3 Year Savings Plan

christabelle23

I have £30,000 to invest for a period of 3 years before I use the cash to reduce my mortgage. At present on a fixed 4.58% for 5 years, and have 3 still to go. Paying an over payment of £495.00 to reduce it until end of fixed term. I know nothing about savings etc. I have max amount for this year in cash isa. No other savings or investments. I need the savings to be safe and don't want to speculate re shares etc. Please can anyone advise me.

LongTermLurker

Why don't you increase the amount of overpayment now? That's got to be beneficial. You're going to overpay £495pm (so we know your lender will allow you to overpay) which is £5940pa, so if you take that up to 3 years and add on the £30000 you already have, you can overpay £15940 pa or £1328pm.

OK, you're not earning any interest, but it's taking a massive chunk off your capital. I'd suggest you ask your question on the Mortgages board, because unless you want access to the money, I think overpaying your mortgage to the hilt would be financially more rewarding.

If you do want to save it separately, Kaupthing Edge have a 3 year Fixed Term Deposit at 7.15% AER (which nets down to 5.72%)

isofa

If you can, as LTL suggests, personally I'd pay off as much as the mortgage with the cash as possible. But I hate debts and paying interest, and would always take this view.

If you can't put this much into the mortgage, then look at good high-rate savings (around 6.5%, either instant access), or if you want to tie it up for 1-3 years, a fixed rate (should be aiming for 7%+)

look at the "best buy" account listings here.

isofa

Depends on factors.

If you are basic rate tax payer, you'll need to be earning roughly 5.73% gross, if you are a high rate tax payer, you'll need to be earning 7.64% gross to match 4.58% net. However that's assuming the amount saved is the same as the amount remaining on the mortgage.

Otherwise there is less of a case, earning 7% gross on 30K in savings might net you £1680 after tax a year, but if you are paying a 4.58% mortgage of 100,000K, with payments well over £4500 a year.

Jonbvn

isofa wrote: »

Depends on factors.

.....that's assuming the amount saved is the same as the amount remaining on the mortgage.

The above is nonsense??? The amount saved or overpaid is not relevant. It is only a matter of comparing the net savings rate against the mortgage rate. Whichever is higher is where the OP should put their money, whatever the amount.

BTW, index linked savings certs (tax-free) will currently beat your mortgage rate. Given the outlook for inflation certainly worth considering......

ManAtHome

NS&I certs at RPI + 1% are a bit marginal - heaps of "essentials" stuff has gone up over the last year and you could still get more as a basic-rate taxpayer on many 1-3 year fixed-rate savings accounts. I still have the RPI + 1.35%, but won't be putting any more in until we hit the same or higher.

List of 1-3 years fixes here http://www.thisismoney.co.uk/saving-and-banking/best-savings-rate/article.html?in_article_id=431812&in_page_id=50

isofa

Jonbvn wrote: »

The above is nonsense??? The amount saved or overpaid is not relevant. It is only a matter of comparing the net savings rate against the mortgage rate. Whichever is higher is where the OP should put their money, whatever the amount.

I'm not sure.

With that logic, everyone would keep their mortgages forever, never pay them off as long as they could beat the interest rate with the savings rate. But most people would rather clear their mortgages and be debt free! :rolleyes:

I'm not saying it's the gospel, just an example from my personal opinion of clearing debts first. It depends on your attitude to debts and if you find that more rewarding, or balancing with savings and interest, of course if you beat the mortgage rate with savings you'll be bring in more than your are spending, that's irrefutable.

However if you are a high rate tax payer, I think it does make a difference (or if you are a low rate tax payer with savings not at least beating the mortgage rate).

For example, if you had 30K to save, but a 100K mortgage, each year you are paying, approx £4600 interest on your mortgage (assuming the interest rate says fixed, which with many people coming out of low fixed rates onto a gently rising variable rate, could be contentious!))

Now you opt for easy access savings on the 30K at 6.5% gross, giving 5.2% after tax on the basic rate. On the 30K you are getting, £1560. If you deduct that from your mortgage payments, that leaves £3040.

If you are a high rate tax payer, 30K at 6.5% will give 3.9% after tax, so the interest on 30K will be £1170. Deduct that from mortgage payments leaves £3430.

Now let's compare taking 30K off the 100K mortgage, leaving 70K owing at the same interest mortgage rate of 4.58% - this would roughly bring your annual mortgage payments down to £3200.

Therefore if you are a high rate tax payer you'll be £230 better off a year (i.e. 4600 - 1170 - 3200) if you pay the lump sum into your mortgage. If you are a basic rate tax payer you'll be about £160 worse off (4600 - 1560 - 3200) based on interest alone, but you'll have a lower capital mortgage.

These are only rudimentary calcs, and assume you can put the entire 30K into the mortgage and they ignore the variances of monthly compounding etc. Someone with far more knowledge will come along soon!

sloughflint

isofa wrote: »

I'm not sure.

With that logic, everyone would keep their mortgages forever, never pay them off as long as they could beat the interest rate with the savings rate. But most people would rather clear their mortgages and be debt free! :rolleyes:

I really cannot fathom your logic,isofa.
I don't think I need to go into the nitty gritty Maths. For as long as the appropriate net savings rates exceed the mortgage rate, it's logical to sit on the money and as soon as it swings the other way then make as large an overpayment as possible.
I can't do that with my deal but surely anyone that can make penalty free overpayments should be thinking like this.

cloud_dog

isofa wrote: »

I'm not sure.

With that logic, everyone would keep their mortgages forever, never pay them off as long as they could beat the interest rate with the savings rate.

As sloughflint said it really is quite simple......... You need to re-do your calculations and ignore the total mortgage amount and only work on the amount you could repay (£30k).

If the your savings rate is greater than your mortgage rate then you are better off saving the money. Obviously you need to take in to consideration tax on savings if applicable.

Regarding your comment about risk / repaying the mortgage, etc, if you have the cash in a savings account there isn't any risk (ignoring inflation) and when you choose you can simply withdraw the money and repay the mortgage.

Saving it also gives you a handy nest egg should you ever find yourself in need of cash.

We save extra money in to a savings account (in the wife's name) and claim interest at gross (R85 - as she does not work / earn sufficient income to be taxed) and our mortgage is fixed at 4.59 for another 4 years.

So atm, we have a sizeable advantage in saving the money rather than repaying it. Some of this comes down to psychology and knowing you have this cash available. If you are tempted to dip in to the savings then just overpay the mortgage.

cloud_dog

isofa

OK I do understand the points of view here and agree - and also mentioned right at the start, that it's obvious if the savings rate can beat the mortgage rate then you'll win. A lot of this comes from my hatred of owing money! However the high-tax rate example does show the potential. Most people I know, including myself, strive to kill off mortgages as quickly as possible - but this is a personal view, which if you'll note I also mention several times above.

I don't remember making any comment about risk...

sloughflint

isofa wrote: »

A lot of this comes from my hatred of owing money!

I'm one of those too.
Look at it this way. When the relevant net savings rates are better than the mortgage rate, if you hold on to the cash, you'll owe money for less time in the long run;)