Mortgage - overpay sporadically, or save then lump-sum overpay?

zenbuffy

Hi,

I'm in the lucky position to have bought a house last year for a very good price. I currently have a mortgage for less than 130,000 with AIB, on a variable rate of 4.57% over 35 years.

Earlier this year, I used my bonus to clear an existing car loan, and this month, I'll pay the last payment for my distance learning course. This has put about 5-600 a month extra back into my pocket. I am saving, and will be dedicating some of this money to a savings account, but I'm also considering overpaying my mortgage, with a view to reducing the overall term, and paying it off long before I'm old (I'm 28 now).

I know that AIB allow lump sum overpayments, I've seen and read the form on their site, and I know that I won't be charged fees for overpaying or paying off early because I'm on a variable rate. I'd like to be sensible with my money, however, and get the most out of it while my own personal and financial situation is sound.

So, imagining I can dedicate an extra 100 a month to paying my mortgage - is it better to store these extra bits and pieces in a dedicated savings account, and then make one lump sum payment, or is it better to increase the amount I pay each month? If I increase the amount I pay, and my financial situation changes, will AIB allow me to reduce it to the original amount? (I guess probably not!). Does AIB, or any bank, allow you to make ad-hoc additional mortgage payments (i.e. if I find myself with an additional extra 100, to just transfer it on). I do have an annual bonus from work, so if I continue to earn it, I will likely be devoting some of it to overpaying my mortgage also, as a lump sum after it's paid to me.

Pablo Sanchez

If you can afford to overpay, i would say do so on a monthly basis rather than siphoning the funds into a savings account, as your not going to get a savings account that pays you more than the 4.57% rate of your mortgage net of DIRT.

You may be able to transfer funds direct from your AIB current account into your mortgage account through online banking if you want to make ad hoc payments....you would need to confirm this with AIB, i know that other banks allow this.

coylemj

Pablo Sanchez wrote: »

If you can afford to overpay, i would say do so on a monthly basis rather than siphoning the funds into a savings account, as your not going to get a savings account that pays you more than the 4.57% rate of your mortgage net of DIRT.

+1 Interest on a variable rate loan is calculated on a daily basis, pay the money off the mortgage as soon as you have it.

Pablo Sanchez wrote: »

You may be able to transfer funds direct from your AIB current account into your mortgage account through online banking if you want to make ad hoc payments....you would need to confirm this with AIB, i know that other banks allow this.

+1 Some banks don't allow you to see the mortgage a/c on your online banking screen i.e. you can't see a list of transactions on the a/c but at the very least you should be able to register it as a 'payee' a/c in which case you will be able to electronically transfer money to it.

gordongekko

Never ever ever overpay. I know of people who did that during the boom. It reduced their payment term but now their wages are cut and the bank is insisting that they continue the increase payments and won't entertain increasing the repayment term back to the original term.

NIMAN

gordongekko wrote: »

Never ever ever overpay. I know of people who did that during the boom. It reduced their payment term but now their wages are cut and the bank is insisting that they continue the increase payments and won't entertain increasing the repayment term back to the original term.

Making occasional lump sums is the way around this problem.

coylemj

gordongekko wrote: »

Never ever ever overpay. I know of people who did that during the boom. It reduced their payment term but now their wages are cut and the bank is insisting that they continue the increase payments and won't entertain increasing the repayment term back to the original term.

You may 'know of' such people but your advice is wrong.

In the OP's case, he doesn't tell the bank that he wants to increase the scheduled monthly payment, he simply makes one-off payments when it suits him and that will not affect the schedule of the agreed monthly payments. He has said that his bank allows lump sum payments.

Your friends may have found that they could afford a higher montly payment, they may then have agreed a new schedule with the bank because often a shorter term loan can attract a lower rate of interest. In that case the bank would have been within their rights to insist that the higher monthly repayments were maintained.

At no stage do voluntary one-off lump sum payments suddenly jack up the scheduled monthly payments under the original terms of the mortgage.

As long as the interest rate is variable, there should be no problem lodging one-off lump sums to the account to reduce the interest bill and shorten the life of the loan.

zenbuffy

Thanks for the advice. I think I need to make some calls to AIB and get myself set up. I don't have a current account with them, and am in the process of switching banks, so I'll see if I can get set up with AIB online banking so I can track the balance of my mortgage, and then see if they'll allow me to make ad-hoc payments via EFT.

If I do make an ad-hoc payment (again, assuming an amount of 100 as a base) after my usual monthly payment (on the 19th), does that all go off the capital, or the interest, or is it split between both? Is there a minimum amount that one should look to pay in order to avoid simply repaying interest? Or am I thinking about that all wrong?

Mezcita

zenbuffy wrote: »

If I do make an ad-hoc payment (again, assuming an amount of 100 as a base) after my usual monthly payment (on the 19th), does that all go off the capital, or the interest, or is it split between both? Is there a minimum amount that one should look to pay in order to avoid simply repaying interest? Or am I thinking about that all wrong?

Any over payment you make will be taken off the total amount owed. This in turn will lower the amount of interest you will have to pay on the amount you owe as you are basically reducing the time that it will take you to pay off the mortgage.

Obviously a bigger over payment each month means a larger reduction in the long term interest you will end up paying. But that shouldn't stop you from doing it. Regular small payments will end up saving you a fair chunk of money in interest payments but also crucially shorten the time that it will take you to pay the mortgage off.

OU812

I know I'd be telling the bank what to do if they were insisting on larger payments.

Assuming there was no agreement in place, they'd be lucky to get what they were getting off me.

dmire

I overpaid my mortgage by X amount on a monthly basis (came out of my bank account with the regular mortgage payment as one amount) for the past year and half, wrote to the bank (PTSB) recently and cancelled the overpayment. PTSB did so the following month

dobsdave

If you just overpay on a monthly basis, does it just not register as a credit for future payments?
Do you have to inform the bank that the extra money in your account needs to be put against the principal?
Im with EBS and anytime I overpay, it just shows as a credit.
i.e. overpay by 50e and it shows my account as 50 in credit.

Nervous Wreck

dobsdave wrote: »

If you just overpay on a monthly basis, does it just not register as a credit for future payments?
Do you have to inform the bank that the extra money in your account needs to be put against the principal?
Im with EBS and anytime I overpay, it just shows as a credit.
i.e. overpay by 50e and it shows my account as 50 in credit.

Yes, it appears as a credit that you can use to make future underpayments or lump sums but you do have to inform your mtg provider what to do with the credit.

pinkbear

I would definitely overpay as much as you can and try to get your mortgage down as quickly as possible. You really see the difference with a few extra payments, as more and more of your money goes to paying the capital rather than just bloody interest. That'll give you the incentive to keep going.

Hubby & I bought my house at in '95 (mortgage was 70k so I totally know my situation doesn't match most peoples' nowadays), and was in a position to overpay. Initially it was just 20 quid a month or so and we increased it a bit over time, but whenever we got bonuses / redundancies from work put those in too (say 1-2k twice a year from me, and about three 5k injections from him). We never even considered keeping a bonus, regardless of how big or small it was. With each mortgage statement the % interest I was paying was dropping dramatically. We were mortgage free within 9 years. I know that times are very different now and people have much bigger mortgages, but the idea behind it is the same. We aren't huge earners by any means, just people who prioritised over-paying the mortgage instead of fancy holidays or cars, and were lucky enough to be mortgage free in our mid 30's. I know so many people who bought at the same time as us, earned more, and still have mortgages.

rainbowtrout

I'm in a similar situation pinkbear. I bought my house in 2003 with a mortage of 145k. When I got lump sum payments for extra work etc i put them towards the mortgage. Because I'm on a tracker the monthly payments reduced accordingly, so I used to pay in the difference every month to keep up the original payment, e.g. if my monthly payment was 600 and the lump sum one year brought the remaining payments down to 550, i paid in the extra 50 per month, or saved it for a couple of months and then paid in another lump sum, so the monthly payments never went below the original one way or the other, along with the bonus payments, i will be mortgage free a year from now. Am also mid 30s. I haven't had to make major sacrifices overall, but it's nice to know that any bonuses I have a year from now, and what I would be spending on the montly mortgage payment this time next year will be mine and not paying off the house.

NewApproach

Rainbowtrout/pink bear, would you not consider that overpaying your mortgage was a mistake looking back, when you now see that people who underpaid are getting mortgage writedowns?

wexfordman2

I gotta letter from ics the the other week telling me I could if I wanted make overpayment and reduce the interest or term of the mortgage.

Thought it was funny, as I'm on a tracker and the mortgage is quite low, so it would make much more sense for me to save rather than repay. Methinks they are targeting People on trackers to overpay

MarkR

It's not a trick, if you over pay you are reducing your costs in the long run. I've been doing it for as long as I've had my mortgage. You can work it out here.

http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator#result

rainbowtrout

NewApproach wrote: »

Rainbowtrout/pink bear, would you not consider that overpaying your mortgage was a mistake looking back, when you now see that people who underpaid are getting mortgage writedowns?

No because it was a loan I took out and I'm capable of repaying. I'm not looking to default on my loan. Other peoples inability to pay does not affect my ability to pay. If you're suggesting I should seek a write down just to try and get out of paying my debts I think that's more indicative of the way you view personal finance than I do. I'll be mortgage free 12 months from now and will have a lot of financial freedom as a result.

Pablo Sanchez

NewApproach wrote: »

Rainbowtrout/pink bear, would you not consider that overpaying your mortgage was a mistake looking back, when you now see that people who underpaid are getting mortgage writedowns?

You mean to consciously put yourself in arrears in a hope to defraud the lender?

rainbowtrout

wexfordman2 wrote: »

I gotta letter from ics the the other week telling me I could if I wanted make overpayment and reduce the interest or term of the mortgage.

Thought it was funny, as I'm on a tracker and the mortgage is quite low, so it would make much more sense for me to save rather than repay. Methinks they are targeting People on trackers to overpay

Perhaps they are. I have never received a letter of that type from my bank. I did out a spreadsheet for my repayments, I can see the effect of making an extra repayment and what effect it will have on subsequent repayments and the interest owed on the balance. It works the same as an online mortgage calculator, and while I could have been saving that money over the last number of years, 12 months from now my only financial responsibilities will be monthly bills: electricity, heating, car tax, insurance, phone etc. Being mortgage free is an intangible bonus and I feel I will be able to save a lot more in the long run by clearing this debt down as soon as possible.

To put it in perspective, when I add up all the mortgage payments I have made and will make over the next year, and compare that total to the total payments I would have made over the original term of the mortgage had I left it run the way it was supposed to, the difference is about €80k. There's no way I would have saved that kind of money in the last 10 years or so. so overpaying for 8 or 9 years is far better for me in the long run.

zenbuffy

pinkbear wrote: »

Hubby & I bought my house at in '95 (mortgage was 70k so I totally know my situation doesn't match most peoples' nowadays), and was in a position to overpay. Initially it was just 20 quid a month or so and we increased it a bit over time, but whenever we got bonuses / redundancies from work put those in too (say 1-2k twice a year from me, and about three 5k injections from him). We never even considered keeping a bonus, regardless of how big or small it was. With each mortgage statement the % interest I was paying was dropping dramatically. We were mortgage free within 9 years.

rainbowtrout wrote: »

Because I'm on a tracker the monthly payments reduced accordingly, so I used to pay in the difference every month to keep up the original payment, e.g. if my monthly payment was 600 and the lump sum one year brought the remaining payments down to 550, i paid in the extra 50 per month, or saved it for a couple of months and then paid in another lump sum, so the monthly payments never went below the original one way or the other, along with the bonus payments, i will be mortgage free a year from now. Am also mid 30s. I haven't had to make major sacrifices overall, but it's nice to know that any bonuses I have a year from now, and what I would be spending on the montly mortgage payment this time next year will be mine and not paying off the house.

Glad to hear of some other people who managed to overpay their way to freedom early, makes me feel like it's more possible. As I'm living alone, and have very few expenses (tiny electricity bill, etc), I'm definitely hoping that I might be mortgage free before I hit 40. Some people see it as a bit of a pipe dream, but I really do think it's possible, as my current payment is so low anyway, so it won't be too much of a sacrifice for me to add an extra 100 on each month, and ad-hoc payments.

zenbuffy

Hmm, it seems that overpaying at AIB is not as straightforward as I might have hoped. I can write to them and ask them to amend my direct debit amount to overpay, and this would shorten the term of the loan. This will give me a bit less flexibility, though, if I find myself in a position where I'm a bit financially tight in a given month, so I need to think hard about that one.

Apparently, with any other ad-hoc payments, they would adjust my monthly payment, not adjust my term, unless I sent in something in writing to ask, in relation to a given payment, for a term adjust rather than monthly payment adjust, and it's not possible to put some sort of note on file to say that all ad-hoc payments should be used to adjust the term - so I'd have to write in every single time.

With that new info in mind, does anyone have any extra advice?

AlmightyCushion

zenbuffy wrote: »

Hmm, it seems that overpaying at AIB is not as straightforward as I might have hoped. I can write to them and ask them to amend my direct debit amount to overpay, and this would shorten the term of the loan. This will give me a bit less flexibility, though, if I find myself in a position where I'm a bit financially tight in a given month, so I need to think hard about that one.

Apparently, with any other ad-hoc payments, they would adjust my monthly payment, not adjust my term, unless I sent in something in writing to ask, in relation to a given payment, for a term adjust rather than monthly payment adjust, and it's not possible to put some sort of note on file to say that all ad-hoc payments should be used to adjust the term - so I'd have to write in every single time.

With that new info in mind, does anyone have any extra advice?

Keep a few hundred in an emergency savings account and that will give you a few months buffer from the increased payments. Ideally you should have more than a few hundred in an emergency account.

billyhead

Quick question in relation to this. I have a mortgage with the council that according to my deeds is for a fixed duration i.e I took it out in 2006 on a 20 year term. I cannot reduce this term but would it be advised to pay off lump sums into the mortgage account i.e 20000 to reduce the overall amount even though the length of the mortage has only ben reduced by 7 years now i.e 2006-2013. The mortgage was initially for €120,000 and is apporx €90000 now. Or should I just invest this amount into a long term investment account such as the National Solidairy bond. Any advice would be appreciated

rainbowtrout

zenbuffy wrote: »

Hmm, it seems that overpaying at AIB is not as straightforward as I might have hoped. I can write to them and ask them to amend my direct debit amount to overpay, and this would shorten the term of the loan. This will give me a bit less flexibility, though, if I find myself in a position where I'm a bit financially tight in a given month, so I need to think hard about that one.

Apparently, with any other ad-hoc payments, they would adjust my monthly payment, not adjust my term, unless I sent in something in writing to ask, in relation to a given payment, for a term adjust rather than monthly payment adjust, and it's not possible to put some sort of note on file to say that all ad-hoc payments should be used to adjust the term - so I'd have to write in every single time.

With that new info in mind, does anyone have any extra advice?

I would say ignore the term thing for the moment. Realistically it is just a time frame on paper, one which you are already committed to. If your repayments are say 1000 per month at the moment and this month you go in and make an extra repayment of 2000 on top of the normal monthly payment, it will reduce the remaining monthly payments, lets say for arguments sake to 950 per month. Well next month you can let the bank take 950 out of your bank account and then make an extra payment over the counter of 50 (and anything extra you had planned on overpaying). The repayment will keep reducing every month and the proportion that you are making as an overpayment will increase. The other way of doing this is to save up the extra 50s and then make one large overpayment every few months.

You can still have a time frame in mind in which to repay the loan without adjusting the term. The advantage is that if you got to a point say where the overpayments had reduced your monthly repayment from 1000 to 600 and you then took a pay cut at work, well then you would also have leeway in that you could just leave the repayments at 600 and make no overpayments again until you are in a position to do so.

Currently the actual monthly repayment I'm making only makes up one third of the money paid towards my mortgage each month, the rest is the over payment. I haven't bothered adjusting the term the last few years, not worth the hassle with the paperwork and if I need the money for something else, it simply means there will be no overpayment in a given month which is not a big deal.

hfallada

Susie Orman has a show on CNN, where she gives financial advice. She says everyone should have a 10 month wages emergency fund, so if you lose your job tomorrow you aren't ****ed basically( but don't forgot there is no social welfare as such in the us and 3/4 months is probably enough in Ireland). Then she says pay off your mortgage.

OP don't forgot you are on a variable mortgage and you are better paying off your mortgage now when the interest is "low". The ECB will probably keep the rates the same for the next 2/3 years at least. But when the rates start rising again. Your repayment will probably be mostly interest. Make over repayments now, so in the future you are mostly repaying capital.

run_Forrest_run

wexfordman2 wrote: »

I gotta letter from ics the the other week telling me I could if I wanted make overpayment and reduce the interest or term of the mortgage.

Thought it was funny, as I'm on a tracker and the mortgage is quite low, so it would make much more sense for me to save rather than repay. Methinks they are targeting People on trackers to overpay

I also got this from ICS. I got another letter complete with examples on how I save with my end of year statement. Very tempting...if only I could cut my childcare bills now

Ros1234

Wouldn't now be a good time to pay off capital in your mortgage with the interest rates low?

I'm not sure and not in a position to do so, but saving accounts are only offering max 3% at the moment. (they were as high as 8% back in 08)

Nobody knows how long the ECB will remain low for, so I suppose it's a bit of guess either way.

frebel

zenbuffy wrote: »

Glad to hear of some other people who managed to overpay their way to freedom early, makes me feel like it's more possible. As I'm living alone, and have very few expenses (tiny electricity bill, etc), I'm definitely hoping that I might be mortgage free before I hit 40. Some people see it as a bit of a pipe dream, but I really do think it's possible, as my current payment is so low anyway, so it won't be too much of a sacrifice for me to add an extra 100 on each month, and ad-hoc payments.

Interesting reading here as I'm in a similar situation. I know these posts are from last year but good to hear something positive around mortgages.

I have a 28 year mortgage where I put down a 20% deposit now owing just under 170k. I'm just 6 months in and made an extra payment of 2500k last week. I have come into an extra income lately and have a renter as well. I realise I'm lucky not to have a huge mortgage but I'm also determined to get it down.

Making a 2500 overpayment with AIB was easy in fairness. Just sent off form and it was done in days. Having my mortgage account up on my online banking had a big effect on me - I nearly puked when I saw the first 1600 euro interest charge.

I think we can all forget that your mortage interest alone often works out at 40% over 30 years.

Maybe someone might make a further comment but I like the security of building up a little lump of savings (making sure I have more to fall back on) and then putting it into the mortage.

Interest rates will go up so don't want to be in a situation where my monthly mortgage payments will put me under pressure. I can always adjust the lump overpayments. Although even raising your payments by a tenner a month can have huge reductions over the term

At the moment, if I can put it 5k each year (roughly 416 a month) it will reduce mortgage almost in half making a saving of 65k.

Even I had the brains and balls, I could never make a clear 65k in any investment. I know I'm lucky to be able to afford overpayments now (I might not in the future) but I'm more asking "Can I afford NOT to make overpayments?" with that kind of saving.

Would love some more inspiration. There was a UK TV series before called Pay off your Mortage in 2 years but no real chance of it now apart from one youtube clip

bilbot79

Have a 30 year mortgage with kbc and make overpayment via online banking. Very easy. On mortgage of 176, payment amount began as 825. Three some spare cash at it and pay off total of 2700 per month. Got a 0.2 rate reduction and now the payment amount is 763e.

I've paid around 3k in interest so far but to reach the same balance without any overpayments would take 4 years and cost 24k in interest