MSE overpayment calculator suggesting it is better to overpay a 3% mortgage than save interest at 4.5%

[honoluluwindow]

@rnblessings I think this could explain though I think it’s better to compare to the lower mortgage term which is essentially one of the main benefits along with interest savings from overpaying.

If we were to compare to the 25 years, the mortgage balance would stop at £0 and the savings would of course rise to give you a considerable balance at the end.

Well my take on this, and it might be wrong, is that it would be unfair to stop the mortgage side at this point. You could keep saving your monthly repayment and/or the interest you saved by paying early.

Feeling like there’s more to this than these calculators.

 

[sophia89]

@honoluluwindow Yes I agree, the "Compare to savings" part doesn't seem to be calculating correctly.

I plugged in 5% interest rate (just as a nice round number), £200 savings per month, and over the course of 22 yrs 4 months it claims you'd make £45,093 in interest. The actual figure is more like £98k so something in their calculation seems to be going wrong.

 

[dungmarketing418]

@sophia89 Wouldn't 98k be the investment value including the capital you saved, whereas the 45k would be the interest earned.

 

[sophia89]

@dungmarketing418 Ah yes that looks right. It's just talking about the interest you earn.

 

[stargrl232]

@sophia89 £98k would be your capital + interest, not just the interest.

 

[honoluluwindow]

@sophia89 Hmm that’s interesting, can you post the exact amounts you put in for mortgage value etc too, I’m trying to figure out what their calculator is doing wrong.

 

[sophia89]

@honoluluwindow Loan 132k, term 40y, mortgate interest 3.5%.

 

[filu63]

@honoluluwindow Hi, we talked in modmail I'm a bit surprised by some of these responses, that wiki update is definitely overdue.

Does this spreadsheet illustrate it clearly? I would really value your feedback. Edit: or anyone else's, I see you clicking 'Anonymous Turtle', Jackal, Quokka and friends!

https://docs.google.com/spreadsheets/d/1kEB17hQ5bfGSVadWSp-mhRJr0xKVW_PoM9xhSVPJSoQ/edit?usp=sharing

Double edit, I see now that I was responding partly to your older question rather than this post. Oops, my error there.

 

[honoluluwindow]

@filu63 This seems to illustrate well that in the example I’ve provided, of course the higher savings rate will indeed be better off than overpaying.

Column D difference should ideally describe that it’s the normal mortgage vs overpayment difference.

Also not sure what E38 Interest earned is showing.

 

[filu63]

@honoluluwindow From a quick poke around I'm pretty sure they're making the same error that I misunderstood you to be making - letting the mortgage accrue hypothetical interest for the full term while cutting off the savings interest at the end of the the shorter mortgage term. Would have thought better from them honestly, but equally that whole calculator seems to be built to sell the (very real) benefit of overpaying vs not doing anything, rather than the more fiddly and risky task of super optimising.

 

[filu63]

@honoluluwindow That was a WIP sorry! And yeah you're right, the MSE calculator is weird. I'll see if I can replicate what they're doing tomorrow maybe, otherwise interested to know what you find.

 

[sinead]

@honoluluwindow I've not looked at the calculator but I'm not seeing the value of the equity affected by the property market in any of the responses. Unless I'm missing something the more equity you have the more you benefit from increase in property value which is historically a high rate. Overpayment increases this aspect as well as reducing the loan balance.

Edit - Yeah this is nonsense. Mortgage isn't an equity loan. Sorry!

 

[tolearn]

@sinead

Unless I'm missing something the more equity you have the more you benefit from increase in property value which is historically a high rate

No, your equity doesn't give you any extra benefit when values increase.

Imagine a £100k house secured with a £90k mortgage and £10k equity. The owner has £15k in the bank. If house prices increase by 20%, the the owner has £30k equity plus £15k in the bank, total net worth is £45k.

Imagine the same but the owner pays £15k off that mortgage. Now they have £75k mortgage and a £120k house, Net worth is still £45k either way.

Some investors actually want less equity in each property as it means more leverage.

 

[sinead]

@tolearn you are correct

 

[honoluluwindow]

@sinead This is a good point although it is difficult to input this in a calculator. We also have the issue of this point only being valid when you sell to realise the additional value ie it’s an unrealised/paper gain.

 

[sinead]

@honoluluwindow True, but historically it's a substantially higher rate than the savings rate, and realised a lot faster and more readily than a pension.

 

[rodrigwest]

@honoluluwindow It can be explained by knowing the assumptions. It assumes realistic scenario but it does not look consistent. While your mentioned scenario 4.5% easy access account is unrealistic there are accounts paying like 2%. However. They pay interest only once a year but not monthly ?

Meanhile your mortgage montly payment adds your interest monthly. So that would be a difference.

Its not the same at all as I previously tried to explain

 

[freakonaleash]

@honoluluwindow i paid my mortgage off in 2011, at age 34,

i had 35k outstanding and had about 40k in savings,

for me my only goal was to pay off my mortgage, which would of continued until 2029,

i used the small amount had left to build a nest egg to secure my future, by starting a business,

the mental relief i felt paying off my mortgage was far better than some small amount of interest i could of got at the time,

a think there was a small fine for over paying more than 10% of the outstanding mortgage,

but definitely worth it,

my average monthly payment was £440, so if my interest savings weren't more than £440 i would be out of pocket,

it would be fine earning £133 in interest a month on £40k, but i still had to pay £297 mortgage a month,

whereas paying off the mortgage meant no mortgage to pay and i saved £440 per month,

yes i missed out on interest, but paying down my debts was my main focus, as my 5 year fixed rate deal was ending,

and i am happy to save around £81k in additional mortgage payment over the remaining 18 years of the mortgage.

 

[spacct2]

@freakonaleash Don't remember asking

 

[freakonaleash]

@spacct2 yes but did answer OP question, he has to make the decision, it was clear for me,

salty debt slaves gonna be salty,

it is how the system gets you, it is designed that way,

rebellion can't happen with your nose to the grindstone.