Paying a chunk off a mortgage

[Zatoichi.uK]

Apparently its well worth finding out when the interest is applied within the month, week, or year etc. (Some charge daily) and simply making over payments the day before the interest is applied. I'm not sure how much real world saving this would make though.

 

[bad_ass_neil]

Thought very one was daily? all the lenders we have been calculate it daily

 

[Blackjack Davy]

You need to contact the mortgage lender and see what they say. I've heard of a case where someone paid off their mortgage early, or made regular overpayments, and rather than reducing the capital sum or reducing the monthly payments the mortgage company simply put the money in a "holding account" until the length of the mortgage term was over!

In which case you may as well invest the money elsewhere at least it's earning money for you rather than the mortgage company.

 

[£15]

I've been asked about repaying a chunk of mortgage - why ask me, I don't know... I'm a software developer, not an IFA. I am curious as to what the answer is though, so thought I'd ask here.

Say a mortgage currently has £100K outstanding on it and repayments are ~£500/month.

If you repay £80K, would the monthly repayment reduce correspondingly by 80% - ie to £100/month - or is it not as straightforward as that?

It depends entirely on the terms & conditions of their mortgage. They vary and they would need to check the paperwork or ask the lender.

Some place limits on overpayments, e.g. 10% every year.

Some will ask if you want to reduce the monthly payments, or reduce the term.

They need to ask them. We, you, don't know.

 

[tintin82]

With current interest rates, everyone should be putting their money into their mortgage. Especially if your mortgage company allows your to withdraw it if needed.

Possibly not the best advice. In this age of extremely cheap credit a mortgage is essentially the cheapest loan you will ever get. Paying this off over putting you money to work in a few funds in an ISA offering greater return may be wiser.
Obviously I am not telling one what to do with their hard earned cash, it is all about risk / reward and to what degree one is willing to take risk.

However if someone was to put all their money into their mortgage they could find themselves in the latter years extremely wealthy property wise (dependant on house prices), which is a very difficult asset to relies (you really want to downsize that house to release much needed cash for whatever?), but with little else.

A more prudent approach may be to spread your wealth across various assets. Such as paying off your mortgage at a comfortable rate, topping up the pension, openings a funds ISA etc.

No one can tell you what to do (well an IFA can but will charge you and the responsibility ends with you anyways), its your money.

 

[D.P.]

Possibly not the best advice. In this age of extremely cheap credit a mortgage is essentially the cheapest loan you will ever get. Paying this off over putting you money to work in a few funds in an ISA offering greater return may be wiser.
Obviously I am not telling one what to do with their hard earned cash, it is all about risk / reward and to what degree one is willing to take risk.

However if someone was to put all their money into their mortgage they could find themselves in the latter years extremely wealthy property wise (dependant on house prices), which is a very difficult asset to relies (you really want to downsize that house to release much needed cash for whatever?), but with little else.

A more prudent approach may be to spread your wealth across various assets. Such as paying off your mortgage at a comfortable rate, topping up the pension, openings a funds ISA etc.

No one can tell you what to do (well an IFA can but will charge you and the responsibility ends with you anyways), its your money.

This x1000.

No need to overpay by much when rates are so low.

 

[itchy]

Short Answer: Payments will stay the same just the term will be less.

We make over payments that cover interest and regular payments cover capital.

We pay interest at 2.65% tracker so have to watch the interest rates!

You do all know that interest rates will rise very soon, by how much who can tell but it is coming!

So get that mortgage down now before they rise!

 

[tintin82]

Short Answer: Payments will stay the same just the term will be less.

We make over payments that cover interest and regular payments cover capital.

We pay interest at 2.65% tracker so have to watch the interest rates!

You do all know that interest rates will rise very soon, by how much who can tell but it is coming!

So get that mortgage down now before they rise!

Yes an interest rate rise is coming. We do not know by how much, however can make a pretty educated guess that it will be 0.25/0.5%, and subsequent rises will be very very gradual due the BOE not wanting to shock the shaky recovery.

Just to use the above as an example. You state you are paying 2.65% interest. If you overpay this you are effectively investing for a paltry 2.65% return. If you had invested some of those overpayments in a FSTE tracker fund a year ago you would have increased your return by 90%! Based on a rough 5% FTSE 100 performance.

Everyone is becoming increasingly obsessed with the impending doom surrounding an interest rate rise, something the not so much older members will remember was a very regular occurrence as the economy fluctuated.

If you are really stressing about the impending % or so that your mortgage will rise I would suggest you may need to relook at your mortgage / equity as a whole and get yourself into a place where you can afford the inevitable. Don’t get me wrong, many people will be hurt by even the smallest rise in rates. But this is because many are so accustomed to living pay check to pay check and having mortgages for houses they really can’t afford in the first place.

As I said before, piling into a mortgage for a low return at the expense of other investments might not be the best idea. You are effectively putting all your investment eggs into the property basket.

 

[Bear]

We have a fully flexible offset mortgage where we can over pay what we want with no penalties. Instead of paying off a lump sum, we saved the cash to offset against the mortgage interest and now we have savings which equal the mortgage which means we have an interest free mortgage.

This has a few benefits namely we have a large amount of capital available should we ever need it, as we don't receive any interest payments on our savings it's tax free, anything we pay towards our mortgage including overpayments always comes off the capital and it also means it doesn't matter what the interest rates are.

Also by utilising our ISA allowance and SIPP means we can make sure most of our money is kept tax free.

 

[tintin82]

We have a fully flexible offset mortgage where we can over pay what we want with no penalties. Instead of paying off a lump sum, we saved the cash to offset against the mortgage interest and now we have savings which equal the mortgage which means we have an interest free mortgage.

This has a few benefits namely we have a large amount of capital available should we ever need it, as we don't receive any interest payments on our savings it's tax free, anything we pay towards our mortgage including overpayments always comes off the capital and it also means it doesn't matter what the interest rates are.

Also by utilising our ISA allowance and SIPP means we can make sure most of our money is kept tax free.

+1 here here!

I have had the same arrangement for the last 5 years. Top product that gives you all the flexibility you need when you need it. Having emergency funds offsetting against the mortgage, tax free, and instant access is epic. Almost too epic as the wife views the funds as less 'emergency' and more 'home improvement'

 

[D.P.]

Yes an interest rate rise is coming. We do not know by how much, however can make a pretty educated guess that it will be 0.25/0.5%, and subsequent rises will be very very gradual due the BOE not wanting to shock the shaky recovery.

Just to use the above as an example. You state you are paying 2.65% interest. If you overpay this you are effectively investing for a paltry 2.65% return. If you had invested some of those overpayments in a FSTE tracker fund a year ago you would have increased your return by 90%! Based on a rough 5% FTSE 100 performance.

Everyone is becoming increasingly obsessed with the impending doom surrounding an interest rate rise, something the not so much older members will remember was a very regular occurrence as the economy fluctuated.

If you are really stressing about the impending % or so that your mortgage will rise I would suggest you may need to relook at your mortgage / equity as a whole and get yourself into a place where you can afford the inevitable. Don’t get me wrong, many people will be hurt by even the smallest rise in rates. But this is because many are so accustomed to living pay check to pay check and having mortgages for houses they really can’t afford in the first place.

As I said before, piling into a mortgage for a low return at the expense of other investments might not be the best idea. You are effectively putting all your investment eggs into the property basket.

And if the property prices do go down and you are forced to sell for whatever reason (interest rates too high, moving jobs) then you have just blown a wad of cash down the drain when if you had instead invested the assets in a diverse portfolio you would not only likely be getting a larger return but could be much safer.

Mortgage rates are super low, prime time to do something with your money other than overpaying. When the rates rise you can then reconsider what you do.

 

[itchy]

Its all pennies to me when the mortgage will be paid for in 5 years at the current rate.

If it goes up a bit, maybe 1 year extra added no big deal.

Saving is useless at the current Bank of Englands base rate.

Even 5% on 10k is only £500 a year! Whats that £10 quidish a week? If looking at saving £10 a week you need a better job or more money!

 

[tintin82]

Its all pennies to me when the mortgage will be paid for in 5 years at the current rate.

If it goes up a bit, maybe 1 year extra added no big deal.

Saving is useless at the current Bank of Englands base rate.

Even 5% on 10k is only £500 a year! Whats that £10 quidish a week? If looking at saving £10 a week you need a better job or more money!

I wouldn’t be so hasty to diss a 5% return. Many investors would be happy with a steady year on year 5% return.

That 10k you wouldn’t invest as it only gives you £500 back at the end of year one. Well after 10 years with the nice little concept known as cumulative interest it would be worth £16,299. Hardly pennies.

Cumulative interest my friend!

 

[tintin82]

Its all pennies to me when the mortgage will be paid for in 5 years at the current rate.

If it goes up a bit, maybe 1 year extra added no big deal.

Saving is useless at the current Bank of Englands base rate.

Even 5% on 10k is only £500 a year! Whats that £10 quidish a week? If looking at saving £10 a week you need a better job or more money!

On another note, you mention are paying 2.65% interest on your mortgage.

You can get 3% on an instant access high street account.

So effectively you can turn your statement on the head, and say that paying into your mortgage is useless as you are making a .35% loss, and locking your monies away in your house for the privilege.

Just a thought.

 

[Kappa]

Other thought is depends where the house is located. Can't forget the % change in house prices. My overpayments have resulted in what I see as a great return although not realised yet (may go down as well as up ). And therefore what you plan to do, release it to buy another home, to let out, your stage in life etc etc. Everyone's appetite varies, but I'm with the 'pay off the mortgage'.