Mortgage Over Payment Query

[NiallP]

It is generally accepted wisdom that mortgage overpayments are, in principle, a good thing as they can knock chunks off the time it takes to repay a mortage and it cuts down on interest repayments.

My query is whether, mortgage over-payments make much sense for me, where I have no intention of ever actually paying off my mortgage in its entirety. My reason for this is that i foresee myself trading up at some point in the not too distant future.

Thus, the main reason given for the benefits in overpaying a mortgage (i.e. knocking time off it) don't really apply to me.

Additionally, my understanding (from checking with my mortgage provider) is that any overpayments I make are not applied against the principal of the mortgage. They are actually kept seperate and may be withdrawn by me at any time should i so decide.

Is it then the case that the second main reason given for overpaying mortgages (i.e. reduced interest payments) is not applicable in the short term in that interest will still be calculated by reference to the outstanding principal amount - as opposed to the outstanding principal MINUS overpayments.

What I am looking to do would be to maximise the equity in my house so that I would have a larger amount to apply if and when I trade up.

Would i be better off opening a savings account, with the aim of using that money (together with the equity released from my current property when i sell it in the future) towards a new home?

I hope this makes sense!

 

[ClubMan]

My query is whether, mortgage over-payments make much sense for me, where I have no intention of ever actually paying off my mortgage in its entirety. My reason for this is that i foresee myself trading up at some point in the not too distant future.

Even if that is the case you can still save money on interest costs by accelerating the mortgage repayment. Whether or not this is a good idea in the overall scheme of things really depends on your wider financial/personal circumstances. Obviously if you have higher cost (e.g. unsecured) debts then these might merit more urgent attention.

Additionally, my understanding (from checking with my mortgage provider) is that any overpayments I make are not applied against the principal of the mortgage. They are actually kept seperate and may be withdrawn at any time should i so decide.

That may be the default position but if you have a variable/tracker rate owner occupier mortgage then you just instruct them (ideally in writing to avoid confusion and to have a paper trail) that you want any additional repayments paid off the capital immediately and they should (must?) do this.

What I am looking to do would be to maximise the equity in my house so that I would have a larger amount to apply if and when I trade up.

Which means accelerating the capital repayment surely?

Would i be better off opening a savings account, with the aim of using that money (together with the equity released from my current property when i sell it in the future) towards a new home?

Depends on your overall circumstances as I mentioned above.

You can use Karl Jeacle's mortgage calculator to estimate the potential interest cost savings of accelerating the mortgage capital repayments and other calculators listed in the Posting Guidelines & Links section to estimate the potential returns from various deposit accounts.