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Overpaying The Mortgage Or Save The Cash?


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I am 26 years old, and I bought my 2-bed flat a couple of years ago for £140k in the London Borough of Sutton. I only put down a 5% deposit and I took out a 35-year mortgage. Similar flats in my area now go for £180k+.

I did not overstretch myself, and borrowed 3.3 times my salary (at the time). Due to pay rises, my initial mortgage borrowing is only 2.8 times my salary.

My mortage is approx £675.00 per month and is fixed until October 2010. When the deal expires, my payments will go up by at least £200.00. At around the same time, I plan to move into a 3-bed house in my area, which, at the moment, go for around £300k, and I plan to put down at least a £75k deposit.

I have not made any overpayments on my mortgage yet, mainly because during the last two years, I have been saving non-stop, and now have a new kitchen, new central heating, the electrics done and a new car (all paid in cash :rolleyes: ). I have also topped up my personal savings to £10k at the same time :o .

I am now in the fortunate position of having approximately £1,200.00 leftover every month, after my mortgage, all Bills including petrol, food, travelcard, pension etc. have been paid, and also including my going out/entertainment expenses.

I am now not sure whether to over-pay my mortgage by £1,200.00 every month, which will reduce my mortgage borrowings to approx £80,000.00 in October 2010 instead of £127k when the deal expires, or whether to carry on putting my left-over money in a high interest savings account. I have worked out that my mortgage payments when the deal expires will be around £900.00 with no overpayments, but around £550.00 with the overpayments. Also, presuming there is no crash, I will have at least £100k equity in my flat, instead of £53,000.00 equity.

Overpayments = £80k mortgage £100k equity £10k savings with £550.00 mortgage payments

Saving = approx £60k savings with £54k equity in the flat but £900+ mortgage payments

If there is a crash, I would obviously prefer to have my money protected in savings accounts, however my mortgage payments, although still easily affordable, will be a lot higher, particuarly if the interest rates rise much further.

Help and advice please!

I am just not sure what to do! Help!

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I am 26 years old, and I bought my 2-bed flat a couple of years ago for £140k in the London Borough of Sutton. I only put down a 5% deposit and I took out a 35-year mortgage. Similar flats in my area now go for £180k+.

I did not overstretch myself, and borrowed 3.3 times my salary (at the time). Due to pay rises, my initial mortgage borrowing is only 2.8 times my salary.

My mortage is approx £675.00 per month and is fixed until October 2010. When the deal expires, my payments will go up by at least £200.00. At around the same time, I plan to move into a 3-bed house in my area, which, at the moment, go for around £300k, and I plan to put down at least a £75k deposit.

I have not made any overpayments on my mortgage yet, mainly because during the last two years, I have been saving non-stop, and now have a new kitchen, new central heating, the electrics done and a new car (all paid in cash :rolleyes: ). I have also topped up my personal savings to £10k at the same time :o .

I am now in the fortunate position of having approximately £1,200.00 leftover every month, after my mortgage, all Bills including petrol, food, travelcard, pension etc. have been paid, and also including my going out/entertainment expenses.

I am now not sure whether to over-pay my mortgage by £1,200.00 every month, which will reduce my mortgage borrowings to approx £80,000.00 in October 2010 instead of £127k when the deal expires, or whether to carry on putting my left-over money in a high interest savings account. I have worked out that my mortgage payments when the deal expires will be around £900.00 with no overpayments, but around £550.00 with the overpayments. Also, presuming there is no crash, I will have at least £100k equity in my flat, instead of £53,000.00 equity.

Overpayments = £80k mortgage £100k equity £10k savings with £550.00 mortgage payments

Saving = approx £60k savings with £54k equity in the flat but £900+ mortgage payments

If there is a crash, I would obviously prefer to have my money protected in savings accounts, however my mortgage payments, although still easily affordable, will be a lot higher, particuarly if the interest rates rise much further.

Help and advice please!

I am just not sure what to do! Help!

Read your small print to see if there are any penalties to paying chunks off while it's fixed.

If there are penalties - save it somewhere else

Also read the small print to find out if you paid off chunks if the capital owed would reduce straight away - or just once a year

If no penalties and it is reduced immediately, then pay it off the mortgage

If no penalties but it only gets reduced once a year then save it somewhere else and make a timely once a year payment

If there are penalties during the fixed period, but not afterwards, save it elsewhere until the day after the fixed period

If there are penalties whatever you do, then f*** em and save it elsewhere

"If there is a crash, I would obviously prefer to have my money protected in savings accounts" - not sure what you mean by this. Your money is "safe" if you've paid it off the mortgage. Just means you owe less on the mortgage. OK you probably can't get it out again to spend, but if you are getting another property it won't matter where the money is: reduced mortgage or in a savings account. The numbers amount to the same

Edited by ScaredEitherWay
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Traditionally mortgage lenders calculated the interest charged on mortgages annually. This meant that, if you did pay off extra, you still paid interest on that money until the end of the year. But with the introduction of flexible mortgages lenders started to calculate interest on a daily or monthly basis - a fairer method as you pay interest only on the money you owe. In fact many now use a daily or monthly interest calculation on their standard mortgages too

also take into account this.

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I know I can overpay the mortgage by up to £14,000.00 a year, and as long as the mortgage is not completely paid off by October 2010, I will not incur any penalties.

Also, the deal I am on re-calculates the interest on the date the overpayment is made.

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agree with all of the above, but would add that you might want to consider whether you can get your overpayments back if you need them.

If you can do that (plus all the other things on penalties and interest) then put it against the mortgage.

You probably know this anyway, but you will also find then that you will reduce your monthly payments on the mortgage. You could plough that difference back into the mortgage as well, making the over payments even bigger.

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also take into account this.

If you absolutely have to do something boring with the cash like saving it or paying down the mortgage, then pay down the mortgage. If you save it, you get taxed and based on your earnings, you'll be taxed at 40% on the interest. If you pay down the mortgage, you don't have that tax disadvantage. But as sure as bears do do-dos in the forest, life won't pan out exactly like it does on your spreadsheet and so on that basis, why don't you save £300 for the unforeseens and pay off £900 of the mortgage?

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Thanks for the above.

I know that the interest is re-calculated daily, I can make overpayments of £14k per annum without penalty, and as long as the mortgage is not paid off by October 2010, then there will be no penalties. I also know that I cannot borrow back overpayments.

I also do have £10k saved up already for emergencies and unforeseen circumstances, and the flat is not in a 'show home' condition but is in very good condition (built in 1975, double glazing, security entry phone, new kitchen and central heating and electrics (2007), nearly new bathroom and carpets (2005).

I have read a lot of posts on this site, and I am not a bear or a bull. I honestly hope house prices do no increase further, as what I can afford in terms of houses (which I hope to be in a position to buy in 2010 without over-stretching myself) decreases all the time, and whilst my flat would increase in value in line with the present HPI, this does not help me afford a house. To explain, say my flat goes up 5% in value over the next 3 years. This makes an increase of £9,000.00 to £189k. If a £300k house also increases by 5%, their value goes up by £15k, to £315k.

Ideally, if prices decreased by around 20%, this would take us back to 2005 levels, which is the last time I thought prices were remotely sensible. I simply cannot believe the recent HPI, and I think it is a joke. Most of my friends cannot even buy a 1-bed flat in my area, and have all clubbed together to rent a house instead, which whilst it is fun initially, simply shows up the state of the market for FTB.

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Overpay the mortgage. Once your current deal ends reduce the time left to pay the rest. ie go from 35 years to 15 (or 20yrs).

Funny how no one on here has commented what a fool you were to buy 2 years ago. 2 years ago no one would have recommended you buy! They would have actively dissuaded you, and probably questioned your sanity, intelligence and parentage to boot.

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Yes they probably would have done.

However, back in 1995 - 2000, I would say that properties were grossly under-valued, following the crash. Also, in the long term, you have to take in to account facts such as, my mother bought her house for £20k in 1980, and it is now worth £250k, and my Gran bought her house for £600.00 in 1957, and it is now worth £350k. No crash will ever makes prices go back down to these levels, and I doubt any crash will bring prices back down much below 2005 prices. Even the great property crash of 1990 - 1995, prices were only reduced by around 30%.

I am not a bull or a bear, just someone who is taking a sensible view. My job (I work for a Law Firm) will be safe in any recession as it is not affected by such market forces. Therefore, I will always be able to pay the mortgage.

In terms of supply and demand, I do not believe there is a lack of supply, there are hundreds of properties for sale in Sutton and nearby areas. I think Estate Agents are the main culpits, however, there are further influences, one obviously being the historically low interest rate, and also the wealth in the City of London which is rippling out to the suburbs, with many workers taking home massive pay packets. There is also the fact that there are normally two breadwinners instead of one at home (something I do not necessarily approve of, as I believe kids should not be put into creches when they are still babies, but nevermind).

My present mortgage is only 2.8 times my salary, and £675.00 take out approximately 22% of my take home pay. Even at an interest rate of say 8%, my mortage would be less than 30% of my take home pay. This is because I was sensible, and did not over-stretch myself, like some people whom are reguarly criticised on housepricecrash.co.uk

I do not see property as an investment, rather a place to live. If in 50 years time, in a house I paid £300k for in 2010, which by then would be fully paid for, is only worth £10, I would not care at all, as I see it as a place to live, not an investment or a pension, as I also have my own provate pension pot that will pay at least £25k per annum to me when I retire, with no rent to pay out as my home would be owned by me.

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I would also ask whether people whom are bulls or bears (or neither) would tell me whether they are home-owners or not when they reply to this post, and if they are, when they bought their properties.

This will help me understand their points of view, as I know for a fact there are many disgruntled bears on here simply wishing and longing for a house price crash, whose view will be biased.

Also, ignorant steve, if I listened to you and other people on this site, to move into the place I own now, would have cost me £40k extra, which would have been over £200 per more than my present repayments on my current deal! Good job I'm ignorant hey!!!

Thanks

Edited by JB1981
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I would also ask whether people whom are bulls or bears (or neither) would tell me whether they are home-owners or not when they reply to this post, and if they are, when they bought their properties.

This will help me understand their points of view, as I know for a fact there are many disgruntled bears on here simply wishing and longing for a house price crash, whose view will be biased.

Also, ignorant steve, if I listened to you and other people on this site, to move into the place I own now, would have cost me £40k extra, which would have been over £200 per more than my present repayments on my current deal! Good job I'm ignorant hey!!!

Thanks

As you're being so polite (and I'm in a good mood).

We purchased our "final home" (5 bed detached, just under an acre of land in glorious rural Warwickshire) just over 18 months ago. We have been, like you, very conservative in our borrowing. Our mortgage was £370K, it is now reduced to £260K. (We have another £50K saved and allocated for over-payment)

I've been a property bear since 2002 (in London) and have consistently been proved wrong. I fully expect prices to crash at least 20% nominal but don't think it will be a short lived affair so not worth being out of the market paying rent. (We did STR for a year but bottled it due to complexity of providing decent stable accomodation for our young family). I changed form a bear to neither earlier this year.

I have to admit that 2 years ago I would not have recommended you bought in suburban Sutton. These were the places I expected to be hardest hit. For balance though if you look in the classics section there's a thread there about poster called "Donnie Darko" who was thinking about buying in a decent part of London - I recommended he did (mid / late 2005). He didn't - he must be kicking himself.

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Appreciate the nice reply.

Sutton does have a lot going for it. It has a mainline train station fast train links in 30 minutes to London Bridge and Victoria, and 15 minutes to Clapham Junction, good bus links, plenty of green open spaces, a pedestrianised high street with plenty of good shops, and a lower than national average crime rate. The houses and flats too are of a good quality (except new builds-cant stand that plastic rubbish). The nearest tube, Morden, is only a 10 minute bus ride away. The M25 is a 15 minute drive away, and countryside (such as Epsom Downs) is only a 5 minute drive away. It also has some of the best performing schools in the country, such as Sutton Grammar.

In terms of places like Morden, and especially Croydon (which is a proper dump), I agree that places like that will be hard hit by any crash. However, back in 1995, before the boom, Sutton was ranked 8th highest in the london borough rankings for most expensive property. It is now something like 23rd, which indicates that if the market were to crash, Sutton would not be hard hit, but the places that have risen above it will probably be the hardest hit. Such places would include areas that are dumps but fairly Central to London, whjere there is high crime and lots of council housing, yet have inexplicably risen in price significantly (£800k for a 3-bed semi in Wandsworth - who'd have though that!!).

It sounds as though you have done alright for yourself, and I hope that continues for you.

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I would also ask whether people whom are bulls or bears (or neither) would tell me whether they are home-owners or not when they reply to this post, and if they are, when they bought their properties.

Well, alright. I'm an uber-bear, and I don't own a house. That won't affect my advice though.

If you took out a fix 2 years ago I'd imagine it's at a rate that's relatively low- you don't state, but I'm guessing 5-5.5% or so? You can get over 6% now for a cash ISA, and that may well rise if IRs carry on rising. I'd stick the first 3K every year in an ISA that doesn't charge an exit fee (so you can swap if it becomes uncompetitive). Beyond that point, the mortgage offers the best 'return', so stick the rest in there. If IRs continue to rise, and depending on your fix rate, there may come a time when even after 40% tax on your interest, a savings account is the better deal (though I doubt it). Sorry if this is teaching granny to suck egss, and you were already proposing to continue to use up all your cash ISA allowance every year.

As for being unable to borrow the money back, having cash savings being more flexible etc., in your circumstances I reckon the point is moot. Your mortgage will have to be repaid at some point, and that's the end of the story. It doesn't matter what house prices do. As long as you've got a rainy day fund (which you have) then don't worry about it. Just get the best return on the cash you're 'saving', however you do that.

The only people who should worry, IMO, are the ones who are already in or are at serious risk of neg. eq.- if they want to walk away, they could conceivably put the savings in one partner's name, and the house + debts in the name of the other, who then goes bankrupt. I dare say it'd be tricky to get away with though.

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I am 26 years old, and I bought my 2-bed flat a couple of years ago for £140k in the London Borough of Sutton. I only put down a 5% deposit and I took out a 35-year mortgage. Similar flats in my area now go for £180k+.

...SNIP...

Isn't this a no brainer. The interest rate on money owed is higher than on money loaned to said bank. So there is no point saving until you have cleared your debts since you will always loose that difference.

Also every £1 overpaid can be thought of a another £1 paid off the capital amount owed. So by paying an extra £1 today you should save yourself all the interest that would have been owed on it between today and the end of the mortgage term you have left. This is over simplistic and contract terms apply.

Another polint I should make, its impossible to "work out the future interest rate in 2010". Yeah sure you can say "it should be lower than 15% at that time", but thats about it. Don't think you can work it out and don't exepect to be in the financial position you think you will be in at that time, the world changes.

If there is a crash your money is not better protected in a saving account, because you still owe the debt. If there is a crash you want to get your mortagage paid off ASAP so you have the ability to move out, since while you are in negative equity (where the amount of equity you own on your property is less than the drop in price due a crash, then you can't move anywhere).

You are best off keeping enough of spare care around you (for rainy day, savings, emergency use, several 1000s) and with any surplus pay off your mortgage. What you should work out is how much money do you end up paying the bank overall under the various options you are thinking through. You win when you paid the bank the least to gain the most. The only thing you are gaining when you buy a property is more equity, so that is your goal which numbers work out cheapest for you (least money spent) to give you the most equity in return. Cash in bank and equity in property are interchanage as you have already chained yourself to the mortagage, it makes no sense to factor in a crash of your asset price since you are committed to paying the original purchase price now.

The best way to preserve your equity is to sell before the crash while the whole deal remains profitable (i.e. if you sell today overall you would have built up your equity), because once a crash happens (if that is your belief) then the first person to loose is you, as your equity you were building up takes a hit when you sell out for a lower price. Of course selling before a crash is a luxury that very few will ever be able to enjoy and make no sense to an owner ocucpier with no where else to live.

Edited by Odin
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Guest nosugarbaby

For readers who are swumng by the bullish arugnments to buy here, the OP doesn’t mention whether it is a repayment or interest only (least I couldn’t spot it).

After the 5 year fix expires there maybe penalties to exit the mandatory move to the standard variable rate. Sometimes this can be a percentg3e of the outstanding loan or a fixed fee, a couple of grand norammyl. Thus moving from a rate of 5.5 to possibly, what in 2010?, Bearish side let’s say 10 (mortgage rate) 8 boe rate (I belive by this time oil will be running around 110 usd per barrel – basically meaning it costs more to produce more and the powers that be have to stop you spnding more to conservev whatever is left at a sustainable pace). Then again, a a bullish argment is they’ve discovered an oil field the size of belgium in beckhams back yard and all is rosy – setting rates at 3%).

The tarting up of the flat and the cost of ownershuip until 2010 (insurance, maintannce, etc, new hearting etc are additional costs, so you need to add a further, lets say 10k to the cost of the flat.

In 2010 Godon brown will have made widened Sutton to include 50,000 rat fvlats thuys the avge value of a 2 bedrom flat will be 140k.

Buyers in 2005 will only have paid 5% of the capital (zero percnt of the capital if it is interst only). If they plan to sell in 2010.

By my calculatiosn if the buyer sticks with the flat for 35 years he has paid 378,000 and about 300,000 if its repayment. Do remember however I am slightly intoxicated, so don’t cry if I’m wrong.

I can’t write any more ‘cos I’m slightly drunk, but any one who is sober who can put in any further facts for the benfit of others.

Also, respect to the original op. Sutton is a lovely place fora a laywer. GOod luck.

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Overpay the mortgage. Once your current deal ends reduce the time left to pay the rest. ie go from 35 years to 15 (or 20yrs).

Funny how no one on here has commented what a fool you were to buy 2 years ago. 2 years ago no one would have recommended you buy! They would have actively dissuaded you, and probably questioned your sanity, intelligence and parentage to boot.

Someone made the point about whether you can get the overpayments back. Friend of mine bought in Rochford (Essex) a few years ago with a large mortgage. He overpaid all the time. When he lost his job his payout lasted about 8 months and he was on the verge of eviction. As it happened he got a new job in the end and all was well, but if he had retained some of the overpayments it would have been an additional cushion against unemployment and inability to meet the mortgage. When he fell behind on the mortgage he was about 4 years "ahead" but that cut no ice at all - the lender still threatened reposession if the monthly payments were not kept up.

Edited by HPC Convert
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I would also ask whether people whom are bulls or bears (or neither) would tell me whether they are home-owners or not when they reply to this post, and if they are, when they bought their properties.

This will help me understand their points of view, as I know for a fact there are many disgruntled bears on here simply wishing and longing for a house price crash, whose view will be biased.

Also, ignorant steve, if I listened to you and other people on this site, to move into the place I own now, would have cost me £40k extra, which would have been over £200 per more than my present repayments on my current deal! Good job I'm ignorant hey!!!

Thanks

Bear here. Bought a flat in 1991, a small house in 1994, and our current house in 1999. Got caught out in the last crash to the tune of £30K of negative equity and don't intend to repeat the mistake thanks.

Mortgage in 1999 was £90K. We remortgaged about 3 years ago onto a fully flexible product, allowing us to overpay, take payment holidays etc. Due to substantial overpayment, we've knocked it down to £56K, and are currently overpaying by £600/month+lump sums. We'll be mortgage free in 36 months at the current rate.

Given your disposable income, it's a no brainer. Keep a slush fund of a few thousand in a high interest account for emergencies, and then take every penny you can of that mortgage. There's really nothing else you can do with your money that's more interest rate/tax efficient.

Either look at it as reducing your debt or saving for your next house.

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Having been thumped in the last crash (my house has now recovered it's lost equity) I would in your position do three things, pay some more off the mortgage, increase the rainy day fund, at least as a cash fund you have more control over it and spend a little more on some fun. :)

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If there is a crash, I would obviously prefer to have my money protected in savings accounts, however my mortgage payments, although still easily affordable, will be a lot higher, particuarly if the interest rates rise much further.

Help and advice please!

I am just not sure what to do! Help!

This is a no brainer. Over pay it all into the mortgage. Assuming you are a higher rate tax payer this will stop you having to pay 40% on your savings.

As you are overpaying if there is a crash you will still have instant access to your overpayments. Overpayments are flexible and your money will work much harder for you in your mortgage than in savings.

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Someone made the point about whether you can get the overpayments back. Friend of mine bought in Rochford (Essex) a few years ago with a large mortgage. He overpaid all the time. When he lost his job his payout lasted about 8 months and he was on the verge of eviction. As it happened he got a new job in the end and all was well, but if he had retained some of the overpayments it would have been an additional cushion against unemployment and inability to meet the mortgage. When he fell behind on the mortgage he was about 4 years "ahead" but that cut no ice at all - the lender still threatened reposession if the monthly payments were not kept up.

I don't understand that. He could have just taken out all his overpayments and drip fed them back in if he was that far ahead but it doesn't sound right.

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Guest Cletus VanDamme

I don't wish to be rude, but I always find it a bit odd when a clearly quite well-off individual (i.e. with £1200 month-on-month disposable income twiddling its thumbs with nothing to do), in a self-proclaimed recession-proof job comes onto a forum such as this asking for financial advice.

Surely anyone with that sort of money left over at the end of each month is smart enough a) to work it out for themselves B) pay a couple of hundred quid for proper financial advice.

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You'll be much better off asking this in the mortgages board on money saving expert.

Although it is over supplied with numpties there are a lot a seriouslyy clued up people on there and real mortgage advisors too.

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