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

[spacct2]

@freakonaleash OP is asking about a calculator and whether he's understanding the result correctly. Not particularly for advice on overpaying vs saving, and especially not what you personally did.

 

[freakonaleash]

@spacct2 OP is assuming interest rates stay high for full 10 years, and mortgage rates don't pump to 8 to 9%, if he isn't fixed for term of the mortgage,

doesn't make my information any less valid, i showed it could be done, and showed yes the savings are nice but it keeps you locked in the mindset of continuing being a debt slave,

especially more important now looking at what the £ dropping versus the interest rate on mortgages did, scary times, some people have to find an extra £400 per month on their new mortgage,

the relief from paying it off completely is far higher than a small amount of savings, you can pay it off and then worry about savings,

and not paying a monthly mortgage will allow your savings to add up so much faster,

people should use it as a life lesson,

the ones who can remove their manacle of all debts should do that and become free,

especially if interest rates go to 6% by next June,

we need to get our heads out of short term just pay the minimum, keep our heads down don't rock the boat,

not save for the future because life got in the way, paying for a worthless degree for the rest of their lives,

we aren't taught about money at school for a reason, we are however trained to be a good employee that doesn't question the system,

the system wants us turned against each other not seeing what is happening,

the biggest wealth transfer in history.

 

[spacct2]

@freakonaleash None of this is relevant to what the OP asked about. OP was checking his understanding of the calculation, which is correct. Everything you've written is incidental and not directly relevant.

Adiós

 

[resjudicata]

@honoluluwindow The way to calculate it is to calculate over the fixed period of mortgage.

I have a 5 year fix, and I have 2 years left on my fixed period, so would calculate over that 5 year period. I’ve been unable to get a decent savings rate for the last 3 years, so overpaying was the better option.

 

[rodrigwest]

@honoluluwindow Ok so your savings account dont pay interest monthly, they pay once a year.

Meanwhile your mortgage adds interest monthly.

Its different. In a way your mortgage compounds interest reduction

 

[newcreation17]

@honoluluwindow

My understanding was that the overpayments are affecting interest on a larger debt balance whereas the savings compound from a smaller balance hence it is better to overpay.

Huh? That makes no sense at all. If you overpay you stop paying interest on what you've overpaid, which doesn't touch the remainder.

 

[honoluluwindow]

@newcreation17 I know, that was my understanding. As I say the comments on UKPF I’ve read recently contradicted this thought which is why I was bemused at the MSE calculator going against what people were saying. I also read the comments and thought, yes, they make sense.

 

[sunnybasa]

@newcreation17 Overpaying stops you paying future interest too because each overpayment reduces the capital balance, and means more of your regular payments go against capital, so you're paying down faster with your regular payments as well as with the overpayment.

 

[newcreation17]

@sunnybasa Paying regularly into a saving account gives you future interest too...

 

[insanelydisturbed]

@honoluluwindow If you’ve got 25 years left on say a 35 year mortgage, the interest to cap repayment ratio will be lower than if you’d just taken out a 25 year mortgage, which the Mse calc may be assuming.

Even so a 1.5% differential should still make a savings account the winner so not sure what’s happened there.

Increased flexibility of savings account is valuable too.

 

[gospel_van]

@honoluluwindow Tax? Not taxed on "mortgage saving".

 

[ralphias]

@honoluluwindow The thing with that, is you can do both. You can save for a year, and then overpay in one lump sum at the end (12 months overpaying in one go) obviously check that this is correct for your mortgage but most are like this.

 

[tolearn]

@honoluluwindow I posted a reply with calculations earlier, but its just occurred to me that the simple flaw is what the calculator is assuming.

It says "The interest saved is £31,559 vs earned in savings of £30,951 resulting in a net £608 gain for overpaying."

But the interest saved comes from paying off the mortgage 10 years earlier. So why is it stating it like if we save instead of overpay, we can't still pay off the mortgage 10 years early and still save £31,559 in interest?!

We plan to do exactly that with our savings, so we will save £31,559 in interest regardless, because whatever we do (overpay or save), we are going to clear the mortgage in 15 years and therefore save that interest.

We basically end up about £14k better off by saving, because not only do we end up clearing the mortgage in 15 years and saving £31,559 in interest, we end up with about £14k in our savings account after using the rest to clear that mortgage. (https://www.reddit.com/r/UKPersonalFinance/comments/xwlfvy/comment/ir9b5wc/?utm\_source=share&utm\_medium=web2x&context=3)

 

[roneal]

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[lidarenee]

@honoluluwindow I may be out of the loop, but where are you going to get anywhere near 4.5% interest on savings?

 

[honoluluwindow]

@lidarenee This was just the example I used on the calculator to test how much of a differential in interest rates would still show overpaying as better off to highlight the calculator was broken.

Rates for savings are rising so not entirely unachievable either.