Should I overpay my mortgage when rates are high?

[irishfinanceguy]

I always believed you should pay off the loan with the higher borrowing rate. So for example if you have a loan for a fixed borrowing rate 11% for a car its best to pay off the car asap (if possible) rather than say invest some moving un savings etc.

However in the cases of mortgages as the rate changes over time what is best practice?

When mortgages rates are high? Are you better of paying off just the minimum amount (i.e. no overpayment) as the rates could go down in the future.

Or is it the case when mortgage rates are low you should not make overpayments as you could invest that money instead and earn a return better than the cost of credit?

Hope that makes sense, aware its a silly question.

 

[DublinHead54]

Simple answer is pay off debt first with the highest interest rate. If mortgage rates are high then the hurdle rate for returns on investments become greater. Now you are into the area of speculation and risk tolerance.

You have to look at it across available investment options and the likelihood of the returns for the individuals situation. For example if you have a fixed mortgage rate of 3% for the entire duration of the mortgage and savings rates were netting 4% after tax then the argument is to save instead of overpay. However, this is not the case.

I think for most whether on variable or fixed the risk free rate of saving is less than mortgage rates and thus people should be overpaying mortgages.

This is even more critical for those on fixed who will roll off onto likely higher rates in the coming years which may impact the affordability.

 

[ClubMan]

I always believed you should pay off the loan with the higher borrowing rate. So for example if you have a loan for a fixed borrowing rate 11% for a car its best to pay off the car asap (if possible) rather than say invest some moving un savings etc.

However in the cases of mortgages as the rate changes over time what is best practice?

When mortgages rates are high? Are you better of paying off just the minimum amount (i.e. no overpayment) as the rates could go down in the future.

Or is it the case when mortgage rates are low you should not make overpayments as you could invest that money instead and earn a return better than the cost of credit?

Hope that makes sense, aware its a silly question.

As ever, trying to time a market is pointless as nobody can predict the future.
As @DublinHead54 says just pay off loans starting with the highest cost.
If your mortgage is your only loan then tackle that regardless of prevailing rates.
Once it is down to a "manageable/comfortable" level for your circumstances (e.g. a reasonable LTV level or multiple of your income) then maybe consider other uses for spare cash - e.g. increasing/maximising pension contributions etc.
All of this is predicated on allocating money to reasonable day to day living expenses - e.g. not living on porridge/beans just to clear the mortgage sooner than the scheduled term.

 

[irishfinanceguy]

As ever, trying to time a market is pointless as nobody can predict the future.
As @DublinHead54 says just pay off loans starting with the highest cost.
If your mortgage is your only loan then tackle that regardless of prevailing rates.
Once it is down to a "manageable/comfortable" level for your circumstances (e.g. a reasonable LTV level or multiple of your income) then maybe consider other uses for spare cash - e.g. increasing/maximising pension contributions etc.
All of this is predicated on allocating money to reasonable day to day living expenses - e.g. not living on porridge/beans just to clear the mortgage sooner than the scheduled term.

I see your point, it is risky to a degree choosing to not overpay your mortgage and investing in a pension. Even though on paper it make more sense from a returns point of view it arguably could mean you not being able to pay your mortgage payments (if an extreme event such as losing job and unemployment/health issues). No point paying too much into a pension if you cant access that cash when you need it
I guess everything is a balance of risk.

 

[ClubMan]

I see your point, it is risky to a degree choosing to not overpay your mortgage and investing in a pension. Even though on paper it make more sense from a returns point of view it arguably could mean you not being able to pay your mortgage payments (if an extreme event such as losing job and unemployment/health issues). No point paying too much into a pension if you cant access that cash when you need it
I guess everything is a balance of risk.

Sorry - I don't really understand your point and how this relates to your original question or my comments.

 

[Brendan Burgess]

When mortgages rates are high? Are you better of paying off just the minimum amount (i.e. no overpayment) as the rates could go down in the future.

It it's anything at all, it's the opposite.

Think of an extreme situation.

If you have a mortgage with an interest rate of 0.5% , it might make sense to invest rather than to overpay your mortgage as you should be able to get a long term return in excess of 0.5%.

On the other hand, if you have a mortgage rate of 15%, you will not be able to get a return on your investments in excess of this, so you should overpay it.

In practice, what actually happened was that when people had very cheap trackers, they were paying a lot less than they expected on their mortgage, so they used that opportunity to overpay their mortgage. And now that rates are high, most people don't have the capacity to overpay their mortgage.

Brendan

 

[Brendan Burgess]

As you are planning to borrow 4.5 times your salary, you should overpay your mortgage whatever the rate is, to get it down to a more comfortable level.

Mortgages

Anyone have any experience with banks that are more lenient on giving 4.5 times your income?

www.askaboutmoney.com

 

[lff12]

Simple answer is pay off debt first with the highest interest rate. If mortgage rates are high then the hurdle rate for returns on investments become greater. Now you are into the area of speculation and risk tolerance.

You have to look at it across available investment options and the likelihood of the returns for the individuals situation. For example if you have a fixed mortgage rate of 3% for the entire duration of the mortgage and savings rates were netting 4% after tax then the argument is to save instead of overpay. However, this is not the case.

I think for most whether on variable or fixed the risk free rate of saving is less than mortgage rates and thus people should be overpaying mortgages.

This is even more critical for those on fixed who will roll off onto likely higher rates in the coming years which may impact the affordability.

Nearly all the banks offer significantly discounted rate, especially fixed, for existing customers who have lower LTVs, so I presume its worthwhile throwing an extra little in if it brings you down to 70% or 60% or even 50% if you've been very fortunate.