Mortgage Overpayments and Monzo

Financial Chat
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Last November, I bumped into an old friend who lives a couple doors down. They had bought their home 3 or 4 years before me and they told me all about how they were already well on track to pay it off in less than 10 years by making significant overpayments. They were putting off all big purchases in the short term to make their financial lives significantly easier in the long term. This would allow them to go part time in 10 years, spend significantly less time working and more time doing the things they love doing.

I became obsessed with the idea of making overpayments against my mortgage to bring down the mortgage term and save a tonne on interest. So I added my mortgage to my financial spreadsheets and posted about it here, it looks like this;

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I can now track the balance remaining on my mortgage if I were to just continue making regular payments (red) against what I feel I could realistically achieve in overpayments (in blue) and the savings the blue scenario would give me. On average for my circumstances, every Ā£1k I can pay as an overpayment today, saves me Ā£1k in interest (i.e. reduces the overall amount I end up paying by an additional Ā£1k).

My spreadsheet can also tell me how much interest my mortgage is accruing every day (nearly Ā£10 per day in my case) and can tell me the exact impact each mortgage payment makes.

So my goal is to hit enough in overpayments each year to reduce my mortgage end date to around 2033 rather than 2046 and save myself around Ā£30k in interest. This target also allows me to hit the 60% loan to value ratio about 10 years earlier and just in time for when my current mortgage rate runs out in 2023 which should save me even more as I should in theory be able to get a better mortgage rate sooner. Iā€™ve tried to account for average trend in house prices in my area, but this will probably skew things a little for my LTV ratio.

So how am I achieving this? I recognise Iā€™m in a very fortunate position where my partner and I both work fulltime with an above-average household income, we have no dependants or significant debts and relatively low outgoings. This is allowing us to put aside almost as much as a second mortgage payment each month into a hidden ā€˜overpaymentsā€™ pot. Then a couple times a year Iā€™ll use the money in that pot to make an overpayment (unless something significant arises). Circumstances can definitely change and who knows whether Iā€™ll be able to achieve this goal but Iā€™m optimistic. Doing overpayments early in the mortgage term will always have the highest impact on total amount paid, so Iā€™ll be happy even if I can only achieve this for a couple of years.

I have considered alternative saving methods that could potentially earn me more in interest than I save through this method, but there is just something very rewarding and satisfying about making an overpayment and seeing the years of mortgage payments and interest accrued disappear.

EDIT: Iā€™ve created a template

So my questions:

For info, I built my tool in google sheets, but a similar mortgage tool can be found here; Mortgage Calculator UK: Repayment & interest only mortgages - MSE

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Love this!

This is something I want to start doing, even if itā€™s just overpaying by Ā£50 a month, itā€™s staggering the difference it makes to not only the overall term but what you pay in the long run.

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I need to go and add a ā€œsavingsā€ line to my mortgage graph now. :grinning:

I have a very similar spreadsheet setup but not for the same reasons. Iā€™ve maintained it for all the years weā€™ve lived here but having moved in our 40s with 3 school age children we havenā€™t had the finances to achieve your aims so my use of the graph has been different. Much more monitoring than planning. Thatā€™s changed recently but, again, for different reasons.

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I have considered mortgage overpayments but have gone the other route to becoming mortgage free: investing.

The way I see it, the market grows on average by more than 5% per year. This past year has been particularly crazy because of covid and (S&P +32%, FTSE500 +18%, Ā£VWRL (all world ETF) +22%)

If (my mortgage rate < average growth - risk appetite), Iā€™d get more for my money by investing in an incredibly safe instrument.

E.g if my rate is 2%, and the market grows by 5% on average, iā€™m 3% better off per year by leaving that money in $VWRL than giving it back.

I donā€™t want to discourage you, though. Overpaying your mortgage is extremely commendable and smart, and has other benefits. E.g the better mental wellbeing for having less debt/no debt.

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Iā€™m overpaying mine at the moment, it knocks off approx 5 years from that if I keep it up. Iā€™m not even paying off the maximum I could without penalty at the moment. That may change at some point, 5 years off though is still quite a saving

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Yep, I definitely see this as a smart alternative to overpayments. Iā€™ve done this for part of my personal savings. The reduction in mortgage term is just too appealing an idea for me personally with the prospect of being able to significantly reduce our outgoings and being able to afford to work part-time.

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Having seen your other comments I kind of want a similar spreadsheet, but it looks daunting to set up. Do you have template?

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I might be able to pull together a template. Iā€™ll have a go and let you know.

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@ndrw, @Revels, @Feathers and @danbeddows

I have created a crude template that you may or may not have success trying to use. Do not expect this to provide super accurate values. This should more be taken to give an insight into the impact of overpayments, it has a lot of limitations:

In short;

  1. Click File then Make a copy
  2. Update the box of fields to match your circumstances
  3. wait for a bit for the fields to update
  4. scroll down and see whether the charts have updated

If not, check the calculations sheet for any obvious errors then check the pivot table for issues.

Iā€™m sure someone like @BritishLibrary can probably point out a more efficient way to do the calculations. Iā€™ve gone about in a brute force kind of way when Iā€™m sure thereā€™s a simple set of array formula that would do much of the heavy lifting more efficiently.

Also note that the ā€˜Calculationsā€™ sheet contains my helper columns that I use in all of my spreadsheets that you may find useful for your own stuff.

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If youā€™re keeping potential over payments in a Monzo pot, have you considered an offset mortgage? The rates are a bit higher, but depending on your savings you can actually save more money than a combination of overpayments and savings accounts.

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In early 2020 I renewed my HSBC mortgage and the monthly payment came down by roughly the same as the monthly interest now

So Iā€™ve left my monthly transfer across to my legacy HSBC account at the same value and then use that for a monthly overpayment

Itā€™s not so wildly large that Iā€™ll shaves years and years off, but it kinda feels like itā€™s interest free now in a way

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Interesting, I hadnā€™t considered this. From what Iā€™ve just been reading it sounds like generally you need to keep your savings with the same institution as your mortgage provider which would make this tricky for me personally. Iā€™m quite attached to having my emergency funds and savings in designated Monzo pots.

Though Iā€™ve run the numbers with Barclays and it looks like it could shave a few additional years off my mortgage and save me a couple extra grand:

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Definitely something Iā€™ll consider when the introductory rate with my current provider runs out.

It would be really cool if Monzo could offer this kind of mortgage.

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Youā€™d save even more over the term of the mortgage if you set you a standing order every month to overpay, rather than saving up and paying it off twice a year, as your interest is applied daily.

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Yep, youā€™re absolutely right. But Iā€™ve done the sums and for me personally the financial benefit of doing monthly overpayments rather than annually (couple hundred pound) is outweighed by the potential to divert the accumulated overpayments towards something else if needed. My current approach is the right balance for me between making the overpayments and having the money on hand should it be needed. This has provided extra peace of mind during the pandemic, on top of our emergency fund (in line with the flow chart).

Iā€™ve added a monthly overpayment option to the spreadsheet template.

Also to note, you can of course just input overpayments manually on the calculations sheet if youā€™re part way through your mortgage.

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Love this thread! When me and my partner bought our flat recently I built a similar tool to help calculate overpayments. As yet we havenā€™t made any because of redecorating first, BUT SOON.

The one thing you could build in if you were so inclined, is a mechanism to factor in mortgage rate changes as fixed terms come to an end and you shop around for better deals (especially as your LTV % improves, youā€™ll also access better deals).

I cobbled together something similar, and to be honest I think all my formulae are similar, but presentation is a bit less straightforward!

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Yeah the changing interest rate is definitely a limitation of the template, I might see if I can do something about that. Your method of a look up table of mortgages seems a smart approach. For my personal spreadsheets I havenā€™t bothered as I figure Iā€™ll just manually update the interest for the next period when I know my new rate.

I suppose in its current form my template overestimates your savings in interest by overpaying as it assumes you wonā€™t get a better interest rate which would allow less potential for saving. Though this might be offset by the ability to reach better LTV ratios earlier.

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Yeah for me what I wanted to try and calculate was also the variable of ā€œcan I hit the next LTV bracket with overpayments before I need to remortgageā€.

Which also depends on market value etc which I didnā€™t factor in, but gave a decent enough idea at what goal to be aiming for as well.

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I do. I made the decision a year ago to do it, based on the fact I want to buy a new house which will have a higher mortgage. So I worked out what that mortgage cost may be and pay that now on my current mortgage.

Reason being I donā€™t have a worse quality of life by paying it now and getting used to it.

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