Mortgage overpayment - real figures included

[triphip2]

I see the concept of mortgage overpayment discussed here a lot so thought I'd put in the result of a recent mortgage lump sum overpayment we did for reference.

Original mortgage: 31 years left, with 344k outstanding at 4.1%, monthly repayment 1.63k

Overpayment lump sum: €45,000

New mortgage: 24 years left, 299k remaining

Future payments saved: 1.63k monthly x seven years = 137k so a total interest saving of 92k. All tax free.

Will ultimately aim to pay it down within 15 years unless I can get on a lower rate. Then the figures above change.

If I had invested the €45,000 instead, what rate of return % would I have to achieve to hit 137k after tax after 15 years? I can't quite work it out but curious as I may do this in future vs the overpayment.

 

[jesuscentered]

@triphip2 I was lucky to buy outside of Dublin in 2016 for €132k - my mortgage was €118,800.

I didn't overpay my mortgage until 2021, when it had reduced to c.€100k, and I cleared it completely in the past 2 and a half years, due to supplementary income and some inheritance.

I saved approx. €30k in interest (according to an online calculator), and paid off my mortgage 17 and a half years early.

To me, the guaranteed saving (compared to the potential risk of investment ) and the prospect of being mortgage free made it the right choice for me.

I could have saved even more interest if I had started to overpay my mortgage earlier. That's the only regret that I have - even a small amount of overpayment at the early stages makes an exponentially bigger difference than in the latter stages of the mortgage, when there is very little to be saved in interest.

 

[tiamia]

@jesuscentered Did you have to pay the lender any fees when you were clearing it completely? And I’m assuming you were on a variable interest rate? I have similar size mortgage and I am considering paying it off in the coming years.

 

[jesuscentered]

@tiamia Yes, I was on the variable rate, of course, in order to be able to clear €100k in 2 and a half years. So, I didn't have to pay any fees.

 

[triphip2]

@jesuscentered Yeah this is one of the reasons I tried to take a lump off it early, felt like it would make the most impact from a savings pov.

 

[jesuscentered]

@triphip2 Yes, absolutely - the way to go. I've met people who've never overpaid their mortgage in 20 years talking about clearing it then. It's great for peace of mind and no longer having a monthly payment I'm sure, but the potential to make substantial savings is long gone at that point. Having said that, some people can't afford to overpay their mortgage or prefer to invest their money, which is fair enough.

 

[dendrobatidae]

@triphip2 I think a very important thing to remember is that overpayment is 100% risk free. Other investment comparisons are usually not without risk. I myself do not gamble. Simply because I've never won any time I did. I chose overpayment based on this alone and do not regret it at all.

 

[captainfarkus]

@dendrobatidae I don't think you understand risk as term when it comes to investing. While there are some people who gamble but call it "investing" (using leverage, putting all their money in a single asset, chase pipedream "investments" etc), when it comes to investing in the stock market etc, the "risk" is simply referring to volatility. But over the long term (especially 24 years), volatility is not really an issue. ie, investing in the stock market for just 2 years could see your money double or half, but the longer the investment period, the closer the investment's average return come to the general "average".

Meanwhile, the "risk" with overpayment is quite significant. What if you need that money between now and repaying the mortgage and then building back up that amount? Overpaying a mortgage is a long-term approach where you are locked in to that initial decision (for decades in the OP's case). That risk needs to be appreciated. Also, when it comes to volatility, interest rates change. If the fall (which they are expected to shortly), then your returns fall drastically, and you could end up even losing money due to inflation.

 

[gentilerain]

@captainfarkus You fail to say what if you need the money right around the time there's a big correction in the market. A smoothed average will give you a positive return in the future but at a single point in time it could be negative. So it's not correct to say volatility isn't an issue

 

[captainfarkus]

@gentilerain But the risk with overpayment is bigger.

For example - let's say 10 years down the road, the OP needs 50K for an improvement to his house. Now, his stock market investment might have been worth 135K after year 9, but then there is crash in year 10 and it is now only worth 90K. They have the choice to cash in 50K, or some of it, or just wait another year or 2 for it to recover and then sell 50K worth.

However, if that money is tied up in equity in their home, then they have zero choice. Not one cent is available.

With any decent stock market investment, you will typically only be at risk of a negative return in the first few years. After that, any crash/correction is simply reducing profits. Which is why "time in the markets" is one of the key factors in reducing risk/volatility.

 

[gentilerain]

@captainfarkus Your LTV will be low so you could do an equity release. It doesn't have to be one or the other either, can be a mixture of both.

 

[rosyy57]

@triphip2 It’s a time horizon issue. But the answer is, like for like. Pension is the best return, investing in the market like gives you a slight advantage over mortgage repayment but has risk; paying down the mortgage is zero risk and guaranteed results.

What I’d suggest is doing a combination of all three.

 

[triphip2]

@rosyy57 Totally agree, have the pension maxed out for my age so OK on that front.

Just can't really figure out what return I'd have to hit to make a long term investment better than the overpayment.

 

[rosyy57]

@triphip2 average S&P returns were 10%, it’s 12% over the last 10 years. So if you are paying 40% on an ETF 8% probably beats the mortgage.

However rates will drop and you get a better rate at lower L2V ratio on the mortgage.

Assuming you have no other debt.

Look at pre paying for stuff. Bulk buying is overlooked for return on capital (booze, toilet paper etc).

Once you pay off the mortgage you will put it in the market so the difference is minor. Psychologically though having no mortgage is incredibly freeing and removes stresses about earning.

 

[triphip2]

@rosyy57 Any particular place you bulk buy? Interesting!

 

[rosyy57]

@triphip2 Depends on the product I suppose. Examples: Wine run on the ferry to France if you like wine. Musgraves for frozen food, sacks of rice, pasta etc. like nice whiskey? Cask investments if you have the patience.

 

[southernyankee]

@rosyy57 So your ideas include getting the ferry to France to buy wine and investing in a ponzi scheme like whiskey investments?
How about NOT buying stuff you don't need in the first place?
And unless you own a restaurant nobody really needs to be buying rice and pasta by the sack.

 

[rosyy57]

@southernyankee No more like if you know you will be buying stuff anyway, or going to France / Northern Ireland anyway, plan ahead.

I’m meaning this is the most simplistic way. For example One person will buy a can of coke every time they get a take away at 2.50 a can. Another would buy a 6pack of cokes for a €1 a can in the supermarket. And another might buy a 24 pack for €0.60 at a wholesale place.

Effectively this latter is getting a 4x return for the same utility on their money.

It’s harder to earn the money than deploy it sensibly.

Birthday cards are another example. I bulk buy them when in the wholesalers (not going out of my way as I’m there anyway) and have a stash at home. €0.50 a card wholesale vs €4 a card when I’m rushing to yet another kids bday. 8x return in a matter of a few months.

And musgraves etc sell smaller portions than sacks.

 

[orion3003]

@triphip2 on assumption you reinvested any interest (and without tax payable) a 4% annual return would net you 106,791 (excluding your 45k) after 31 years.

5.75% gross annual return, deducting 33% tax each year would then net you 100K - after tax and excluding your initial 45K.

 

[captainfarkus]

@rosyy57 Investing in the market is vastly superior to mortgage overpayments. See my post on this page with the figures. As for the pension.

Yes, it is likely to be the best, but it all depends on how much you are on track to have in your final pot. If pot is looking like it will hit the max tax-free lump sum and an annual drawdown/annuity at the higher rate of tax, then the only tax advantage is the tax free investment returns. But this is countered by the high pension charges, poor performance compared to direct investing as well as the fact that money is locked away until retirement, so it really all comes down to the specifics of each unique individual's circumstances.