Magic Number 2 8 8 – A Better Calculator Mortgage

1. Magic Number 2 8 8 – A Better Calculator Mortgage Interest Rate
2. Magic Number 2 8 8 – A Better Calculator Mortgage Calculator
3. Magic Number 2 8 8 – A Better Calculator Mortgage Calculator
4. Magic Number 2 8 8 – A Better Calculator Mortgages
5. Magic Number 2 8 8 – A Better Calculator Mortgage

1. Magic Number is the most intuitive calculator. Do everyday math with joy. Handle hard problems with ease. Whether you are learning fractions or crunching complex numbers, Magic Number is the ideal companion for education, science, engineering, business, and more.
2. The Mortgage Calculator helps estimate the monthly payment due along with other financial costs associated with mortgages. There are options to include extra payments or annual percentage increases of common mortgage-related expenses.

The homeowner also has a car loan for $25,000 at 8%, a student loan for $10,000 at 6%, and several credit cards with balances totaling $15,000 all at double-digit interest rates. The homeowner would take out a new mortgage on his or her home for $225,000.

Deciding whether to overpay the mortgage or pay more into the pension is a tough decision. The choice of paying less interest and eventually having a paid-for home against potentially much higher returns that aren't guaranteed.

Disclaimer:This is not financial advice. This is post is for educational purposes only. If you are unsure of what to do consider seeking an independent financial advisor.

Every couple of years I review my own personal finances and decide whether I should overpay the mortgage or invest more in my pension. The factors which govern the decision change can every year.

By overpaying the mortgage you can typically expect lower returns but with a higher level of security due to reducing your levels of debt. Paying more into a pension will benefit you in the form of tax relief as well as higher expected returns although these returns are not guaranteed and your capital is at risk depending on how it is invested.

Whether you decide to overpay your mortgage or pay more into your pension will depend on a number of factors unique to your personal situation and psychology.

Here are some of the things to consider.

Security of Owning More of Your Home

One of the biggest factors in deciding whether to overpay your mortgage or pay more into your pension is based on your own psychology and risk levels towards money, rather than black and white mathematical scenarios.

Debt is a risk. If at any point in the future you can't afford to keep up with your mortgage payments you risk losing your home. It is, therefore, no surprise that many people take great comfort from paying off their mortgage and owning their home outright.

Once paid off you have the option of putting the equivalent of repayments into your pension or other investments. How those investments fluctuate feels less relevant when you have your home paid off.

These are some of the key questions you might ask yourself:

• Do you want to feel more secure in having paid off more of your home? That feeling of security brings happiness to some.
• How comfortable are you with the size of your current mortgage payments? Do you feel overextended and want to build up more equity?
• In recent times we have lived during a period of very low-interest rates, but if that should change will you be able to afford higher repayments if interest rates rise?
• Do you have enough savings elsewhere to cover payments should your income reduce and affording the mortgage ever become a temporary issue. Do you have an emergency fund to cover a possible job loss?
• Do you want to clear your mortgage before you retire so your pension doesn't have to be large enough to cover your monthly mortgage payments? Are you on track to do this?

Comparing Interest Rates and Investment Returns

In this era of exceeding low interest rates the financial long term benefits of overpaying the mortgage in terms of returns are very low.

Typically over the long term, we can expect returns from pension investments to be an average of 7 to 8%, which compounding over many years can result in significantly higher returns than saving on 1.5-2% mortgage interest.

The lower interest rates are, the more compelling it is to invest in a pension.

However, investment returns are not guaranteed and your capital is at risk.

Workout How Much Will You Save Overpaying Mortgage

To start with you can use the MSE overpayment calculator to work out how much money you will save if you start overpaying your mortgage, either with a lump sum or recurring payments.

Example savings:

• A £1000 lump sum payment on a £100,000 mortgage at an interest rate of 2% would save £642 over 25 years.
• A £1000 lump sum payment on a £100,000 mortgage at an interest rate of 4% would save £1684 over 25 years.

At the time of writing, it's quite possible to get a mortgage rate at 2% or lower.

Workout Potential Investment Returns

Next, you can work out your potential investment returns

Using a compound interest calculator to calculate the following rates of return annually:

£1000 at 2% returns over 25 years would be worth £1640.41 (£1000 principal + £640.41 interest)

£1000 at 7% returns over 25 years would be worth £5427.42 (£1000 principal + £4427.42 interest)

A difference of 5% in the rates of returns results in nearly 7 times more interest, and more than quadrupling the intial starting principal sum of £1000.

I prefer to err on the side of caution using 7%, but if 8% returns can be achieved over 25 years, the interest alone is £6340, almost 10 times that of overpaying a mortgage 2%.

These calculations don't include the fact you would benefit from the 25% tax top up and in effect start with £1000 + £250 added on top. Higher tax rate taxpayers claim the extra 25% to 31% through their self-assessment tax returns. Although not added directly to the pension pot it effectively means the initial £1000 has cost you less.

This extra boost makes an even bigger difference to projected returns.

Over Paying the Mortgage

The other key factors to consider when deciding whether to over mortgage or invest in a pension are:

Redemption Fees

If you are considering overpaying your mortgage, make sure there are no redemption fees to pay, which in some cases could amount to thousands of pounds. These are typically on fixed-rate term mortgages. Although some of these still let you overpay to a certain amount without incurring fees, for example, overpay up to 10% with no fees. Check your mortgage T&C's.

If you are on a fixed-term mortgage your only option in the meantime might be to pay extra into your pension until a time when you can actually over your mortgage.

Inflation

If inflation is above the interest rate of your mortgage you are essentially losing value on those returns. One of the advantages of investing in your pension is that you can expect the returns to exceed inflation, even if not guaranteed.

Another factor that some people take into consideration is how inflation reduces the value of debt over time. Your £150,000 mortgage may not seem like such a huge debt in 25 years time when a new mortgage on the same property might be £500,000 due to inflation.

By paying off the mortgage debt early you are potentially losing out on the benefit of inflation on the debt.

Accessible Equity

If you put your money in a pension it's out of reach until you either qualify for the 25% tax-free lump sum or you reach retirement age.

However, with equity in a house in theory it is accessible, (albeit not readily) should you want or need to.

For example, some people remortgage if an opportunity for higher returns arises, such as buying an investment buy to let. Or perhaps they want to build an extension that will also increase the value of their property.

Other people might suffer from ill health, be unable to work and want to take advantage of equity release years before they are due to retire. (I've seen people benefit from this first hand).

Another example might be when people downsize property when the kids have all left home and free up some equity to enjoy life while they can.

Although these aren't generally the options considered by most people when aiming to pay off their home, but they are factors for some, often based on unexpected life circumstances.

Advantages of Overpaying Mortgage:

• Guaranteed returns
• No tax on the savings you make
• Feeling of security
• Higher % equity in the property (lower Loan to Value) could qualify you for better rate deals in future
• Potentially the option for lower payments if you remortgage over the same term
• A paid-off mortgage significantly reduces monthly outgoings
• Lower pension required if your is home paid off
• Building equity you could in theory access before retirement (remortgage, sell to rent, equity release)

Disadvantages of Overpaying Mortgage:

• Your overpayments are not accessible in times of need (you may be able to withdraw equity but not when you can't afford the repayments
• Your home is still potentially at risk if ever you can't afford to meet repayments in the future
• Not allowing inflation to reduce the relative value of the debt over time

Paying More Into Your Pension

The higher the rate of tax you pay, the more advantageous paying into a pension becomes. 40% tax relief is more than the rate of tax you will pay on earnings in retirement if you are a basic ratepayer and in a good position to be in.

Pension Tax Relief (Extra 20-45%)

One of the key factors in favour of paying into a pension is the tax relief you benefit from immediately.

The amount of tax relief you get is based on your income in the current financial year.

• Non-taxpayers will get 20%
• Basic rate taxpayers will get 20%
• High rate taxpayers can get 40%%
• Additional rate taxpayers get 45%.

This means as a basic rate taxpayer if you contribute £80 to your pension the government will add £20 making a total of £100.

With higher rate taxpayers, if they also contribute £80 to their pension the government adds £20. The remaining £20 is claimed as tax relief through your Self Assessment tax return or contact HMRC. See the HMRC tax relief page.

This is a key factor, as you can see it is far more beneficial for higher and additional rate taxpayers to pay into a pension.

Bear in mind, you will get taxed on pension income when you come to draw it (excluding the 25% tax-free lump sum).

If you are someone benefiting from higher rates of tax relief and expecting to be a basic rate taxpayer in retirement the benefit is at its greatest.

For more information on pension tax relief and a pension tax relief, calculator by Which? click here.

Workplace Pensions – Matched Contributions Boost

If you have a workplace pension and get matched contributions increased from your employer this is the best position to be in and well worth considering.

Matched contributions and tax relief combined is the heaviest weighting towards it being most beneficial to pay more into your pension. It's essentially two lots of additional free money.

However, not everyone has a workplace pension if they are self employed.

Advantages of Paying More Into Pension

• Pension tax relief (20-45%)
• Workplace pension – matched contributions
• Higher potential returns
• Could potential pay off the mortgage in the future with the 25% tax-free lump sum

Disadvantages of Paying More Into Pension

• No access to money
• Pension rules can change (age of drawing, taxation)
• Returns not guaranteed (higher risk)
• Drawings are taxed

Other Factors to Consider

Current Mortgage and Pension Pot Size

Another factor to maybe consider is the overall size of your mortgage and your pension pot.

If you have a comfortable mortgage but haven't even started a pension, now could be the time to start.

Or vice versa, perhaps you have built a pension pot over years but have recently taken out a much bigger mortgage.

Age / Timeframe

It could be argued that the younger you are and the longer timeline of your pension the more advantageous it might be to invest in your pension so the magic of compounding those returns can start to work as soon as possible.

With a shorter timeline, say 5-10 years, there's less time for your investments to grow.

Your Overall Personal Finances

Are your personal finances in good enough order to be

Have you paid off other interesting bearing debts?

Do you have a 3 – 6 month emergency fund, to cover any unexpected expenses or life situations such as losing a job and covering those mortgage payments in times of need?

These are 2 key questions that should be considered before even deciding to pay more into a pension or overpay the mortgage.

Another factor might be whether you have other savings or accessible investments with which to cover mortgage costs if you ever faced a loss of income. Imazing 2 0 5. If you know you can cover the mortgage in any event, this may make it easier for some to opt towards paying more in the pension.

Do Both?

Another option you have is to do some of both, overpay the mortgage and increase pension contributions, just doing less of each.

You can review your payments annually and adjust anytime one way or the other based on the relevant changes to the financial metrics and your own personal financial situation.

If you are unsure, often a balanced approach is a good way to go.

What Do I do?

Over the years I have opted to do both, overpay the mortgage and pay extra into my pension. Some years more of one than the other, and in other years just choosing one of the options.

Let's assume going forward, my personal circumstances and the financial metrics change, here's what I would consider doing:

• Higher rate taxpayer with matched workplace pension contributions – I'd pay into a pension
• Just a higher rate taxpayer but no workplace pension, I'd still lean heavily towards paying into a pension
• If I was a basic rate taxpayer I would more inclined to either focus on reducing mortgage or split between both
• If interest rates rose to 3 to 4% Id consider paying off more of the mortgage (or doing both).
• If I moved house and took on a much larger mortgage that I wasn't comfortable with long term I'd overpay the mortgage
• If stock markets took a huge dip I'd temporarily pay more into my pension

In reality, none of the above factors are black and white as there are always other factors to consider.

The financial metrics are constantly changing and will continue to do so over the course of a mortgage term.

At times I have fluctuated between times of wanting to clear my mortgage or not.

However, I didn't expect to get an interest rate of 1.74%, which for me skews me towards paying into my pension.

Magic Number 2 8 8 – A Better Calculator Mortgage Interest Rate

Ultimately

Ultimately we are all in different financial situations as well as having our own personal views on debt and risk. As long as we are giving due thought to all the factors it should enable us to choose options that we feel most comfortable with.

Unless a one-off lump sum decision, the allocation of funds to overpaying a mortgage or paid into a pension can be changed at any time.

Your Say – What Would You Do?

Has this post helped you come to a decision?

What is your preferred option and why?

Magic Number 2 8 8 – A Better Calculator Mortgage Calculator

Feel free to share in the comments.

Mortgage Calculator Results Explained

You'll need to provide a few numbers to get the most accurate estimates:

• Home price: How much you'll pay for your new home.
• Down payment: How much you're paying upfront toward the cost of the home. We have it set to 20% of the home's price as a default, because anything less might mean paying additional costs in private mortgage insurance (PMI).
• Loan term: How long you'll be paying off your loan. A 30-year mortgage is common (and is the default here), but other terms are also available.
• APR: This is the financing cost of the loan that you'll pay over time with each monthly payment, expressed as a percentage (annual percentage rate, to be specific).
• Property taxes: How much you'll owe the government in property taxes. Our calculator's default is on the high end of what you might pay, but you can get a more accurate estimate by finding out the specific rate for your potential property.
• Homeowners insurance: Lenders require that you purchase homeowners insurance, and we have it set to the typical cost. Again, you can get a better estimate by entering a more accurate number for your situation, if you know it. (It's worth getting a couple quotes.)
• HOA fees: If your home is a part of a homeowners association (HOA), you may have to pay an additional monthly fee.

Once you've provided these numbers, you'll get a few numbers in return:

• Mortgage size: This is the total amount you're financing, including the purchase price of the home (minus any down payment) and sometimes closing costs or other fees.
• Mortgage interest: This is how much it'll cost you over time to borrow this amount of money. In other words, this is how much the lender will charge as payment for giving you the mortgage.
• Total mortgage paid: This is how much you'll pay back to the lender in total (the amount you borrowed plus the interest that will accumulate).
• Estimated monthly payment: This is how much you'll pay to your lender each month.

What Costs Are Included in a Monthly Mortgage Payment?

Your lender will split your monthly payment into three separate elements:

• Principal: This portion goes toward paying down your mortgage balance—the original amount you borrowed.
• Interest: This portion goes into the lender's pocket. It's their fee for lending you the money.
• Escrow: This goes into a 'holding fund' (an escrow account) that your lender or mortgage servicer uses to pay your property taxes and homeowners insurance. They use this holding fund to make sure these crucial bills get paid. Once your mortgage is paid off, you'll have to pay your property taxes and homeowners insurance on your own.

The above costs are included in every person's monthly mortgage payment. But depending on your situation, you may also need to budget for these fees:

Magic Number 2 8 8 – A Better Calculator Mortgage Calculator

• PMI: If you make a down payment of less than 20% with a conventional mortgage, you'll need to pay an additional payment for private mortgage insurance. Certain other loans, like FHA or USDA loans, also require a similar monthly payment (mortgage insurance premium, or MIP) regardless of the size of your down payment. These costs will usually be added to your monthly mortgage payment.
• HOA fees: As noted above, if your new home is within a homeowners association (HOA), condominium, or co-op, you'll need to pay its fees either monthly or quarterly. Often, this cost won't be included in your mortgage payment, and you'll need to pay it on your own.

How Can I Calculate My Monthly Mortgage Payment?

The easiest way to calculate your monthly payment is to use a mortgage calculator like ours. But if you'd like to do it by hand to check the math, here's the formula for the principal and interest portion of your monthly payment:

M = P[i(1+i)ⁿ]/[(1+i)ⁿ-1]

Where

Magic Number 2 8 8 – A Better Calculator Mortgages

M = Monthly mortgage payment (principal plus interest)

P = Principal (i.e., the amount of the loan)

i = Your monthly interest rate (Your lender likely lists it as an annual percentage rate (APR), so to find the monthly interest rate, divide the APR by 12.)

n = How many payments you'll make over the life of the loan (For a 30-year mortgage, that's 360 payments: 30 years x 12 months per year.)

From here, you can find out your total monthly payment by adding in any other fees, including the monthly payment amount for taxes and insurance (find their annual costs and divide by 12), HOA or condo fees, and/or PMI.

What Is the Average Interest Rate on a Mortgage?

The average interest rate on a 30-year fixed-rate mortgage was 2.67% APR on Dec. 17, 2020. That's the lowest average rate since at least 1971, the Federal Reserve's earliest published rate. Mortgage rates have been falling more or less steadily since 1981, when average mortgage rates topped out at over 18% APR.

How Much House Can I Afford?

Asking yourself this question involves thinking about more than just what you can pay each month based on your income.

If you're not careful in your planning, you could easily find yourself in a situation where your monthly payments eat up most of your income. When you're 'house poor,' it's a lot harder to make progress toward your other financial goals or afford your home's upkeep.

Here's what we recommend.

Before you start looking at real estate listings, sit down and make a detailed monthly budget to identify a reasonable number for your total housing-related costs. Remember to include any other savings goals, such as retirement or your kid's education. Many people recommend keeping housing expenses to 30% or less of your income.

Next, figure out how much home maintenance and repairs might cost you. These costs won't be included in your monthly payment, but it's a good idea to set a certain amount aside each month in a high-yield savings account. That way, you'll be able to afford repairs and even upgrades when they're needed. One common recommendation—the 1% rule—advises setting aside 1% of the home's value for annual maintenance and repairs. For a $300,000 home, that's $3,000, or $250 per month.

Finally, deduct the monthly maintenance amount from the amount you budgeted for housing costs. The amount left over is what you can reasonably afford to pay as a monthly mortgage payment.

How Can a Mortgage Calculator Help Me?

Knowing how much you can reasonably afford to pay toward your mortgage each month is only one part of the financial picture.

By using a calculator, you can play around with different variables to see what effect each one has on both your monthly payment and how much interest you pay over time. The goal is to minimize the total amount of interest you'll pay over the life of the loan, while keeping the mortgage payment at an amount you can comfortably afford each month.

For example, how much does a 0.05 percentage-point change in mortgage interest rates affect your monthly payment? What about the total amount of interest you'll pay? Can you fit the monthly payments for a 15-year mortgage into your budget, which will let you own your home outright in half the original time frame?

How Can I Choose the Best Mortgage?

Your mortgage rate has a big effect on how much you'll pay over time for the loan. Some lenders will offer lower rates than others, so it can pay off big-time to shop around with different mortgage lenders.

Magic Number 2 8 8 – A Better Calculator Mortgage

For example, the difference between 4.5% APR and 3.5% APR on a 30-year, $500,000 mortgage is a whopping $103,753 in interest. Even small changes in interest rates add up to a lot of money over the course of 30 years.

Some people prefer to work with certain lenders, such as credit unions or banks. However, for most people, the main consideration is how low your interest rate will be. Remember, it's common for lenders to sell your loan to a different lender or at least assign you to a mortgage servicer. This means that even if you choose a particular lender, you may wind up working with another company at the end of the day.