118. Should I overpay my mortgage?

We discuss the age-old dilemma of whether to overpay your mortgage or not.

- Debt management: Understanding the importance of addressing other debts before focusing on your mortgage.
- Establishing an emergency fund: The significance of having a financial cushion for unexpected expenses.
- Mortgage provider policies: Exploring the limitations and potential penalties for overpaying your mortgage.
- Calculating the interest rate differentials: Michelle walks through the math behind comparing mortgage interest rates and savings rates to determine the most effective use of your money.
- Setting up overpayments: Practical tips on setting up regular overpayments and the benefits of automation.
- Offset mortgages: Michelle explains the nuances of offset mortgages and the considerations when deciding on overpayments.

Resources:
- Debt Payoff Calculator
- Sprive app
- MSE website

YOUR HOST
Julie Flynn is an experienced independent financial adviser and financial coach. Justice and equality drive Julie. Which is why she’s spent years studying and researching how stress affects our financial decision making.

Julie is best known for her work with women who have lost their partner and coaching financial services business who want to implement fair and transparent charges.
Ebb & Flow Financial Coaching | Bree Wealth & Tax | Instagram


CO-HOSTS
Emily Pool is a Financial Planner and Will Writer. She is passionate about empowering people to invest their wealth (pensions and savings) sustainably and in line with their personal values.

Michelle Lambell  started her career in financial services as a Stockbroker in 1999 undertaking both advisory and discretionary investment management. Today she is a Chartered Financial Planner, specialising in retirement planning advice, pensions and investments and a Certified Financial Coach. 

Sara Walker is a financial planner and financial coach with 33 years’ experience in financial services. She wants all women to feel financially confident and uses her professional and life experiences to support and educate women over 40 so they in turn feel able to support and be role models for the younger women in their lives.

Jennifer O'Neil is a mortgage and protection specialist and director of Athena Mortgages. Having been in the industry since 2014 Jennifer decided to set up a company in 2020 that suited her core values as a broker – integrity, service, honesty and continuous improvement.
LinkedIn | Instagram | Facebook

Transcript

Julie [00:00:26]:

Welcome back to this new episode of the Women and Money Cafe. Now today, we're going to do our best answer a question that we hear quite often, and that is it's a really simple question that people ask us is, should I be overpaying my mortgage? Right. And to put this into context, we're just going to talk you through all the things that you need to consider Before you actually go and pay off your mortgage in this episode from an overpayment point of view. Now for the purpose of the episode, we're just talking about the op alternative is you put the money in your savings account or you use it to pay off your mortgage. Now I know that some of you, Emily, I sit in there thinking, yeah. But what about my pension? And what about my ISER? And what about everything else? Like, yeah, these are all really good questions, but we're going to do that in the next episode. But today is just really simple. Do I keep my money in my savings account, or do I use some of it to pay off my mortgage? So with me today, rather eagerly, looking forward to chatting about pensions.

Julie [00:01:26]:

I've got Emily on the sofa with me.

Emily [00:01:28]:

Hi, Julie. Hi, Michelle.

Julie [00:01:30]:

Alright. And at the other end of the sofa, I've got Michelle.

Michelle [00:01:34]:

Hi, Julie. Hi, Emily.

Julie [00:01:36]:

Alright. Okay, ladies. Thank you for joining us today. So I think is it fair to say this is fairly common question that we get, isn't it?

Michelle [00:01:42]:

Yeah.

Emily [00:01:43]:

Yeah. Sometimes you don't get the question. Sometimes the client just does it anyway, and then you think, why didn't you come and talk to me about it?

Julie [00:01:53]:

I think it's because it's quite easy to do now, isn't it? I know that. I do it. And just the preparation for the episode, I sat there. I did some quick numbers just to see why you know, what the potential benefits of it are. So to give you an idea of why some people are doing this, if it's not you already, is let's say you've got a 200,000 pound mortgage, and it's got a 25 year term, and you've got an interest rate of 4 a half percent. If you were to overpay 200 pound a month on top of what your existing payment is, that’s shaving 6 years off your mortgage term. And that's 6 years that you're not paying interest on the mortgage. So the total saving is about £36,000.

Julie [00:02:43]:

So that's not an insignificant Sum of money. As I say, what we're going to do is talk you through all the different things that you might want to take into consideration before making the decision that you're going to take some of your money from savings or some of your monthly income, and you're going to overpay your mortgage. So to kick us off, Michelle, what do you think are some of the things that people should be considering before they do this?

Michelle [00:03:11]:

So for me, the first Money I would always raise with anybody, a friend, a client, anybody who's got this question is, do you have any other debt? So your mortgage is obviously your largest Debt and that for some people can be quite a burden in itself Women they sort of then don't compare it to more short term debt such as credit cards or overdrafts or loans. And those shorter term debts can have sort of really high levels of interest. You know, credit cards, 28, 29, 30%, same with loans. And if there is other debt in the picture, it's always, for me, a priority. You clear those down 1st, because actually you're saving the interest. If you've got a mortgage with an interest rate of 6%, Say, and you're paying 30% on your credit card. For me, you wanted to get rid of that most expensive debt first. So for me, that's the 1st place I would look, and I would go to.

Michelle [00:04:05]:

And if you have a few forms of short term debt, so you've got a loan, you've got a credit card, you've got an overdraft, you know, an overdraft, think it's about 40% interest, isn't it? If you've got an overdraft, if you're over.

Julie [00:04:16]:

Wow.

Michelle [00:04:16]:

Your limit, you clear the highest in tray Interest rate first. So you start with those and then you work back. Once those are gone, then you can consider the mortgage question.

Julie [00:04:27]:

Alright. Fantastic. So step 1 for Michelle there is to take stock of the other debt that you have because mortgage tends to be the cheapest debt that we have. Like, a little segue here. There's a little app called I think it's debt payoff calculator, and it lets you go in and add all the different debts. So it could be your mortgage, personal loan, could be credit card. And then it will work out the avalanche and the snowball methods for you so you can figure out which is the most efficient way to pay off your debt or which way is best for you. So little top tip there.

Julie [00:04:57]:

So, Michelle, your number Money point is go and look at all the debt first of all. Emily, what would you say is the 2nd consideration after that?

Emily [00:05:06]:

Well, obviously, something that we've talked about a lot on this podcast is emergency funds or, your FU fund or, actually, I came up with an amazing new name for this the other day. I was going to call it the field mouse fund. And the reason is because we're listening to Morgan Housel's book about, Psychology of Money very good book. Anyway, he explained how when the Germans lost a very important pivotal battle in the 2nd World War, It wasn't due to anything major that they had, thought about, but, apparently, field mice had chewed through the cables of the electrics on the tanks. So they've lost the battle because they couldn't move the things. And I thought, you know what? I'm going to call my emergency fund, the field mouse Because it's the emergency fund is there to cover the things that you did not see coming, So I like that anyway. So if you have not got a field mouse fund or an f u fund or an emergency fund, whatever you want to call it, I would be making sure that you, channel any spare disposable income or any lump sum, into just giving yourself a little bit of a cushion for the field mice because, that can derail any financial plan. And in fact, I would put the field mouth fund above the, short term debt payoff Initially, I would make sure I had something even if it was just a month's worth of expenditure in that emergency fund before or then applying it to short term debt, and then I would want to start rebuilding building up more Up to about 6 months, really, for an emergency fund.

Emily [00:07:01]:

So 6 months' worth of expenses is kind of the golden general rule in financial planning. But, you know, sometimes it's 12 Money, sometimes it's more. It really does depend on circumstances. But, yeah, make sure you've got that field mouse Money.

Julie [00:07:14]:

Okay. So Emily's got her field mouse, which was stopping us from saying a bad word, f off fund. Okay? If you want to know more about how to start an emergency fund, Might I suggest you go back and listen to episode 28, where you can listen to myself and Catherine explaining why everything you've been told about emergency funds is wrong, And we also tell you how to actually go about building 1. So yeah. So thanks for that, Emily. So we are going to take care of death as well. We're going to make sure we've got an emergency stash of money. Michelle, is there anything else that you what would you say is the next step to consider?

Michelle [00:07:50]:

If you're in a position where you can overpay your mortgage, it's then saying can you? Can you in practice? Does your, You know, mortgage provider allow it. Often, there is a guide that you can overpay by 10% a year. So it's really important to check with your provider because you don't want to pay a penalty if you pay more than that. So it's just working out if you want to do it monthly, how much that works over the year, is that more than 10%? If it is, check with the provider to make sure that they'll allow you to do that and that they'll, you know, facilitate that for you. Because the last thing you'd want to do is think that you're reducing your mortgage debt and then get hit with a penalty because you've overpaid over the limit that they allow.

Julie [00:08:31]:

Yeah. That'd be really annoying.

Michelle [00:08:33]:

It would be it kind of defeats the object, doesn't it?

Julie [00:08:36]:

Yeah. That would be really annoying. Anything you

Michelle [00:08:38]:

would add to that, Evelyn?

Emily [00:08:41]:

I would only just sort of say something in a little bit in defence of the mortgage companies because I bet a lot of the listeners out there were thinking, oh, why are they charging us a penalty for overpaying debt? Surely, they want us to repay them the Money. The money that, we owe them. But, obviously, you are shortening the contract that they have with you from which they're making their profits. So, That that's one consideration, but, also, the mortgage providers have done what we call hedging. That just means that they've gone out and placed a load of trades in the markets and done something very clever. And in order when you break your loan or shorten it or change it, It means that they have to do the same in the markets, and it costs them Money. So they have to pass that cost on to you. So, anyway, I just wanted to say that it's not just that it's not just mortgage companies being a bit nasty about that, but they just have to, manage their positions out in the market as well.

Julie [00:09:40]:

Okay. So we've covered off some of the essentials there, so it's dead easy. Deal with your other look at other debt first of all. Make sure you've got an emergency fund. Let's make sure that you got scope that you can pay off the mortgage without getting into any penalty. So next, I think, Michelle, I'm going to come to you with the maths. Right? Because I have this I've had this conversation where people were they get that it's to do with the interest rate, isn't it? Is what they'll say to you whether I overpay or not has to do with the rate, isn't it? But they're not sure right. Sure.

Julie [00:10:12]:

Does it need to be higher, or does it need to be lower? So could you just walk us through the maths of, of when, in theory, the textbook say it's a good idea to overpay your mortgage? So if we look at

Michelle [00:10:24]:

that against putting money in the bank with an interest rate they pay you. So if you're thinking I'm going to add my savings. I've got my emergency fund, but I'm going to add to my savings rather than overpay my mortgage. If you're going to get an interest rate of, say, What are we getting at the moment? Between 4 5% on most accounts when you put your money in the bank. So, you know, at the end of the year, you could have an additional four 5% of your in interest has been added on. If you've got a mortgage, which is on standard variable rate, and you're paying an interest rate of 6%, Then, actually, you're paying more to what we call service that debts than you are achieving back in the bank. So you would probably, in our world, with the math side, be better off overpaying the mortgage, Assuming that you have everything else that we've talked about in place because you're not getting a return higher than what it's costing you on interest on your mortgage, if that makes

Julie [00:11:22]:

sense. Think so. Can I just re repeat it back to you to make sure I've got that? So I'm going to use myself as an example After I've just re because I'm like, I think I'm the opposite. So if the money that I would if so I put money in the bank in my savings and I get rewarded with interest. Mhmm. I borrow money from the bank for my mortgage, and I get penalized with interest. Yeah. So if my reward interest, So 3 or 4 or 5% on my savings is lower than my penalty interest that the mortgage charged me.

Julie [00:11:55]:

Put the money towards the mortgage.

Michelle [00:11:57]:

Yes. In a nutshell.

Julie [00:11:59]:

So this is the textbook folks, by the way. Everybody's circumstances are different. So Whereas I my mortgage rate is, let's say, I think it's about 4%. I've got the nationwide regular saver at 8%. I'm better off my money into the savings out, like, so I'm getting double what it's costing me to borrow.

Michelle [00:12:17]:

That's right. And then, you know, in a year's time, if we see interest rates different, That equation may swing around the other way, and it may be better for you to actually take that money out of your savings and pay that into the mortgage. And throughout the time of your mortgage, Your that that equation is going to swing back and forth the whole time.

Emily [00:12:36]:

Alright.

Julie [00:12:37]:

Okay. So let's say we've figured out Then the amount of money I'm going to make by saving it isn't as much as the interest I would reduce by overpaying. So the My mortgage interest rate is higher than my savings rate. So that's a that's an indicator to me to start overpaying. Yeah. What else could that influence or should I be taken into account if I do that?

Michelle [00:13:02]:

If you're overpaying?

Julie [00:13:04]:

But I'm under my 10%.

Michelle [00:13:08]:

So in terms of if you're if you're overpaying, you are, 1, reducing interest you pay, and you could then potentially shorten the term of your mortgage if you wish to. So if you're coming up to a remortgage, You know, a lot of people are on rates, and they know that they're going to have to do this again. By overpaying, you've got the ability when you come to remortgage, actually, you could get a more attractive rate Because you owe less, and your loan to value may also be less, which is the amount of Money you owe as a percentage of your house.

Julie [00:13:43]:

Alright. Fantastic. So these loan to value things, they come in bands. So they start they tend to drop in 5%. So 95%, 90%, 85, 80, down to 60%. So if your outstanding mortgage amount is just Hovering above one of the bands and overpaying. It means that you can drop down into the next band the next time you remortgage, And they tend to come with let lower interest rates than the higher bands do. So ultimately saving you a bit of money.

Julie [00:14:11]:

One thing has just popped into my head about this whole overpaying thing. Because I found it very frustrating because I had to contact Halifax, who my mortgage is with. And I hate speaking to financial institutions. Absolutely loathe it. I'd rather just deal with them on an app. This. Oh god. Yeah.

Julie [00:14:29]:

Because I knew I was going to be making overpayments. But what I contacted them to make sure is I want the overpayment to reduce the term of the mortgage. Because alternatively, what they will do is they will just reduce your monthly Women, in which case you've achieved precisely Bugger all. So if you're going to make overpayments, you want to make sure that it's set up so it's going to reduce the term of your mortgage. That was

Michelle [00:14:55]:

really important. Yep.

Julie [00:14:57]:

Okay. What else have we got?

Emily [00:15:01]:

I've just thought Something, but I don't think we

Julie [00:15:03]:

Does it begin with the letter p?

Emily [00:15:05]:

No. It doesn't. It is about attitude to risk. Now swing back swing back to that episode we did a long time ago about investing and other things. But generally speaking, if you've got a high attitude to risk, You may not feel that repaying your mortgage is the right thing to do because bricks and mortar generally are fairly safe assets. And if you are a higher risk person, you might prefer to own less of your house and put your cash In high risk asset, I haven't said any p word. I haven't said any p word.

Julie [00:15:50]:

I'm going to take issue with some of that, Should I? This might be we're going to get a bit controversial here. You

Emily [00:15:56]:

might do.

Julie [00:15:57]:

I don't actually think of my home as an investment Or an asset as such. It's where I live. It's not designed to make me money. It's designed to keep me warm and keep the rain off me.

Emily [00:16:12]:

This is true.

Julie [00:16:13]:

So it has nothing to do with my attitude to risk. I'm averse to getting wet and cold and having nowhere to keep my stuff.

Emily [00:16:22]:

Some people might have Houses that have an investable element to it. Not everyone. I agree.

Julie [00:16:30]:

I think if you've got a property portfolio, but that's not We don't overpay. Those people tend not to overpay those mortgages, I think.

Emily [00:16:41]:

Anyway, as an asset class

Julie [00:16:46]:

You're pushing the envelope today.

Emily [00:16:48]:

Slightly safer than some other asset classes, it's. And we'll leave it there.

Julie [00:16:53]:

Michelle, do you want to jump in and stop the 2 of us digging a hole for each other?

Michelle [00:16:57]:

Yeah. Because I'm going to change it completely now. There is also a side of offset mortgages, which is something that a lot of people do have. Not as widely used as they once were, but they are sort of where you have a mortgage, you're paying an interest rate, but there is a sort of a bank account link to it that you can put money into and save Money, which offsets your mortgage so you don't pay interest on the money that's in the bank account, if that makes sense. So if you have a £100,000 that you're paying interest on your mortgage, you've got £50,000 in your bank account, you're only paying 50,000 Worth of interest, if you see what I mean. Mumm. Another

Emily [00:17:36]:

best of both baseballs, isn't it?

Julie [00:17:38]:

It is. And I

Michelle [00:17:39]:

think you have to be really careful before you look to overpay these mortgages. I've had this with a client because if you overpay rather than putting money into the offset, That money is gone forever. You've lost what we call liquidity of the money. You can't just go to your mortgage provider and say, can I have that back, please? Whereas if you've got an offset account and you're just adding money to that, you still are reducing what you're paying interest on, but you still could access the money if you needed to, and the money isn't gone forever. So that's just quite an important difference to make between the 2 that You're having accessible money and nonaccessible Money, so just making sure that you understand the difference of what you're doing because you can't get that back.

Emily [00:18:22]:

I've never had an offset mortgage, but is it the case that your reward interest on the offset mortgage It's the same or different than the penalty mortgage. I guess they've got to be different. Are we? Was it does it vary between I

Julie [00:18:39]:

think different lenses are going to have different approaches to that. So Look at that. Quite specific. Perfect.

Michelle [00:18:44]:

Yeah. It's just the offset, isn't it? That you're offsetting some of the interest. Or if you Julie funded it, you're offsetting, You know, all of it, but, again, depending on their terms. But they can be quite tricky, so definitely look into that one a little bit more.

Julie [00:18:59]:

Mhmm. Alright. So then the other thing is okay. So let's say you've worked through all of this. You know that you've got an emergency fund. You've taken care of expensive debt. You know what you're allowed to pay without Penalty. And you've now decided, yes.

Julie [00:19:10]:

I'm going to do this. I'm going to start paying extra off my mortgage. So how do I do it? And I also know that I need to tell the mortgage company to reduce the term, not reduce my payments. So you can contact them directly, and you can set up a regular Overpayment. You can go and get a little app that we all know and love called Sprive, which just lets you do it as and when you fancy it. So anytime I walk past Costa Coffee without going in, there goes £10 off of Julie's mortgage. So these are the different ways that you do. Michelle, I don't know if you're feeling brave and bold, and you want to talk about making a lump sum payment off your mortgage.

Michelle [00:19:49]:

I think for some people, that they think they can only overpay their mortgage by lump sum. And I've had this before where they think, well, I you know, I don't have enough to do that. Whereas, Actually, doing it monthly, what makes it more palatable for you and your budgeting because you're not having to keep Squirreling money away. But secondly, it can be a gradual thing. So as you, you know, explained with the figures earlier, by overpaying, Actually, you can save a really significant amount of money even if it's a small amount each month. So it doesn't have to be a lump Women and I find so many people think I can only do it with big chunks of money, and it's certainly not the case. If you've got a little bit of extra income and you've Ticked all the other boxes that we've been through, then then do it because any overpayment is actually going to help you

Julie [00:20:35]:

in the long term. Absolutely. Automation is key as

Emily [00:20:39]:

well, isn't it? Sorry? Automation is key to just make sure that you're not just going, oh, see how much I've got left this month, but actually increase your Money.

Julie [00:20:51]:

I like to do

Emily [00:20:52]:

both. Yeah.

Julie [00:20:53]:

I'm not an either or woman. I like all of the options.

Michelle [00:20:57]:

You want everything?

Julie [00:20:58]:

I do with Sprinkles on the top. So I've got the regular monthly amount that goes, and then there's my Costa reward. Every time I walk past Costa, I don't go in. Then I throw another 10 pound at it. So I like to do a little bit of both. I think that's why I like the Sprive app because it makes me feel I'll I get to be in control. But you can actually just go to your bank and ask them to set it up for you as well. Something else popped into my head, but it's gone now.

Julie [00:21:23]:

I'm sure it'll come back. Anybody else for anything else? Okay. So just to wrap things up then. The example I gave at the start Was if you were to overpay by 200 pound a month on a 200 k mortgage over 25 years at 4 a half percent, You're shaving 6 years off your mortgage term, and it's a saving of about £36,000. That is significant. Michelle's talked us through making sure that we've taken care of any other debt. She's explained this whole interest rate thing. Okay.

Julie [00:22:02]:

If the interest rate on your mortgage is higher than the return you're getting from the bank, the mortgage is the most efficient place to put the money. Okay. Miss Ellie's talked us through making sure that we have an emergency fund. We've always we've touched on how this can have an off con effect when it comes to remortgaging and moving yourself down through the loan to value bands, which can make mean that you get different deals. What else have we covered?

Michelle [00:22:33]:

Lump sum versus Money. So whether it's better to do it as a lump sum or Money. And, really, there is no minimum, So don't worry about having a minimum.

Julie [00:22:42]:

No. Because as we know, I throw a tenor at it when I walk past Costa. Yeah. And I think that's a good point as well. It doesn't have to be a lump sum. You can do this on a monthly basis as well. Alright.

Emily [00:22:55]:

Oh, thank

Julie [00:22:55]:

you very much for that, Julie. Emily, have you got any closing thoughts for us?

Emily [00:23:00]:

Not without the risk of going on tangent, so I'm not going to say anything to you. It's been lovely as always.

Julie [00:23:07]:

Alright. Michelle, is there anything you relate to us before we finish?

Michelle [00:23:11]:

No. I don't think there's anything sort of add to the list. It's just obviously you know, it's a big thing for people having a mortgage, so the ability to do things with it Is a great thing. So always just work through the list and see how you get on. But if you can't do it now, don't worry because you might be able to do it in a couple of years' time because as we say, that seesaw moves all the time.

Julie [00:23:30]:

It does. It does. Thank you for that. Okay. So we hope that you found this useful. Thank you both, Michelle and Emily, for that. If you're like sitting there and you're thinking, yeah, I know that it's probably better putting in the mortgage rather than having it sitting in my savings account, but why wouldn't they talk about whether I should put it in my pension on my eyes are. Okay.

Julie [00:23:49]:

We are going to talk about that next time, Brown. So tune in next week, and we will give you the answers to those questions. Until then, please do take care of