Overpaying mortgage and then withdrawing the overpayment - any advantages?

[Sunnysoutheast]

We have €250,000 left on our mortgage. 31 years to go. Recently we received €90,000 from a parent. KBC allow us to overpay on our mortgage account and we can withdraw the overpayment (or part thereof) at any time. We will need this €90,000 over the next 5 years (as I’m a Stay at Home mother and we need this money in order for me to continue doing that). We would withdraw about €18,000 per year so if we overpay we will need to withdraw it all over the coming 5 years.

If we overpay by €90,000 now we will save €400/month on our mortgage. However once we take it out the monthly mortgage figure will obviously go up. The capital figure on our mortgage would increase by €90,000 in 5 years if we withdraw all the money and we would have to repay it over the remaining 26 year term instead of our current 31 years at whatever interest rate will prevail then. We will obviously be making mortgage payments that will reduce the current capital amount over the next 5 years.

Is there any advantage in overpaying now and withdrawing the money over the next 5 years? Would we save anything on interest payments? Bear in mind that a lot of our monthly payment goes in interest payments as opposed to capital payments as we are just 4 years into our mortgage.

Any idea as to how best to maximise our return on this money?

Many thanks for any help you may be able to provide!

 

[RedOnion]

we are just 4 years into our mortgage.

Are you 100% certain your mortgage allows the withdrawal of overpayment? I can't remember when they removed it, but surprised if it's this recent.

To answer your question, yes there is a benefit. Interest is charged on your daily outstanding balance. You're talking about a saving of about 5,400 interest if your rate us 3%.

 

[Opus2018]

Hi Sunnysoutheast,

You obviously save on interest for the period that the overpayment although it declines as you said as you withdraw the sum on an annual basis. The question is how much is the interest rate that KBC charge. Say it's 3% for the sake of argument so to match an equivalent return say on a deposit account, its 3%/1-0.37 (current DIRT rate) which equals 4.76%, so given it's risk free, it's a pretty good deal. You can also try messing around with the karl jeacle's mortgage calculator (www.jeacle.ie) . It's kind of like a reverse sinking fund, where you'll have 90k over payments for one year, 72k for two years etc etc..

Hope this helps, but if you have any further questions, do please let me know.

Best,

Opus2018.

 

[RedOnion]

@gnf_ireland started a good thread on this topic previously:

https://www.askaboutmoney.com/threads/how-much-is-kbcs-overpayment-offset-worth.195929/

 

[Sunnysoutheast]

Are you 100% certain your mortgage allows the withdrawal of overpayment? I can't remember when they removed it, but surprised if it's this recent.

To answer your question, yes there is a benefit. Interest is charged on your daily outstanding balance. You're talking about a saving of about 5,400 interest if your rate us 3%.

Thanks RedOnion. Yes, I'm 100% certain I can withdraw an overpayment with KBC. I have it in writing from them and I also overpaid by a certain amount and then withdrew it as a test to make sure that it would work.
I'm just finished a 2.9% 1 year fixed rate and once I have my house valuation I will move to 2.5% 1 year fixed (which includes the 0.2% current account reduction).
So you are saying I would save €5400 in interest over the lifetime of the mortgage because in 5 years time even though I will owe €90k more in capital, it will be €90k plus a lesser capital amount due to having made some capital repayments over the next 5 years.
If however the interest rate jumps to 5% in 5 years time would I lose that saving because it will be offset by higher interest on the total amount owed at that time?

 

[Sunnysoutheast]

Hi Sunnysoutheast,

You obviously save on interest for the period that the overpayment although it declines as you said as you withdraw the sum on an annual basis. The question is how much is the interest rate that KBC charge. Say it's 3% for the sake of argument so to match an equivalent return say on a deposit account, its 3%/1-0.37 (current DIRT rate) which equals 4.76%, so given it's risk free, it's a pretty good deal. You can also try messing around with the karl jeacle's mortgage calculator) . It's kind of like a reverse sinking fund, where you'll have 90k over payments for one year, 72k for two years etc etc..

Hope this helps, but if you have any further questions, do please let me know.

Best,

Opus2018.

Thank you Opus2018 for your response.
We are currently paying 2.9% interest rate, soon to be 2.5%. I can overpay by any amount if I'm not on a fixed rate.
Would the fact that I'll owe €90k over a shorter period of time (26 yrs instead of 31 years) mean I'd end up paying more back to the bank overall in terms of interest than if it was owed over a longer period of time?
I just don't want to be hit by a massive increase in mortgage payments (eg paying an extra €600/month rather than the €400/month that I would save over the next 5 years) at the end of the 5 years.

 

[Sunnysoutheast]

@gnf_ireland started a good thread on this topic previously:

https://www.askaboutmoney.com/threads/how-much-is-kbcs-overpayment-offset-worth.195929/

Thanks, that's an interesting general thread on overpayments. In fact it was that thread that got me thinking about overpayments in the first place, about a year and a half ago!

 

[Opus2018]

Hi Sunnysoutheast,

In response to your question, the answer is no. If you keep the monthly repayment the same, the element of the repayment that is capital is higher and the interest element lower when you have lumped in the 90,000 figure. This will change over time as you withdraw 18k back out each year but the payment remains the same just the composition changes. One other thing, if you can afford to with the interest rate drop, I'd suggest keep paying the same amount as you were beforehand - this will hit the principal a little more and believe me it adds up over time. The only thing I can't tell you is whether interest rates will be in five years time! Still the advice holds as in reducing the principal by whatever means you are also reducing your exposure. If it were me, I'd hit the principal as much as you could and remember every little bit you save does count!

Hope this helps,

Opus2018.

 

[gnf_ireland]

Are you 100% certain your mortgage allows the withdrawal of overpayment? I can't remember when they removed it, but surprised if it's this recent.

Yes, I'm 100% certain I can withdraw an overpayment with KBC. I have it in writing from them and I also overpaid by a certain amount and then withdrew it as a test to make sure that it would work.

Just as an FYI here, in my lengthy discussions with KBC on this matter I was advised that this facility had been withdrawn in either 2013 or early 2014. I know you say you have it in writing and you have tested the waters with a small amount of money - but I personally found out that when the overpayment becomes material, the rules sometimes change. If you have it in writing, you should be fine - just make sure that is not just the standard letter you get when you make an overpayment, but it is very clear that you can do it. I had all those letters, and still needed to go through a 6 month internal complaint to get confirmation that I could redraw as the "letters had been issued in error to me". Its just a word of caution, having been through it myself

If we overpay by €90,000 now we will save €400/month on our mortgage.

In terms of savings, you have miscalculated them, as you are going to be redrawing the money over a 5 year period. So in simple terms your over-payment is
Year 1 - 90k @ 2.5% = 2250
Year 2 - 72k @ 2.5% = 1800
Year 3 - 54k @ 2.5% = 1350
Year 4 - 36k @ 2.5% = 900
Year 5 - 18k @ 2.5% = 450
Assuming your interest rate is 2.5% for the term, you will save 6750 euro in total, or 112.50 a month on average (more in the earlier years as over-payment is higher)
I appreciate with compounding this is not as straight forward as that calculation, but its gives you an idea of it.

I'd suggest keep paying the same amount as you were beforehand - this will hit the principal a little more and believe me it adds up over time.

I would suggest either this approach if you can afford it, or keeping repayments within the ~112 euro of the original. This means that when you get to year 5 the net position is more or less balanced out for you.


But the simple answer is yes - all over-payments make a difference to the amount of interest charged, and the money is better off in your pocket than the banks !

 

[Gordon Gekko]

If I needed the money, I would not overpay.

The world can change and rules can change.

 

[gnf_ireland]

The world can change and rules can change.

It does depend on what guarantees the person has from KBC - and this is exactly why I said to be very careful in this regard

In my own situation, for example, the guarantees around over-payments are written into a mediated agreement with the FSO - so I would be pretty confident the bank would not attempt to default on them. That said, I hope never to have to redraw the funds overpaid.

However, yes it does depend on how safe the person feels the written confirmation is..

 

[Sunnysoutheast]

Hi Sunnysoutheast,

In response to your question, the answer is no. If you keep the monthly repayment the same, the element of the repayment that is capital is higher and the interest element lower when you have lumped in the 90,000 figure. This will change over time as you withdraw 18k back out each year but the payment remains the same just the composition changes. One other thing, if you can afford to with the interest rate drop, I'd suggest keep paying the same amount as you were beforehand - this will hit the principal a little more and believe me it adds up over time. The only thing I can't tell you is whether interest rates will be in five years time! Still the advice holds as in reducing the principal by whatever means you are also reducing your exposure. If it were me, I'd hit the principal as much as you could and remember every little bit you save does count!

Hope this helps,

Opus2018.

Hi Opus2018. Is it only if we keep the monthly repayment the same that we will benefit from the overpayment? Our required mortgage payment would reduce by €396 per month if we were to make the overpayment. I know it would be best if we make the same monthly repayment (the amount we would have been required to pay if we hadn't made the overpayment) but is there any benefit to me if we were to use that extra €396 per month ourselves and pay less on our mortgage each month and then pay more each month (whatever is required by the bank) once we withdraw some of the overpayment?

PS We actually took out a 30 year mortgage in 2014, not a 35 year one but I don't think that would materially affect the answers people have given here.

 

[Sunnysoutheast]

Just as an FYI here, in my lengthy discussions with KBC on this matter I was advised that this facility had been withdrawn in either 2013 or early 2014. I know you say you have it in writing and you have tested the waters with a small amount of money - but I personally found out that when the overpayment becomes material, the rules sometimes change. If you have it in writing, you should be fine - just make sure that is not just the standard letter you get when you make an overpayment, but it is very clear that you can do it. I had all those letters, and still needed to go through a 6 month internal complaint to get confirmation that I could redraw as the "letters had been issued in error to me". Its just a word of caution, having been through it myself

Thanks gnf_ireland, that is good to know. Their letter to me states: "We confirm that an amount overpaid to your mortgage account will be available to you to re-draw, subject to the terms and conditions prevailing at the time of the request. Additional documentation may also be required". I rang the bank several times and each person I spoke to said that the overpayment was my money and any and all of it can be withdrawn at any time by me. They said that their calls are recorded and that the recordings are also evidence that this was promised to me.

In terms of savings, you have miscalculated them, as you are going to be redrawing the money over a 5 year period. So in simple terms your over-payment is
Year 1 - 90k @ 2.5% = 2250
Year 2 - 72k @ 2.5% = 1800
Year 3 - 54k @ 2.5% = 1350
Year 4 - 36k @ 2.5% = 900
Year 5 - 18k @ 2.5% = 450
Assuming your interest rate is 2.5% for the term, you will save 6750 euro in total, or 112.50 a month on average (more in the earlier years as over-payment is higher)
I appreciate with compounding this is not as straight forward as that calculation, but its gives you an idea of it.



I would suggest either this approach if you can afford it, or keeping repayments within the ~112 euro of the original. This means that when you get to year 5 the net position is more or less balanced out for you.


But the simple answer is yes - all over-payments make a difference to the amount of interest charged, and the money is better off in your pocket than the banks !

That is extremely helpful, thank you. You are showing the actual saving per month on interest. The bank said that my repayments would reduce by €396/month if I was to overpay but you are saying that the only real saving to me is €112/month or so (more in the early years, less in the latter years) and that I should really only decrease my actual mortgage payments by that amount per month so as not to be caught out at the end of the 5 years.
I really appreciate your advice on this.

 

[Sunnysoutheast]

If I needed the money, I would not overpay.

The world can change and rules can change.

Thanks for your input Gordon Gekko, good to get another perspective!

 

[Opus2018]

Hi Sunnysoutheast,

To be honest, the benefit is if you keep going with the same monthly payment. The advantage is that you clear the mortgage by a fair number of years, although it slows down again when you take the cash out. Gordon Gekko makes a fair point in terms of not overpaying if you feel you need the money later. It really depends on your priorities - I would overpay (I have done so) but my circumstances were different so you have to do what's most appropriate for you. You could of course do a half and half, but have a look at the amount of interest you are paying early on - it will give you pause for thought!

Hope this helps,

Opus 2018

 

[Leo]

We confirm that an amount overpaid to your mortgage account will be available to you to re-draw, subject to the terms and conditions prevailing at the time of the request.

Based on the bolded piece they can alter the terms to remove this facility at any time.

 

[Brendan Burgess]

Hi SSE

If you put the money on deposit now at 0% interest, this is what your mortgage will look like after 5 years (based on €250,000 @2.5% over 31 years.) Your repayments will be €966 per month.

If you keep up the same repayment of €966 per month and pay €90k off now but withdraw €18k a year for 5 years, your account will look something like this.

So you save €6,361 - which ties in with GNF's €6,750. I have underestimated the interest a bit.

You will then owe about €215k over 26 years, instead of owing €221k over 26 years.

So this doesn't really make any sense:

The capital figure on our mortgage would increase by €90,000 in 5 years if we withdraw all the money and we would have to repay it over the remaining 26 year term instead of our current 31 years at whatever interest rate will prevail then.

If you overpay by €90k now and withdraw it over 5 years, the capital figure will be lower than it would otherwise have been had you not overpaid it.

But of course, if you overpay €90k now and withdraw it, the capital figure will be higher than if you had not withdrawn it.

Brendan

 

[Steven Barrett]

It does depend on what guarantees the person has from KBC - and this is exactly why I said to be very careful in this regard

In my own situation, for example, the guarantees around over-payments are written into a mediated agreement with the FSO - so I would be pretty confident the bank would not attempt to default on them. That said, I hope never to have to redraw the funds overpaid.

However, yes it does depend on how safe the person feels the written confirmation is..

Like all the people who were told they'd get their tracker rate back?!!

A guarantee is only as good as the person giving it. And going on bank's track records on tracker mortgages...

 

[gnf_ireland]

Based on the bolded piece they can alter the terms to remove this facility at any time.

Absolutely agree with Leo here. This guarantee needs to be treated with caution, as it does give them the option of changing their rules in the future. Is there any reference to overpayment capabilities in your original mortgage agreement you signed with KBC.

I rang the bank several times and each person I spoke to said that the overpayment was my money and any and all of it can be withdrawn at any time by me. They said that their calls are recorded and that the recordings are also evidence that this was promised to me.

Like all the people who were told they'd get their tracker rate back?!!
A guarantee is only as good as the person giving it. And going on bank's track records on tracker mortgages...

Personally I would not be comfortable with the 'guarantee' you have. There are too many risks associated to it in my view, and this is for money that you need, and have a plan to spend.

 

[gnf_ireland]

The bank said that my repayments would reduce by €396/month if I was to overpay but you are saying that the only real saving to me is €112/month or so (more in the early years, less in the latter years) and that I should really only decrease my actual mortgage payments by that amount per month so as not to be caught out at the end of the 5 years.

You really need to look at your personal circumstances using a mortgage overpayment calculator. I use the following one, but some others use different ones.


There are two things to keep in mind, as @Brendan Burgess has shown. One if the monthly repayment and the second is the outstanding mortgage balance after 5 years.

If you do make no overpayments, your situation would look something like this:

• 250k for 26 years @ 2.5% is 1,091 per month. The balance after 5 years is 213,636

If you overpay by 90k today, and redraw 18k every 12 months for the next 5 years, your situation would look something like this (based on my rough figures):

• balance is 250k, overpay by 90k
• 160k for 26 years @ 2.5% is 698 per month. After 1 year the balance is 155,575
• You redraw 18k after 1 year
• 173,575 for 25 years @ 2.5% is 779 per month. After 1 year the balance is 168,513
• You redraw 18k after 2 years
• 186,513 for 24 years @ 2.5% is 862 per month. After 1 year the balance is 180,769
• You redraw 18k after 3 years
• 198,769 for 23 years @ 2.5% is 948 per month. After 1 year the balance is 192,293
• You redraw 18k after 4 years
• 210,293 for 22 years @ 2.5% is 1,037 per month. After 1 year the balance is 203,031
• You redraw 18k after 5 years
• 221,031 for 21 years @ 2.5% is 1,128 per month

So up to the 5 year mark, you will save money on the monthly premiums (roughly 13500 euro) BUT your mortgage balance would be roughly 7400 euro higher. This means that you would effectively pay 37 euro more each month (assuming 2.5% for the lifetime of the mortgage) for the remaining 21 years. This offsets your benefits by roughly 9325 euro, reducing the overall benefit to roughly 4250 euro.

This obviously does not factor in the time value of money, or changes to interest rates.