Mortgage question

I'm sorry, but that doesn't compute. What shortfall? (Shortfall relative to what?) And why remortgage?

Let me rephrase the question it seems you really want to ask:

You have a one-year low fixed rate, so low that you can easily afford to overpay by £Xpm for the year until the fixed rate expires. You want to know by how much you will be better off at the end of year 1, and which of the two following options will achieve this.

(1) You overpay by £Xpm directly into the mortgage account.

(2) You save £Xpm elsewhere for a year and then withdraw the savings together with all the interest earned thereon from this elsewhere-account and pay them into the loan account as a sing lump sum overpayment.

The answer is simple. If the loan interest rate is lower than the net interest rate you can earn on the savings, then option (2) is better, otherwise option (1) is better.

OK - sorry, let me rephrase it - you're rephrasal wasn't correct...

I need Y in 1 year's time.

If I saved 12 x maximum mortgage payments then I will still be short on the required Y, so I will need to remortgage for an extra Z to get Y.

If I overpayed my mortgage 12 x maximum mortgage payments, I will then need to remortgage for the full Y amount needed.

Is it cheaper in the long-term to overpay and remortgage for the full amount or save what I can and remortgage for less?

I see. In neither case do you actually need to remortgage. You could simply borrow the additional £Y on your existing loan account. What remortgaging means is to change lenders, irrespective of whether the total borrowing increases, decreases, or stays the same. If you did remortagge, don't forget the fees this might involve.

This isn't really a long term question, but a short-term one. Which method, you ask, will leave you owing less next year after you've borrowed as much as you need? It is that method which will cause the savings or overpayments (as the case may be) to grow faster, be it as positive growth of real savings, or as negative growth of outstanding debt.

The answer is the same as before. Go for the savings route if the credit interest rate (after deduction of income tax) on the savings product exceeds the debit interest rate on the mortgage account, otherwise go for overpaying.

This is because overpaying is equivalent to saving at the loan rate.

Right - thanks for the help (my knowledge of remortgaging is as you've cunningly deduced, non-existant!) let's introduce some hilariously imaginary figures to help me understand fully.

20 000 = Y 10 000 = total monthly overpayments over the year Current outstanding mortgage balance = 100 000 10 000 = total possible savings over the year

So, with a) using the overpayments route - at the end of the year, the outstanding balance of the now increased mortgage is 120 000 - 12 000 and then minus mortgage interest "saved" by overpaying

b) the savings route - 120 000 - 12 000 minus savings / ISA allowance, etc, interest growth

Conclusion: b)'s new mortgage balance = x; a)'s balance is, you are saying - less than b)'s balance if the mortgage interest rate is higher or more if the mortgage rate is lower than the savings interest rate in scenario b).

Is that what you are saying? I'm sorry to be banging on about it, if it seems easy, its just that I really don't want 25 years worth of debt that could have been avoided by using the "best" route!

Tut-tut, what was I up to?! - I obviously meant to say 120 000 - 10 000, not 12 and another note - the 10 000 is either savings or overpayments - not both!

Oh, and while I'm at it - sorry for top posting in that last message. A dirty habit I'm not fond of.

[and also taking into account your subsequent correction]

Yes, that's what I'm saying, but we're in danger of losing sight of the forest for concentrating on a couple of pine needles. You're still going to be saddled with "25 years worth of" the extra £10k you'd be borrowing (rough figures ignoring interest), while the difference between the two methods is apt to be small:

Suppose the special offer mortgage rate is 3%pa (0.25%pm). Typically the repayments would be calculated on the ficticious basis that this low rate would apply for the whole term, and the monthly payments would be £474.21, and at the end of 12 months the loan account would stand at £97271.89, before you increase it by £10k (assuming the £10k "overpayments" are just saved under your mattress). At that point the payments would be recalculated at the higher rate and on the basis of a 24 year term.

If you overpay by £835 at the end of month 1, the loan account balance at the end of month 12 will be less than it would otherwise be, by £835 times

1.0025 raised to the power 11, so the interest saved contributes only £23.25. Month 2's overpayment will have a similar effect but using the 10th instead of 11th power: £21.11. And so on. Month 12's overpayment contributes no interest, it only reduces the balance by a straight £835.

Similarly, if instead of overpaying, you were to invest the £835 in a monthly-compounding account which pays interest at 4.2%pa (0.35%pm) then the year-end interest contributed by month 1's payment would be £32.72, which is barely £10 more than in the overpayment scenario, so over the course of the whole year you're going to be only £60 or so better off.

I put it to you that the difference between borrowing £10000 and £10060 will hardly be causing you sleepless nights.

! Yes, I see you're right. Sigh. If only the real scenario was this simple!

A big thanks for your help.