Overpay Mortgage or Savings Account

taliwillow · 12 January 2006 at 2:49PM

Hi, I'm not sure if I have posted this in the right place and I hope someone can help me. My husband and I are buying a new house in April and we are having an interest only mortgage. The plan is to save around £500 per month for the next 5 years in a savings account with a rate of 4.5%. The mortgage rate is 4.99%. I thought it would probably save us moremoney if we paid about £200 per month off the mortgage and only put £300 into savings but when I did some calculations on the internet it seems that we would be better off just putting the whole £500 into savings. Is this correct? It doesn't make sense to me as the interest rate we are being charged is higher than we will be earning. Does anyone know what is the best thing for us to do?

Thanks

Taliwillow

grumbler · 12 January 2006 at 3:54PM

Paying money into a saving account that pays 4.99% net has the same effect as paying off your mortgage. However, saving account gives you more flexibility.
With more than 4.99% net you will be better off. With 4.5% gross you lose even if you are not taxpayers. I guess you are. In this case with 20% tax 4.5% gross is only 3.6% net.
Two of you can save up to 2x£3000 per tax year (exactly up to £500 p.m. as you want) in cash ISAs that pay interest free of tax (ISAs - save tax). Best ISAs pay now 5%-5.2% now: The Best Mini-Cash ISA.

taliwillow · 12 January 2006 at 5:31PM

Thanks Grumbler.

I have always ignored ISA's as their interest rates don't seem to be as good as standard savings accounts I have found so my husband has just stopped paying into his ISA and has opened a First Direct savings account. But now you mention it, I suppose we would get a fair amount of interest on £500 per mnonth for 5 years and therefore I suppose not having to pay tax on it could benefit us enough to make it more worth while having an ISA than a savings account. I will look into it.

Thanks again.

Taliwillow :T

MortgageGenie · 12 January 2006 at 7:54PM

Hi,

If you decide to go downn the cash ISA route make sure you find out how the interest is capitalised and read through the small print! I believe a lot of the highest paying accounts pay annually rather than monthly.

grumbler · 13 January 2006 at 11:27AM

MortgageGenie wrote:

...make sure you find out how the interest is capitalised and read through the small print! I believe a lot of the highest paying accounts pay annually rather than monthly.

This doesn't make any difference! What matters is only AER

MortgageGenie · 13 January 2006 at 1:36PM

Yes, I agree as long as you use AER and not the Gross. Take the Portman for instance they have a very high Gross but not as good once you look at the AER.

silvercar · 13 January 2006 at 3:03PM

Consider an offset, then your mortgage payment will be calculated on the loan less the amount of savings. This gives you an effective savings rate the same as your mortgage rate with no tax on your savings.

grumbler · 13 January 2006 at 11:31PM

MortgageGenie wrote:

Yes, I agree as long as you use AER and not the Gross. Take the Portman for instance they have a very high Gross but not as good once you look at the AER.

I agree too, but your example is a little misleading .

Usually when interest is paid monthly Gross rate is lower than AER. See, for example ING: 4.5%AER/4.41% gross p.a.

In case of Portman 5.25% Gross for first 6 month they quote in the table along with 4.27% AER (Annual Equivalent Rate) is higher than AER because 4.50% Gross for the remaining 6 months is hidden nearby. And this has nothing to do with interest paid monthly or yearly.

beefster · 14 January 2006 at 2:19PM

silvercar wrote:

Consider an offset, then your mortgage payment will be calculated on the loan less the amount of savings. This gives you an effective savings rate the same as your mortgage rate with no tax on your savings.

Best read the discussions on here about offsets. They imply that they are only a good option if you can put approx 50% + of the loan into the offset account in cash.

Overpay Mortgage or Savings Account

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