say £200, but added that £200 to the monthly overpayment (up to £700), the mortgage term would remain the same, but… would it reduce the overall interest paid against the do nothing option?

    Apologies if not clear… I’ve gone cross-eyed just re-reading that.

    TIA.

    jimdubleyou
    Full Member

    There’s some maths to be done there. I suspect there’s not much in it.

    You’re crystallising that 25k though – if it’s rainy day money you won’t get it back…

    Also – £700 a month is v. close to 10% of the balance at 75k – you want to be careful about any overpayment penalty rules. Our mortgage only allows 10% a year, yours is almost certainly different.

    Have you considered just getting an offset mortgage? I know they have slightly worse rates but you could better off on that.

    Kryton57
    Full Member

    would it reduce the overall interest paid against the do nothing option?

    If I understand this correctly yes, but the interest is reduced by £200 increments over time e.g. after month 1 interested is calculated on £99,300, whereas in the first approach you reduce interest charged on £25k of your balance from day 1. So you save more interest in reducing to £75k immediately.

    I think.

    matt_outandabout
    Full Member

    I played with this for a couple of hours.

    https://www.moneysavingexpert.com/mortgages/compare-mortgage-rates/

    We re-mortgaged in summer, and:

    – took a much lower interest rate, so reduced mortgage term by 4 years to maintain the monthly payment amount at the same level. New rate 1.17% fixed for 5 years.

    – overpay each month a fixed amount. This means we are ‘in credit’, should we ever need to take a break for some reason.

    – save into S&S ISA the twice the amount as we overpay the mortgage by. This is not ‘guaranteed’, and the last month has been negative, but they have averaged 5-8% for us over the last few years. The growth and monthly savings add up to a better ‘return’ than overpaying the mortgage.

    Summary: reduced mortgage from 16years left, to 12years left. Combine modest overpayment and larger savings with hoped growth, we pay mortgage off in 5.2 years. 😎

    stingmered
    Full Member

    Thanks. The actual numbers are artificial, I also have the 10% limit but I’m not near that.

    The £25k is already sunk into the mortgage as it’s not an offset. I can’t claim that back (unless I remortgage…) But it’s a question of how it is applied, to reduce term or reduce monthly payments. In both cases the daily interest added calculation takes into account the £25k over payment balance.

    matt_outandabout
    Full Member

    But it’s a question of how it is applied, to reduce term or reduce monthly payments.

    Our overpayment is reducing the term.

    And you can play with this version:

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

    stingmered
    Full Member

    Ours is also reducing the term (that MSE calculator has been a staple for the last 10 years!) But it’s an interesting point on reducing the monthly payments and reinvesting not in overpayment. I’ve pondered this with paying additional into my pension, which saves 40% right off the bat… but then it gets to the point of retiring with a balance that I might never spend. (I’ll give it a good go though!)

    nickjb
    Free Member

    I appreciate the mortgage is a bit of a weight around the neck and its nice to see it gone but if you are trying to optimise you payments then do consider investing instead of paying it off

    As Matt says:

    save into S&S ISA the twice the amount as we overpay the mortgage by. This is not ‘guaranteed’, and the last month has been negative, but they have averaged 5-8% for us over the last few years. The growth and monthly savings add up to a better ‘return’ than overpaying the mortgage.

    All going well after a while your saving pot will catch up with mortgage and you’ll have enough in there to pay the lot off should you desire. I’ve just about reached that point now. Still quite a few years left on the mortgage but if I wanted I could empty the saving pot and pay it off. I’m not planning to. The saving pot will keep growing and the mortgage will keep shrinking. It is riskier but it should be a significantly faster way to pay off the mortgage than overpaying.

    robola
    Full Member

    Or put the cash into your pension. Hard for any investment to beat the savings in income tax.

    nickjb
    Free Member

    Or put the cash into your pension. Hard for any investment to beat the savings in income tax.

    Yes, it usually works out better, but the money is locked away. You could take a lump sum at 55 to pay off the mortgage should you desire. That might be early enough for most.

    robola
    Full Member

    Better for me that it is locked away, with my gadget/sports equipment habit.

    martin_t
    Free Member

    Before overpaying the mortgage it is worth considering paying it in to your pension as tax reliefs can make it financially worthwhile. From April when the NI rise kicks in:

    – Basic rate, 20% relief i.e. pay in £100 cost to you £80
    – Basic rate paying in through salary sacrifice, 33.25% i.e. pay in £100 cost to you £66.75
    – Higher rate, 40% relief i.e. pay in £100 cost to you £60
    – Higher rate paying into pension through salary sacrifice, 43.25% relief i.e. pay in £100 cost to you £56.75

    There are no guarantees that tax relief on pension contributions will be so generous going forward.

    Chew
    Free Member

    But it’s a question of how it is applied, to reduce term or reduce monthly payments. In both cases the daily interest added calculation takes into account the £25k over payment balance

    The easiest way is to ask your bank
    They will be able to give you the illustrations of the effects of each method.

    When I remortgaged, I had the option to keep may payments the same and take 6 years off the term, or keep the same term, but reduce my payments by £50 a month.
    Less risky to take the reduced payments and then just overpay £50 a month, as if I unexpectedly need the cash for something else its there.
    The end point for both scenarios is the same.

    It just assumes that you’ll never hit your overpayment allowance.

    stingmered
    Full Member

    The easiest way is to ask your bank

    Ha ha, you’d think so but I spent half an hour on the phone to Barclays and posed the question “which option means I pay less interest overall” and they couldn’t tell me! Hence the question here.

    As said above and others advised, I’ve been considering paying the over payment into a pension instead. Planning to retire early (before the mortgage paid off if I don’t overpay) but am guessing that I could drop a lump some into my mortgage the day I retire, be mortgage free, and still have more money in my back-pocket than had I put it into a S&S ISA, or overpaid my mortgage over the years.

    nickjb
    Free Member

    guessing that I could drop a lump some into my mortgage the day I retire, be mortgage free, and still have more money in my back-pocket than had I put it into a S&S ISA, or overpaid my mortgage over the years

    It usually works out that way assuming interest rates don’t go crazy while share prices crash (we’ll all be in the trouble then anyway). Over a long period it should work. You might not be able to pay the lump sum the day you retire if you are mid mortgage deal but you can do it if your deal has ended.

    stingmered
    Full Member

    That’s a good point. Might be worth changing to a SVR nearer the time. Depends what interest rates are doing though!

    sockpuppet
    Full Member

    I’m pretty sure that having the overpayment reserve you’re already reducing the amount of interest you’re paying, because you’ve already repaid an extra part of the capital. That’s what the interest is calculated on.

    When you say it’s locked in as it’s not an offset, that’s not quite right. Depending on the small print (which you’d have to check) you can essentially stop payments for a while til your overpayment drops to zero, so essentially getting the money “out” just one month’s payment at a time rather than a lump. I emphasise check your own small print!

    As far as consolidating it to make term shorter or payments less: you’ve already reduce the length of time you’ll be paying by making the overpayments. The “term” hasn’t changed, but you would still stop paying sooner if nothing changes. Effectively a shorter term.

    The lower payments aren’t a concern if you’re planning on overpaying anyway, unless you’re worried about rainy day money/disaster planning. In which case maintain the overpayment reserve. It’s both a term shortener & a better rainy day solution.

    This is what I have done. Can you tell!??

    As for overpayments VS stocks VS pensions… that’s whole different discussion, and depends a lot on age VS retirement age, taxation levels (now & in future) and attitude to risk.

    I suggest a bike forum isn’t the best source here!!

    We should probably be investing instead of overpaying, but we aren’t. And I’m ok with that for now.

    dangeourbrain
    Full Member

    Only had a very quick skim of the above but, what I would say is look carefully at the interest in the reduced terms. Under (IIRC) about 8 year term the interest climbed significantly so it made considerable sense to have a big chunk to take off at that point, not before

    intheborders
    Free Member

    Are you & OH paying enough into pensions to get any matching from employers?

    If not, stop ‘overpaying’ and pay into pensions instead.

    Otherwise, do whatever is the cheapest – but rather than continue to ‘overpay’ I’d put the cash in a separate ‘fund’. Always handy to have a lump sum.

    poly
    Free Member

    Before overpaying the mortgage it is worth considering paying it in to your pension as tax reliefs can make it financially worthwhile.

    I was in a position to do that and the IFA’s advice was exactly what you said. I ignored it because whilst he was correct in pure ££, my desire to be mortgage-free was higher than my desire to have a better pension in my 70s. No debt is liberating so I can decide to quit a job, do what I want with life and enjoy life TODAY. I can now put what would have been the mortgage interest into pension if I wish, and whilst the incentive may change so may all sorts of circumstances.

    nickjb
    Free Member

    No debt is liberating so I can decide to quit a job, do what I want with life and enjoy life TODAY.

    I’d say you are more likely to be able to do that sooner with decent savings rather than a paid off mortgage. I agree about the psychology of it though. It’s quite a mental barrier

    my desire to be mortgage-free was higher than my desire to have a better pension in my 70s.

    You can start taking out at 55. That still might be too old, but you certainly don’t need to wait until you are in your 70s. If you mix between ISA and pension then you can start even earlier.

    Every one is different and will prefer different solutions but it’s worth thinking about. Wish I’d put more thought into earlier, but I’m pretty happy where I am now.

    prettygreenparrot
    Full Member

    Didn’t quite understand your description. But we have been overpaying by a small proportion for the past few years.

    I had not realised that the 10% overpayment was based on the original loan value, not the current value. It would have made little difference to our payments, but doh!

    Realising that this year. And having a bunch of ‘cash’ sat around. We paid this year’s 10% overpayment as a lump sum. This has had a couple of effects. Reduction of interest accrual. And reduction of repayments. Nice. We’ll do the same next year. And as the fixed term of the mortgage ends later next year we’ll probably pay it off as there will be no early redemption penalty. Woo hoo. The advantage of having a smart SO and being fairly old.

    prettygreenparrot
    Full Member

    I’d say you are more likely to be able to do that sooner with decent savings rather than a paid off mortgage.

    Agreed. Paying into a pension is WAY more helpful than paying off a mortgage. From the tax relief alone.

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