Overpayments or ISA

beer_tins

Hi all,

I'm getting married in October and OH and I hope to be debt free after our honeymoon, though we won't have any savings! I'm keen on the idea of overpaying the mortgage, as we're each saving between 300-500 a month for the wedding so it may be best to continue saving, rather than slipping into an expensive lifestyle. We won't miss the money too much, as we're used to saving!

My question is: is it worth starting to overpay our mortgage yet (after the wedding) or is it better to use our full mini cash ISA allowance first? We can get a better interest rate than we're paying on our mortgage (fixed for another 2 years) so I'd say we should both use our full ISA allowance first, plus some savings in a regular saver for a rainy day before starting to overpay the mortgage. Then in 2 year's time we can still decide to lump it all on the mortgage and we won't have lost out interest wise.

Does that sound like a sensible plan?

The other reason I'm keen to be saving is because in a few years we plan to have kids, with OH planning to be a SAHM and by that time would prefer to
1) Have a bit of a nest egg
2) Be used to living on a small budget

I'm not sure if my mortgage charges for overpayments, I'm just starting to think about this really...

InMyDreams

Congratulations on your wedding

The general rule of thumb here seems to be that you should have an 'emergency fund' and pensions in place before overpaying on your mortgage. The size of your emergency fund will depend on your job situation/security and what other insurances you have in place, but I've seen 3-6 months salary mentioned.

If you can find savings rates higher than your mortgage rates, then numbers-wise, it makes sense to save rather than overpay anyway, but there are other considerations to take into account. For example, how disciplined are you with money? How likely are you to dip into these savings? If you can't make yourself see the savings as 'spent' money (in the same way as an overpayment of your mortgage) then the benefits may be negated. Also any means-tested benefits that you might be eligible for may be affected if you have what appears to be huge savings (rather than smaller mortgage which isn't taken into account). Having the money in savings certainly gives you more flexibility (it's usually easier to decide to put that pot into the mortgage if your mortgage rate was to rocket, rather than to take it out if you have a good deal and savings rates rocket) but also more temptation to fritter it away. Either way it can be working towards your mortgage-free goal though.

As for your OH planning to be a SAHM, then I think it's very important, as you say, to get used to living on a smaller budget. I'm often told how 'lucky' we are that we can afford for me to be a SAHM. Not that I don't whole-heartedly agree with them, but when they say it as if they aren't and their husbands/partners on their own earn more than mine, it's a bit frustrating. If they would be happy living in our house, within our budget, then they too could have a stay-at-home parent. They don't see the sacrifices you make to achieve that. And one of those sacrifices will be not being able to pay off your mortgage as fast as you would otherwise once children arrive ;-)

Like you, when we got married, we started from scratch. No savings and no debts (apart from student loans). Right from the outset we lived just on my husband's salary and saved mine which eventually became the deposit on our first house. Right from the start we learnt to do things the MSE way (although we'd never heard of Martin) and I often wondered if I'd regret not living life more lavishly while we still had the chance (before children). So 10 years on, do I? No. Because we never got accustomed to a lifestyle that couldn't be sustained by a single income family. Admittedly I do do a few self-employed hours now, but those pay for 'extras' that we know we could do without if we had to. It's all a balance. The trick is working out what balance is right for you and yours because every person/couple/family is different and sometimes people can be judgemental without realising. I guess most people trying to pay down their mortgage quickly will be used to that anyway ;-)

I'm not sure if any of that has answered any of your questions, but hopefully some things to think about.

Edit: PS When your wife-to-be gives up work, you will also have her tax allowance to play with. Any additional savings in her sole name can also earn interest tax-free up to her allowance.

beer_tins

Thanks very much for the long and detailed reply, it sounds like we are planning the exact same route that you chose. Your post has answered just about all of my questions.

I think we'll stick to savings (full ISA allowance plus regular savings) so we can access them in an emergency. We have good financial discipline so we won't touch this for frivolous stuff! I think it's a good way to do it because of the flexibility, we can still lump it all on the mortgage once we know what savings and mortgage rates are like when our fix ends. Likewise, if I should be made redundant in the future, we can pay off a chunk of the mortgage so I would still get benefits. Mind you, I have been employed non-stop since leaving uni in '99 and have a fairly secure job since what we do is always needed in good times as in bad. Also, good point about putting all (non ISA) savings in OH's name once she gives up work, I suppose there is no limit (from a practical point of view i.e. 75-100K) on how much we could put in tax-free savings.

I know what you mean about being told how 'lucky' you are. If you have worked hard and made sacrifices along the way, it isn't simply luck. You make your own luck in life to a certain extent. In our case, both our mums were SAHMs and we both think there's nothing better than kids to be with their parents if it's possible. I'd be just as happy to give up work to look after them, but my salary is higher. We've never really wanted flash cars or the most expensive of everything (both from very grounded families) and we're happy to give up on luxuries for the things that really matter to us.

TheFox

Hi Beinerts......

Just to add to your comparison don't forget that if you overpay your mortgage the amount of interest you will pay on the outstanding balance will reduce. Hence although your ISA may have a higher rate the interest earnt maybe less than that which you would have saved by paying off some of your mortgage - on the otherhand it may not be! I don't know what products you have or are looking at so I can't tell which it would be. It is worth looking at though!

Also, good point about putting all (non ISA) savings in OH's name once she gives up work, I suppose there is no limit (from a practical point of view i.e. 75-100K) on how much we could put in tax-free savings.

Just like anyone there is a limit on how much you can earn before you are liable for tax. Interest earnt is also classed as effective income and if you exceed the limit you must pay tax on it.
Good luck with the wedding !

beer_tins

Thanks. I think as long as I get more interest after tax it's worth saving rather than overpaying i.e. the interest I get is more than the interest I save on the mortgage. I can easily get a better ISA savings rate than my fixed mortgage interest rate, that might change once the fix ends though.

As for the "unlimited tax free interest" I realise there is a limit, just not on a "practical" level for us. i.e. if my wife-to-be isn't working and has a tax free allowance of £6,035, if she finds a savings account with 7% interest, she would need to have something like £86,000 in savings before she has to pay tax i.e. it's not going to happen any time soon!

Thanks for the good wishes, all.