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I keep a household budget spreadsheet, one tab of which represents our savings.

Some of our savings is in traditional savings vehicles (ISAs etc.), but some of it has been used to overpay the mortgage.

Our mortgage permits us to make overpayments, while keeping our monthly payments the same; the overpayments are deducted from the capital balance owing and have the effect of reducing the term of the mortgage. The overpayments can be withdrawn at any time but this would extend the term of the mortgage back towards its original date.

I can't work out whether it makes sense to include these overpayments in the total of our savings or not. They currently form part of our emergency money in that they are liquid and could be used if we were hit with some large unforeseen event. But, at the time that the mortgage reaches term (in about 11 years from now), the money effectively evaporates and will no longer be available for withdrawal as it has been used to pay off the mortgage.

Am I being unwise to include this in the "Savings" category, and how else should I represent it if not as "Savings"?

At present we have about 1 year's income in savings but about 1/3 of this is in the mortgage overpayments, which are reducing the term by about 6 years (from Jan 2032 to March 2026). (Given how poor savings rates are at the moment, it's very tempting to put more towards the mortgage as well...)

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    The overpayments can be withdrawn? May I adk whT country you are in? This sounds like the Austailian mortgage process. Never seen this in U.S. – JoeTaxpayer May 12 '15 at 13:10
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    It's not uncommon in the United Kingdom - for example one of the biggest mortgage lenders, Nationwide Building Society, allow this. – Ganesh Sittampalam May 12 '15 at 14:14
  • All of the overpayment money is available for withdrawal as soon as you need it? Are there any fees associated, kind of like withdrawing early from a 401K? – MonkeyZeus May 12 '15 at 14:45
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    @GaneshSittampalam - Unfortunately that's only true of older Nationwide products. For newer ones they don't allow overpayments to be withdrawn. When my wife and I moved house and remortgaged last year we therefore lost this facility. – AndyT May 12 '15 at 15:52
  • @JoeTaxpayer Vicky's profile says she is from "Cambridge, United Kingdom" – Tim S. May 12 '15 at 15:56
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I would represent it as "Savings" for now, as it is available for withdrawal and will be for quite a while. I'm in the same position and I take that approach.

But you need to keep a close eye as the mortgage approaches term and make an explicit decision at that point whether you want to pay off the mortgage then or keep it going. If you do want to keep the mortgage going obviously you'd need to withdraw the overpayment in time.

If you do decide to pay off the mortgage then at that point make an explicit transfer from "Savings" to "Mortgage".

The downside of this approach is that it does require explicit action from you to preserve it as savings. If you think this might get missed you could make up another category for it instead. In the end this is all about influencing how you think about it, so there's no unambiguously right answer.

EDIT:

Since your mortgage is with Nationwide, you also have the option of asking them to reduce the monthly payments rather than the term when you make an overpayment. If you actually want to retain the same rate of monthly payments, you can then top up your normal monthly payments with an overpayment for the difference.

This does rely on your mortgage product having unlimited overpayments - fixed-rate products often limit overpayments for the term of the fixed-rate.

Also if you make the same payments, you'll logically still reach a zero balance on the mortgage early. However, with the original term unchanged, as you approach zero, the normal monthly payments will also diminish to zero. So if you make sure the overpayments stop before you hit zero, you should be able to keep the mortgage going for the rest of the term with a very small balance.

It will also complicate the accounting: as the mortgage advances, the "overpayment reserve" should naturally drop to reflect the payments you should have been making, though it looks to me like Nationwide don't actually reflect that in the "Current total overpayment" they show in the mortgage statement online. I think you can handle that by making a notional transfer from "Savings" to "Mortgage" every month to make up the difference between the payment actually made and the payment you would have made on the original amortisation schedule. In any month where you actually pay more than the required payment, that difference is an increase in your "Savings".

  • I don't think we'll forget the explicit action - I guess I mostly just don't like the idea of my savings suddenly jumping from "X" to "2/3 X" without me having taken any intermediate action. Makes me inherently uncomfortable! – Vicky May 12 '15 at 17:29
  • I've got our Nationwide mortgage setup so overpayments reduce the payment rather than the term - would that address that problem? If you're on a fixed-rate product with limited overpayments then it doesn't work so well, but if you have unlimited overpayments then it doesn't really matter whether you have lower regular payments and higher overpayments. – Ganesh Sittampalam May 12 '15 at 18:05
  • Reducing the payments won't solve my problem really - I don't want to be paying less now (when I can afford to pay the existing payment) - I'd rather get it paid off while interest rates are low. Otherwise I risk ending up with a much higher payment later if rates go up! I'm on a lifetime tracker (base rate + 0.18%, the joys of having a mortgage taken out before the credit crunch!!) – Vicky May 12 '15 at 18:08
  • But if your overpayments are unlimited, you can just pay the difference as an overpayment. – Ganesh Sittampalam May 12 '15 at 18:22
  • Oh I see. So apply the (existing lump sum) overpayment to reduce the monthly payments (keeping the term as it was originally) and then continue to make the same monthly payments, some proportion of which would now be overpayments. Hmmm. I see. Interesting thought./ – Vicky May 12 '15 at 20:29
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The same as you would account for any debt repayment. It's balance sheet neutral. You owed, say $1000, and had $1000 in savings. Both are now gone.

In my opinion, it's a good thing, but that money will not always be available to you. Even with the provision allowing withdrawals, I imagine your withdrawals are limited to a maximum balance based on the original amortization, in other words there is a maximum mortgage balance the declines as what a normal mortgage anything below that can be withdrawn. Correct?

  • Interesting, I don't think there is any maximum balance that can't be withdrawn beyond in that sense - because the money is still being used to reduce the term, that is effectively providing the cap against time... I'm not explaining myself very well, but if you graph how much I can withdraw against time, it's the full amount I have overpaid until suddenly the mortgage reaches term (early) and then it's £0. If you draw the diagonal line from the mortgage start date to the original end date, it would go through the same point on the graph that the step is at. – Vicky May 12 '15 at 17:28
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    I thing we are in agreement. You can borrow back the overpayment, but your debt cannot exceed the natural amortization. i.e. if you borrow it all back you still end the loan in 2032. – JoeTaxpayer May 12 '15 at 18:53
  • Yes, exactly. You explained it much better than I did, though :-) – Vicky May 12 '15 at 20:27

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