Mortgages and overpayments are frequent topics in the personal finance community.
However personally, I do not overpay my mortgage.
Nowadays I just pay the contractual amount and no more.
But I wasn’t always like this.
I used to overpay
Yes, I used to be very much in the overpaying your mortgage Bandcamp. This was before I learned about investing and knew about FIRE.
My income and affordability were in a much different place then. And my LTV was up at 75%, which excluded me from the best mortgage deals,
And you know what? I believe it was the correct decision for me to overpay then, as much as I believe it’s the correct decision for me to not overpay now.
Buying a house 5 x base salary
So, I bought a house that stretched me. I took a mortgage that was the biggest number that the banks would lend me. I choose the mortgage lender that would lend me more in my situation. Hence, my mortgage was large compared to my income.
And the amount of my mortgage scared me at the time – it was a colossal amount of money. Moreover, I emptied all my savings to pay for that house. I stretched myself to buy the best house, rather than settle for an OK house. Do I regret that? Not at all, with some survivor bias, I can say it was the correct decision.
Hence I needed to keep that job to pay for the house. Given my low-security rate and no backup funds, I initially overpaid the mortgage.
Inflation 2.7% – Mortgage 1.5% – hence my mortgage is being eroded
Inflation erodes both debt and incomes. And in the UK we are now in a place where inflation is significant and outpaces the best mortgage rates.
My mortgage is now at 1.5%. Inflation is greater than that, around 2.7%. Hence in real terms, my mortgage is decreasing. Over the 7 years, I have had this house, mortgage rates have consistently edged down and remained down.
And the erosion of my mortgage by inflation is one of the key reasons I now don’t overpay.
Moreover, I now divert a large chunk of my disposable income into investments instead of overpaying. And therefore I have been in the position for a while that I could pay off my full mortgage tomorrow if I wanted to.
Yes, I have more than the amount of my mortgage in investments – hence I am mortgage neutral. I make the choice to keep my funds in investments and maintain the mortgage as I believe this will be better for me financially. I am using the leverage available to me in this mainstream financial product.
With Money comes less worry
And that’s the truth – the more money you have the fewer worries you have about surviving. Many studies have shown that of the many challenges faced by those in poverty the effort needed to maintain financial control is much greater than for the affluent.
For some people, an unexpected leak or car breakdown can break their budget and plunge them into debt. However, as someone with significant reserves and cash flow, these worries do affect me. So overall this results in a more laid-back attitude. I know I have the funds to cover any emergency.
In addition, if I come across a barrier or a frustration, I am in a position to throw money at it. I can use money as a tool to reduce friction and annoyances in my life. Money can smooth the way in many, many situations in life.
So onto risk. No discussion of mortgage overpaying would be complete with looking into risk profiles. I am a bit of a risk taker. I like to challenge boundaries and see what is possible. And since I have the financial basics covered and have enough money to cover any eventualities I have a high-risk tolerance.
I don’t need the security of having a paid off home. I am not worried or concerned that the bank could repossess me or my fortunes could fade and I’d need to downsize. These are acceptable risks that I am happy to take on.
Therefore I am happy to invest the money instead of overpaying my mortgage. I understand the maths says this usually results in larger financial gains. But also that I could lose money and end up worse off. The balance of probabilities has been weighed up, and I am in the team let’s take a risk.
Privilege and Luck
As I get more affluent, I realise what privilege it is to be in this position. All that hard work over the years has allowed me to become comfortable in my late thirties. I can now gamble with money and hope my luck maintains itself.
The housing ladder has been very good to me since I jumped on it aged 19. This is luck in action – I took calculated risks each time and it has worked out well for me. But timing and good fortune played a massive role here.
And I am realising more and more how the mega-rich keep their fortunes. It really does take money to make money. And you need a base level of financial stability to cover your needs so you can afford to take risks. And most of the population never get this opportunity.
There are times when you should overpay
Just to make sure I’m clear here – I do believe there are occasions when you should overpay.
These are circumstances such as when you reach normal pension age, who you want to get into the lower LTV band if you are a higher rate taxpayer and don’t have the risk appetite. Some people also have a strong irrational dislike to debt, even when used as leverage.
I used to be concerned about LTV and the size of my loan and overpaid. However, I am not in any of these situations currently, therefore, I do not overpay today. I understand the risks and am happy to assume them.
Over to you
- What are your thoughts?
- Do you overpay your mortgage?
- Have you changed your approach on this?