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:
- 5.00% before basic rate tax of 20% (
5.00 * 0.8 = 4.00)
- 6.67% before higher rate tax of 40% (
6.67 * 0.6 = 4.00)
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?
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.