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Why we're overpaying our mortgage

Sunday, 14 May 2017

You may have noticed from some of my posts that since buying our first home back in December, me and my husband have been overpaying our mortgage. We deliberately built a £30 monthly overpayment in to our budget when we were originally planning a mortgage, and this is then topped up by cashback from Quidco, counting up money from penny jars, setting aside my expenses from work, or selling stuff we don’t use or need on eBay. My aim is to be able to double that £30 every month, and so far I’ve managed to hit that target consistently!

Telling people we’re overpaying generally leads to them going “Oh that’s a good idea!” followed by a pause and then “…but why when interest rates are so low?” It’s a good question, I certainly don’t know anyone offline that’s doing this as regularly, but it’s something we were both keen on doing for a variety of reasons.

1. We both hate debt

I still have a student loan, because like many students who graduated in 2008 I found it very difficult to get a well-paid job straight off the bat. Instead I found myself as the proud owner of two degrees and a job as a cashier in a supermarket, followed by various part-time contracts and an attempt at self-employment until I landed my first full-time role at the age of 24. But I don’t like being in debt, and neither does my husband. Having a debt of £160,000 is quite scary when you think about it, and given the uncertainty in the economy (especially with Brexit) we’d like to pay off extra while we can, before interest rates start going up!

2. Reducing the LTV

We found it difficult to get a mortgage in the first place because my current role is a contract. Admittedly at two years and with guaranteed full-time work it’s better than a zero-hours role, but it’s technically temporary nonetheless. We had a decent deposit saved up by my OH, which gave us an LTV of 85% (LTV is Loan to Value ratio, so how much you’re borrowing compared to the value of the house. We had a 15% deposit, so our LTV was 85%). This really helped us get a good mortgage rate despite my contract situation, and taught us a valuable lesson about how important a decent deposit can be. We have a 5 year fixed rate, by the time we’re due to re-mortgage I’ll probably have a stint of maternity leave which will have affected my earning potential, and given the risks to the economy we suspect that rules about mortgages will be significantly tighter. So reducing our LTV will hopefully help us in the long run, and might also make it easier to move up a step on the ladder when the time comes for us to find a bigger house.

3. It’s seriously addictive

I have a spread sheet that tracks, among other things, the daily amount of interest earned, the total amount we’ve paid per month, and the amount we owe to the bank. It’s set up for the next 5 years with our standard monthly payment, and then I can type in how much we’ve overpaid in a particular month and it will recalculate everything. I’m not going to lie, it’s really addictive. As soon as I send my expenses form in to work I make a note of the total, then when I go home I type it in to the spread sheet to see the effect. Same with filling up a bag of change, or getting a notification from Quidco that we can cashout.

The effect so far has only encouraged me to keep going. When we first got our mortgage we were earning £12.01 a day in interest. We would have hit £155,000 owed in May 2018, and would have dropped under £150,000 in September 2019. You'd think that we would need to be overpaying hundreds of pounds every month to make a difference.

So far (it’s only May after all, and we made our first overpayment in January) we’ve overpaid by £490.88. We’re now due to fall under the £155k mark in February 2018 (although my aim is to hit it by December), and will be below £150k in July 2018. Our daily interest rate is currently £11.88 (still a huge amount per day I know!), and will fall below £11.50 a day in October 2018.

It just goes to show that you don’t need thousands in the bank to pay off your mortgage, just small regular payments can make a big difference!

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