Do I Overpay My Mortgage?

Money Advice

Money Saving Expert / Money Advice 323 Views

Do I Overpay My Mortgage?

Is it better to overpay your mortgage, or invest the extra savings from your frugal lifestyle?

I have been asked this question quite a few times over the last few weeks… and as always, my advice is YES of course you should and NO you need to pay your higher interest debts first! So, run the numbers for your own situation, and make an intelligent assessment of your current expenditure, you can even use my rather rough and ready mortgage overpayment calculator.

Steps to decide if overpayments are worth the effort:

  • Find out how much you owe on your mortgage, what the rate is, and how many years you have left. You’d be surprised (or, maybe you wouldn’t!) at how many people don’t know this… either because they have been paying for a few years and have not kept track of their balance, or because they have their head in the sand and don’t want to think about it all.
  • Add the details into your own copy of this spreadsheet (open a google account if you don’t already have one, they are great).
  • Calculate the split of your monthly payment, ask your bank for a breakdown if you don’t have it or can’t calculate it. Some will go towards repaying the yearly interest, the rest towards the principal (the money you borrowed).
  • Calculate how much interest you are paying each year (it will drop each year / month as you pay off more of the principal).
  • Calculate how much interest you will have paid over the whole mortgage.
  • Have a heart attack because it’s such a high number.
  • Recover from heart attack and re-calculate how much interest you would pay in total if you paid off a regular lump sum over and above your standard monthly repayments (the second set of numbers on the spreadsheet).
  • Decide to lower your spending habits so you can over pay your mortgage and save yourself 10’s (if not 100’s) of thousands of pounds in interest repayments! Don’t forget you will probably have a 10% without penalty overpayment cap per year (some don’t though) which may restrict your ability to clear the last few years too quickly (there will be a financial penalty for overpaying by more, as the banks want our interest payments, but consider paying the ‘fine’ if the interest you save is greater).

Further steps to decide if you should be overpaying your mortgage, or invest for 10 years and pay off the mortgage in a lump sum:

  • Simple check – If I invest my extra savings over 10 years, will the interest I earn beat the amount I will have paid in mortgage interest?
  • Simpler check – Seek help from financial and mortgage advice companies like Tax Kings.
  • More complex check – What happens if I pay my mortgage off as usual, and invest for the duration of the mortgage… do I get more investment gains than mortgage interest?
  • Even more complex check – What happens if I invest the potential overpayment, then pay off the remaining mortgage principal as soon as my investments can cover it, then re-start my investments with the extra money I now have from not paying the mortgage each month.
  • Decide your own risk levels (forthcoming post about matching assessed investment risk and perceived personal risk is in the pipeline).
  • Probably end up paying some spare income into the mortgage, and some into investments
  • Sell your larger than you need house and get a smaller one, get a smaller mortgage*, save a fortune on interest, invest the extra income, live on 50% of your take home instead of 90% and retire in 16.6 years.

*Don’t complain about the costs of selling/buying, work out how much interest you’ll save with a smaller mortgage, you’ll soon see with more clarity!