Should I overpay to end a fixed-rate mortgage early? [duplicate]
I would strongly encourage you to either find specifically where in your written contract the handling of early/over payments are defined and post it for us to help you, or that you go and visit a licensed real estate attorney. Even at a ridiculously high price of 850 pounds per hour for a top UK law firm (and I suspect you can find a competent lawyer for 10-20% of that amount), it would cost you less than a year of prepayment penalty to get professional advice on what to do with your mortgage. A certified public accountant (CPA) might be able to advise you, as well, if that's any easier for you to find. I have the sneaking suspicion that the company representatives are not being entirely forthcoming with you, thus the need for outside advice. Generally speaking, loans are given an interest rate per period (such as yearly APR), and you pay a percentage (the interest) of the total amount of money you owe (the principle). So if you owe 100,000 at 5% APR, you accrue 5,000 in interest that year. If you pay only the interest each year, you'll pay 50,000 in interest over 10 years - but if you pay everything off in year 8, at a minimum you'd have paid 10,000 less in interest (assuming no prepayment penalties, which you have some of those). So paying off early does not change your APR or your principle amount paid, but it should drastically reduce the interest you pay. Amortization schedules don't change that - they just keep the payments even over the scheduled full life of the loan. Even with prepayment penalties, these are customarily billed at less than 6 months of interest (at the rate you would have payed if you kept the loan), so if you are supposedly on the hook for more than that again I highly suspect something fishy is going on - in which case you'd probably want legal representation to help you put a stop to it. In short, something is definitely and most certainly wrong if paying off a loan years in advance - even after taking into account pre-payment penalties - costs you the same or more than paying the loan off over the full term, on schedule. This is highly abnormal, and frankly even in the US I'd consider it scandalous if it were the case. So please, do look deeper into this - something isn't right! "The simplest argument for overpayment is this: Let's suppose your fixed rate mortgage has an interest rate of 4.00%. Every £1 you can afford to overpay gives you a guaranteed effective return of 4.00% gross. Yes your monthly mortgage payment will stay the same; however, the proportion of it that's paying off interest every month will be less, and the amount that's actually going into acquiring the bricks and mortar of your home will be greater. So in a sense your returns are ""inverted"" i.e. because every £1 you overpay is £1 you don't need to keep paying 4% a year to continue borrowing. In your case this return will be locked away for a few more years, until you can remortgage the property. However, compared to some other things you could do with your excess £1s, this is a very generous and safe return that is well above the average rate of UK inflation for the past ten years. Let's compare that to some other options for your extra £1s: Cash savings: The most competitive rate I can currently find for instant access is 1.63% from ICICI. If you are prepared to lock your money away until March 2020, Melton Mowbray Building Society has a fixed rate bond that will pay you 2.60% gross. On these accounts you pay income tax at your marginal rate on any interest received. For a basic rate taxpayer that's 20%. If you're a higher rate taxpayer that means 40% of this interest is deducted as tax. In other words: assuming you pay income tax at one of these rates, to get an effective return of 4.00% on cash savings you'd have to find an account paying: Cash ISAs: these accounts are tax sheltered, so the income tax equation isn't an issue. However, the best rate I can find on a 4 year fixed rate cash ISA is 2.35% from Leeds Building Society. As you can see, it's a long way below the returns you can get from overpaying. To find returns such as that you would have to take a lot more risk with your money – for example: Stock market investments: For example, an index fund tracking the FTSE 100 (UK-listed blue chip companies) could have given you a total return of 3.62% over the last 3 years (past performance does not equal future returns). Over a longer time period this return should be better – historical performance suggests somewhere between 5 to 6% is the norm. But take a closer look and you'll see that over the last six months of 2015 this fund had a negative return of 6.11%, i.e. for a time you'd have been losing money. How would you feel about that kind of volatility? In conclusion: I understand your frustration at having locked in to a long term fixed rate (effectively insuring against rates going up), then seeing rates stay low for longer than most commentators thought. However, overpaying your mortgage is one way you can turn this situation into a pretty good deal for yourself – a 4% guaranteed return is one that most cash savers would envy. In response to comments, I've uploaded a spreadsheet that I hope will make the numbers clearer. I've used an example of owing £100k over 25 years at an unvarying 4% interest, and shown the scenarios with and without making a £100/month voluntary overpayment, assuming your lender allows this. Here's the sheet: https://www.scribd.com/doc/294640994/Mortgage-Amortization-Sheet-Mortgage-Overpayment-Comparison After one year you have made £1,200 in overpayments. You now owe £1,222.25 less than if you hadn't overpaid.  After five years you owe £6,629 less on your mortgage, having overpaid in £6,000 so far. Should you remortgage at this point that £629 is your return so far, and you also have £6k more equity in the property.  If you keep going: After 65 months you are paying more capital than interest out of your monthly payment. This takes until 93 months without overpayments. In total, if you keep up £100/month overpayment, you pay £15,533 less interest overall, and end your mortgage six years early. You can play with the spreadsheet inputs to see the effect of different overpayment amounts. Hope this helps."
I would think it depends on when within the 7 years you're planning to move. If you want to move within a year or two, the closing costs for the new mortgage may postpone the break even until after your move date; that wouldn't be a financially smart decision. If your plans suggest you're going to move after the break even point I'd definitely refi sooner rather than later and would try to reduce the term, either by overpaying or by choosing a 15 year mortgage that should have an even lower interest rate anyway. 1) How does owning a home fit into my financial portfolio? Most seem to agree that at best it is a hedge against rent or dollar inflation, and at worst it should be viewed as a liability, and has no place alongside other real investments. Periods of high inflation are generally accompanied with high(er) interest rates. Any home is a liability, as has been pointed out in other answers; it costs money to live in, it costs money to keep in good shape, and it offers you no return unless you sell it for more than you have paid for it in total (in fact, as long as you have an outstanding mortgage, it actually costs you money to own, even when not considering things like property taxes, utilities etc.). The only way to make a home an investment is to rent it out for more than it costs you in total to own, but then you can't live in it instead. 2) How should one view payments on a home mortgage? How are they similar or different to investing in low-risk low-reward investments? Like JoeTaxpayer said in a comment, paying off your mortgage should be considered the same as putting money into a certificate of deposit with a term and return equivalent to your mortgage interest cost (adjusting for tax effects). What is important to remember about paying off a mortgage, besides the simple and not so unimportant fact that it lowers your financial risk over time, is that over time it improves your cash flow. If interest rates don't change (unlikely), then as long as you keep paying the interest vigilantly but don't pay down the principal (assuming that the bank is happy with such an arrangement), your monthly cost remains the same and will do so in perpetuity. You currently have a cash flow that enables you to pay down the principal on the loan, and are putting some fairly significant amount of money towards that end. Now, suppose that you were to lose your job, which means a significant cut in the household income. If this cut means that you can't afford paying down the mortgage at the same rate as before, you can always call the bank and tell them to stop the extra payments until you get your ducks back in the proverbial row. It's also possible, with a long history of paying on time and a loan significantly smaller than what the house would bring in in a sale, that you could renegotiate the loan with an extended term, which depending on the exact terms may lower your monthly cost further. If the size of the loan is largely the same as or perhaps even exceeds the market value of the house, the bank would be a lot more unlikely to cooperate in such a scenario. It's also a good idea to at the very least aim to be free of debt by the time you retire. Even if one assumes that the pension systems will be the same by then as they are now (some don't, but that's a completely different question), you are likely to see a significant cut in cash flow on retirement day. Any fixed expenses which cannot easily be cut if needed are going to become a lot more of a liability when you are actually at least in part living off your savings rather than contributing to them. The earlier you get the mortgage paid off, the earlier you will have the freedom to put into other forms of savings the money which is now going not just to principal but to interest as well. What is important to consider is that paying off a mortgage is a very illiquid form of savings; on the other hand, money in stocks, bonds, various mutual funds, and savings accounts, tends to be highly liquid. It is always a good idea to have some savings in easily accessible form, some of it in very low-risk investments such as a simple interest-bearing savings account or government bonds (despite their low rate of return) before you start to aggressively pay down loans, because (particularly when you own a home) you never know when something might come up that ends up costing a fair chunk of money. The other answers have offered some great advice, but here is an alternative that hasn't been mentioned yet. I'm assuming that you have an adequately-sized emergency fund in savings, and that your cars are your only non-mortgage debt. Since you still have car debt, you probably don't have anything saved for buying a new car when your current cars are at the end-of-life. Consider paying off your car loans early, then begin saving for your next car. Having cash in the bank for a car is very freeing, and it changes your mindset when it comes time to purchase a car, as it is easy to waste a lot of money on something that depreciates rapidly when you aren't paying for it immediately.  This approach might be counterintuitive if your car loan interest rate is less than your mortgage rate, but you will probably need another car before you need another house, and paying cash for a car is worth doing. "Does it ever make sense? Yes, but almost never.  If you're in a situation where you're invested in something with low rates (think government securities) or cash equivalents, then you do need to think about rate spread as you mention. Does the savings over the life over the mortgage beat out the 35% hit now, plus all the interest you would earn over those 20 years? Have you factored in other considerations such as mortgage interest deduction on taxes? Don't forget you need to think about how rates will change down the line (they can't go much lower, so potentially you'll get better rates in the 401(k) down the line). Don't forget there's also the impact of inflation; again the rates on your savings may go up, but your mortgage is a fixed payment, so with even a low rate of inflation, your payments effectively become ""less"" over time. If your investments are in something like stocks and bonds, then I would say undoubtedly you would want to keep the money in the 401(k). Time in market and compounding are your best friends over a long time horizon. Also, as mentioned by @JohnFX, the hit of your 35% now is something you will absolutely feel now. Hopefully not, but your life situation could change where you have an emergency and need to drain your savings or you may not see the end of that 20 years." I would think it depends on when within the 7 years you're planning to move. If you want to move within a year or two, the closing costs for the new mortgage may postpone the break even until after your move date; that wouldn't be a financially smart decision. If your plans suggest you're going to move after the break even point I'd definitely refi sooner rather than later and would try to reduce the term, either by overpaying or by choosing a 15 year mortgage that should have an even lower interest rate anyway. To add to JoeTaxpayer's answer, the cost of providing (term) life insurance for one year increases with the age of the insured. Thus, if you buy a 30-year term policy with level premiums (the premium is the same for 30 years) then, during the earlier years, you pay more than the cost to the insurance company for providing the benefit. In later years, you pay somewhat less than the cost of providing the insurance. The excess premiums that the insurance company charged in earlier years and the earnings from investing that money covers the difference between the premium paid in later years and the true cost of providing the coverage.  If after 20 years you decide that you no longer need the protection (children have grown up and now have jobs etc) and you cancel the policy, you will have overpaid for the protection that you got. The insurance company will not give you backsies on the overpayment. As an alternative, you might want to consider a term life insurance policy in which the premiums increase each year (or increase every 5 years) and thus better approximate the actual cost to the insurance company. One advantage is that you pay less in early life and pay more in later years (when hopefully your income will have increased and you can afford to pay more). Thus, you can get a policy with a larger face value (150K for your wife and 400K for yourself is really quite small) with annual premium of $550 now and more in later years. Also if you decide to cancel the policy after 20 years, you will not have overpaid for the level of coverage provided. Finally, in addition to a policy with larger face value, I recommend that you include the mortgage (if any) on your house in the amount that you decide is enough for your family to live on and to send the kids to college, etc., or get a separate (term life insurance) policy to cover the mortgage on your home. Many mortgage contracts have clauses to the effect that the entire principal owed becomes immediately due if either of the borrowers dies. Yes, the widow or widower can get a replacement mortgage, or prove to the lender that the monthly payments will continue as before, (or pay off the mortgage from that $150K or $400K which will leave a heck of a lot less for the family to survive on) etc., but in the middle of dealing with all the hassles created by a death in the family, this is one headache that can be taken care of now.  The advantage of including the mortgage amount in a single policy that will support the family when you are gone is that you get a bit of a break; the sum of the annual premiums on ten policies for $100K is more than the premiums for a single $1M policy. There is also the consideration that the principal owed on the mortgage declines over the years (very slowly at first, though) and so there will be more money available for living expenses in later years. Alternatively, consider a special term life insurance policy geared towards mortgage coverage. The face value of this policy reduces each year to match the amount still due on the mortgage. Note that you may already have such a policy in place because the lender has insisted on you getting such a policy as a condition for issuing the loan. In this case, keep in mind that not only is the lender the  beneficiary of such a policy, but if you bought the policy through the lender, you are providing extra profit to the lender; you can get a similar policy at lower premiums on the open market than the policy that your lender has so thoughtfully provided you.  I bought mine from a source that caters to employees of nonprofit organizations and public sector employees; your mileage may vary. Interesting thing is not all of this analysis is typically done by the person you are speaking with re: your mortgage.  Likely there is an economic team (at some institution or another, as many many loans are sold/distributed in some fashion), finance team, and all of them are looking at various rates etc.  Typically what is offered is matching an offsetting liability somewhere else.  So there may be cases where the spread someone is looking to pick up might be tighter or looser within institutions or types of institutions vs others, even though the overall market is at one place.  (e.g. banks vs. insurance companies).    So you may have negotiating room at a certain term, but not another, or the reverse at another firm.  One firm might have lots of 10 year money, while another might be limited, so will be picky in what they choose.  Either more conservative loan terms/ltv, or a higher spread, for example.  So many things go into the ultimate rate someone can get, but in theory the blog did a decent job. Paying this off early is robbing yourself of the extra earning potential for this money.  Think of it as an interest free loan from your future self.  If you can otherwise use that money to get a better rate of return then you are better off putting it there.  Best options would normally be to use it to buy additional regular RRSPs, RESPs, or TFSA because of government benefits but even puting the extra into a GIC for a year is better than paying back home buyers plan early.