Should I make overpayments on mortgage?

The first question that springs to mind is did the same letter tell you that the mortgage would be paid off any sooner? I`d guess that you`d knock a few months (at least) off the mortgage with this overpayment - i`d deffinately check this out.

The 1,600 spread over 21 years is 6.35 per month.

The interest saved in a year is about the same.

I wouldn't expect a "spectacular" reduction but why don't you ask how they arrived at the figure?

I would look at it in terms of interest rates.

You want to look to put money that is earning less interest rates to pay off any debts at the higher interest rates.

I'd expect somewhere around 10 reduction if nothing else has changed. But have they put their interest rate up, with the recent BOE increase? That might explain it.

I may be wrong but AFAIK a repayment mortgage is geared to pay mostly interest element in early years of the mortgage and the capital towards the end. Thus , you may have paid of 2% of the original mortgage sum but since the total amount payable over 25 years is around 3 times the mortgage sum with interest - ie 3 x 68 = £204k you have only paid .6% of the actual total owing so can only expect your monthly payment to go down by this amount, and this worked out as £3.26.

I would guess it's related to the recent mortgage rate change. Otherwise I'd have expected about 10GBP.

But the way to think of it is that that 1600 is now "earning" you interest at your mortgage rate tax free for the next 21 years. (This assumes you maintain your repayments at the level they would have been if you hadn't made the overpayment)

Assuming your mortgage rate has gone up from 5.45 to 5.70 your repayments would otherwise have gone up to about 425GBP. If you increase your repayments anyway to 425GBP you will pay off your mortgage about 9 months early - i.e. paying the equivalent of 4 extra payments now saves you 9 payments at the end of the mortgage.

N.B. all these calculations are very rough and ready. I'm sure there's a spreadsheet somewhere that can do these calculations properly - I used to do these calculations all the time when I had a mortgage and used to update my program (wasn't actually a spreadsheet) with every interest rate change and rule change (e.g. annual interest -> daily interest calculations, end of MIRAS etc) and could generally get my calculations to agree with my mortgage statement to within a couple of pence. You can then start making "what if" calculations - what if I increased my repayments to 450/month (418+1600/48 should be affordable to you)

Tim.

Yes.

You fail to account for the interest saving he'll make on the 1600.

The mortgage payment is directly proportional to the amount owing - so if the current debt is 64k and he pays 1600 then his payments should reduce by 2.5%, ie about

Some lenders are a bit fly. When you pay off 1600 this should come off the capital with a recalculation on the repayments... but some reduce the mortage by the capital and interest - as if you had just made a number of regular payments to the mortgage... then they recalculate the loan for the 21 year term. One to watch but I have heard of this happening at least once.

The important point is how regularly they calculate interest.

The recent interest rate could well explain it as the last payment I made had not increased to reflect the raise. The interest is calculated daily and the bank assures me that there are no penalties so I can only assume that the bank will work it out correctly!

Someone once told me to not bother making overpayments on a mortgage. Their logic was the £1000 I put in today is worth more in real terms than £2000 saved in 25 years time. However I would have thought the fact that mortgages have a higher interest rate than savings can attract is a better argument for making overpayments

That's nonsense. If making overpayments were "bad" in this way, then "good" would be to underpay, or even better not to pay at all, not even interest.

Eh? The only issue is whether they give you interest benefit immediately, or wait till the end of the month/year.

They all do this anyway every year.

Paying off some of the capital never hurts, but it's put to best effect if you keep up the original monthly instalments and thus reduce the *term*.

You need to find out how your lender calculates interest. The building society with which I used to have a mortgage calculated it only once per year - so the interest which I paid in a given year was based on the debt as at the previous 31st December - even though the debt was reducing during the year. If your is like this, the best time to to make an extra lump sum payment is as near to the end of the year as you can manage. You can then save up during the year - and earn interest on it - and then present it to your lender on 31st December.

Another effect of calculating the interest annually is that, towards the end of the term when the debt is reducing more rapidly, the *effective* rate of interest is much higher than the alleged figure. If you can get into a position where you can pay the whole lot off in one go about 5 years before the end of the term, you'll save a hell of a lot of interest.

In message , Andy Pandy writes

No they dont. Many (including my own) change every time their rate changes with no annual reviews.

You mean an 'interest only' loan where the interest is rolled into the capital. You'd rely on house values rising fast enough so that when you sell the hosue the proceeds cover the debt that has, by then, accumuated.

Sounds good to me.

Robert

What do you mean when you say: "an 'interest only' loan where the interest is rolled into the capital"?

An "interest only" loan refers to only the interest being paid.

It's good only if you can be confident that the house value will in fact rise faster than the debt accumulates. The risk that it will not is high.

It's good only if your salary also rises as fast, unless by the time you sell the house to pay off the debt you will not then wish to buy another house, as you will find yourself with insufficient equity to put down as a deposit on your next house, which naturally will be more expensive since it too will have suffered/enjoyed a value increase.

Even if you hope/expect to make a killing through house value increase, you can also make a further killing by making payments and/or overpayments on your loan, since the effect of reducing the debt will be to give you that much more cash money in hand when you sell. It's equivalent, as I and others have said here many a time, to putting all your payments into a savings account which *earns* you interest at the loan interest rate, and tax-free to boot.

The one advantage of interest only loans is that, if they are flexible enough, then you can make payments that are a similar amount to a normal repayment mortgage but with the safety net that if you are not able to keep up repayments for some reason then the extra payments will count towards the payments required. This could mean that you could go a significant time without having to make payments if there is a catastrophic event that affects your finances.

Yes, and specifically the "only" in "interest-only" means no more nor less than that no capital is paid. :-)

In other words all you pay is interest. Even more specifically, all *of what you pay* is interest.

That does not preclude the payments you make being less than the interest charged, and a special case of that is that you pay nothing at all, letting *all* the interest charged roll up into the debt, or as Robert calls it, into the capital. :-)

Obviously the purpose of his quotes around 'interest only' was an allusion to the improper nature of such an arrangement. To give it its full name would be to call it a "not even interest only" loan.

You can still pay extra if you want.

Did Robert mean a loan where you don't make any payments until settling the debt?