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Overpaying mortgage

VonLuck

This may seem like a basic question, but would appreciate some guidance.

Hypothetical scenario. If I have a €200k mortgage, say 5 year fixed at 2.65%, repayments €805 approx. I've estimated the interest payments would be maybe around €450 to start and decreasing as the years go on.

Bank states that 10% overpayment of the mortgage balance is permitted. Let's say that I increase the repayments to €1000 (which would be less than 10% of the mortgage balance over 5 years). Does this have any effect on the interest paid initially seeing as you are reducing the capital to be paid off by an additional €195 every month?

I hope I'm making sense. Just trying to figure out if it's best to overpay a mortgage earlier and reduce interest payments at the initial stages or else invest the money I would have used for overpaying into something else.

If it is the case that interest payments would reduce, how would I calculate what they would be?

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VonLuck

Klonker wrote: »

Usually when the banks say you can overpay by 10%, they mean of your monthly mortgage payment. So in your example you could overpay by €80.50 (805.00 * 10%). I'd double check that if I was you.

I read generally that it was 10% of the balance, but I will certainly look into it.

Reading the terms on KBC's website they say the following:

"The Borrower is entitled to make payments in excess of those required under the terms of the agreement however if an overpayment is made during a Fixed Rate Period a break funding fee, calculated in accordance with the formula set out in the statutory warnings section of this letter of offer, may be payable".

By the sounds of it, I will be charged for overpayments during the fixed period, but the phrase "may be payable" leaves it a bit vague. There is no other mention of it in the terms, so I will have to investigate further.

The only reason I'm querying this is that I'm trying to figure out if it's better to overpay my mortgage or else put this cash into a savings/investment account. Essentially I would have to earn greater than 2.65% after tax for saving/investing to be a better option base on the example in my original post. Am I right in saying this? Sounds like this would be hard to achieve.

Klonker

Usually when the banks say you can overpay by 10%, they mean of your monthly mortgage payment. So in your example you could overpay by €80.50 (805.00 * 10%). I'd double check that if I was you.

How overpayment works is at first you will pay the same interest ((200k * 2.85%)/12(monthly interest))). But because you are paying 10‰ extra, this will reduce the principal by more than if you didn't pay the extra. Then the next month when the interest portion of payment is to be calculated on the outstanding principal, this will be smaller as there is less principal remaining. Your mortgage payment will remain same meaning you will pay more principal and less interest every month and paying an extra 10% will speed this up.

Hope that makes sense, I'm not the best at explaining.

cruizer101

Overpaying early in a mortgage can significantly reduce the amount of interest you pay. On my own mortgage I overpay by 400 a month and in a year that has saved 5,424.

Are you better to overpay or invest elsewhere? Very hard to say for certain.
One thing to consider is overpaying on a mortgage is equivalent to putting the same money into a saving account giving the same interest rate as your mortgage. So any alternative should give you a better rate of return than that. A lot of investments might have the potential to do that but they are not necessarily guaranteed.

Depending on circumstances paying into a pension plan can be one of the best investments purely from the point of view of you get to pay it before tax.

kippy

VonLuck wrote: »

This may seem like a basic question, but would appreciate some guidance.

Hypothetical scenario. If I have a €200k mortgage, say 5 year fixed at 2.65%, repayments €805 approx. I've estimated the interest payments would be maybe around €450 to start and decreasing as the years go on.

Bank states that 10% overpayment of the mortgage balance is permitted. Let's say that I increase the repayments to €1000 (which would be less than 10% of the mortgage balance over 5 years). Does this have any effect on the interest paid initially seeing as you are reducing the capital to be paid off by an additional €195 every month?

I hope I'm making sense. Just trying to figure out if it's best to overpay a mortgage earlier and reduce interest payments at the initial stages or else invest the money I would have used for overpaying into something else.

If it is the case that interest payments would reduce, how would I calculate what they would be?

Decent calculator here:
https://m.drcalculator.com/mortgage/
But it may be worth getting some independent advise on how best to use your finances.

NoviGlitzko

Find an accountant who your family or extended family trusts - ask them for advice mate.

hmmm

With most banks you can choose whether the overpayment should reduce the term (e.g. pay the loan off a few years earlier but keeping the same monthly repayment) or reduce the monthly repayment itself, but keeping the term the same. Best to ask them directly.

There's a few "amortisation calculators" on the web which will help you produce a repayment schedule.