Pay off or save?!?

coldstreamalways

Hi, I just wanted to know everyone's ideas please. I'm 26 and have a mortgage of £210,000 (EEEK!!) at the moment on my first house. I have a monthly net income of £3550 and about £1500 of that goes on mortgage and bills (I have no loans or credit cards).
The thing is, I'm desperately saving for a deposit on the house of my dreams which I'm hoping to start looking for in about 18months time and I've saved about £10,000 this year (I have an ISA and a savings account)-I also desperately want to pay off some of my mortgage as I've been horrified by doing the calculations on here at how much interest I'll pay if I just pay it off over 35yrs (the original term). When I move house, I plan to rent this one out to avoid having to sell (unless the market picks up).
I just don't know how much I should pay off if any. Does anyone have any experience in this area? I'm doing so well with saving my money, cycling to work every day, I have a piggy bank (I think it has about £60 in it at present) and packed lunches always!!

Thanks for your help guys.

getmore4less

Find out how much it will rent for.

You need to get the mortgage down to a level where the interest will be covered by the rent, that is the first target, you actualy need to go further and have enough to cover voids and costs as well.

If the property stacks up as a rental then go interest only and keep it.

Then you can start saving for the new place.

If you want to pay less interest, save for longer and borrow less.

abouttimetoo

getmore4less wrote: »

Find out how much it will rent for.

You need to get the mortgage down to a level where the interest will be covered by the rent, that is the first target, you actualy need to go further and have enough to cover voids and costs as well.

If the property stacks up as a rental then go interest only and keep it.

Then you can start saving for the new place.

If you want to pay less interest, save for longer and borrow less.

Totally agree with getmore for less as understanding the proposed rental side of things will inform your decision as to how much you need to pay off your mortgage.

I'm no expert but typically a lender will usually lend no more than 70% of the house value as a Buy to Let mortgage as well as requiring that the monthly rental income is at least 125% of the mortgage payments.

Other things to consider

• you need to consider how you will cover void periods (think it's recommended that you allow for three months no occupancy per year to be on the safe side)
• you need to obtain letting consent - most mortgage providers will charge a fee for doing this as well as a conversion fee when you swap your mortgage to BTL
• will you still want to overpay on the rented property and will the BTL mortgage allow you to do so

PS well done on your savings so far! :T

Jonbvn

You haven't mentioned your mortgage interest rate.

Generally speaking ISA savings rates are slightly higher than mortgage rates. However, since you pay tax on normal savings interest, the net rates for these are usually lower than overpaying your mortgage.

coldstreamalways

My mortgage rate is 5.89%. (I think, I'm at work so can't check)

Mortgage payments are £1096 per month (35 yr term) and I could rent it out for £900. How can I work out what overpayment I would need to make in order to reduce monthly payments to that? I could easily make up the difference (by the time I will be renting it out I'll have had a substantial pay rise) but I understand that the mortgage company may not be too happy with that and require the rent to cover at least the mortgage.

Thank you so much for your help. I've no-one else to bounce my ideas off!

JayZed

coldstream, if your rate is 5.89% I would advise you (once you've used your ISA allowance) to put whatever payments you can into paying off the mortgage. You're certainly not going to get a better rate than 5.89% on savings after tax.

Are there restrictions on the amount you can overpay each month? If not, I would overpay as much as you can. The front-loaded interest at 5.89% on a 35-year term is really going to stack up, and on your income you can afford to pay quite a bit more than you're paying. I'm on a similar income, with a similar outstanding mortgage (at a lower rate but on a 25-year term), and I'm paying about £700/month more than you (including overpayments) - and I'm also supporting a family!

The thing to remember is that you don't have to make a choice between paying off your mortgage and saving. By paying off your mortgage debt and reducing the amount of interest you have to pay, you are effectively saving. If you need to free up equity for your new house a few years down the line then you can always remortgage.

What is the interest element of your mortgage repayments? You need to get that down to about £725 if you're going to be able to let your place for £900. Also, as noted above, you'll need at least 25-30% of equity in the property to get a BTL mortgage.

This is a useful calculator for working out how overpayments can get you to where you need to be (you need java enabled): www.jeacle.ie/mortgage

coldstreamalways

The limit is 10% of the total, I also have to pay a £15 fee if I want to make an overpayment so I was planning to do just one over-payment a year.

I keep telling myself it's just saving with another name but seeing the money disappear into Halifax just doens't feel like filling up a savings account!

getmore4less

coldstreamalways wrote: »

My mortgage rate is 5.89%. (I think, I'm at work so can't check)

Mortgage payments are £1096 per month (35 yr term) and I could rent it out for £900. How can I work out what overpayment I would need to make in order to reduce monthly payments to that? I could easily make up the difference (by the time I will be renting it out I'll have had a substantial pay rise) but I understand that the mortgage company may not be too happy with that and require the rent to cover at least the mortgage.

Thank you so much for your help. I've no-one else to bounce my ideas off!

£900pm rent, say 6% interest only, thats £180k loan, and should be less to cover other costs and voids.

Current loan is £210k so looking to pay off an extra £30k+ before considering renting out. I think you said 18months so say £1500 extra months will get close.

Actual calc, www.whatsthecost.co.uk

£210k@5.89 35y is £1182pm (why is yours lower? i/o is £1030)
£180k left in 18months(march 2010) needs £2625pm so £1443 extra.


Also don't foreget this pay rise might not happen or the job could go, might be better off saving to make sure you have a buffer fund should things go belly up and pay down the loan at the time.

abouttimetoo

coldstreamalways wrote: »

The limit is 10% of the total, I also have to pay a £15 fee if I want to make an overpayment so I was planning to do just one over-payment a year.

I keep telling myself it's just saving with another name but seeing the money disappear into Halifax just doens't feel like filling up a savings account!

Some good advice there from Jayzed and getmore4less. It's worth checking into the £15 fee a little further as when I queried this with my bank the fee depended on the method you used to overpay and it turned out that if I set up a standing order or made overpayments via internet banking then it was free but cheques and other methods incurred a charge. The fee also related to the amount you were overpaying so also worth buttoning down.

One other thing for you to consider if you go down the renting route; explore corporate lets (this is what I have). My letting company deal exclusively with corporate companies and my tenants only live their a few nights a week and go to their own homes at the weekends. Typically the rental income is higher than private lets and I must admit to feeling much happier at having this sort of arrangment rather than private individuals making it their home if you see what I mean

coldstreamalways

I will ask again about the fee, I think I can only make a payment in person at a branch or via posting a cheque but that's very helpful thanks.

I will definitely get this pay rise, its difficult to explain but I can't be sacked and if I were to be ill, I would still get full pay so I can count on my salary fortunately.

This has definitely given me so much help and I'm really grateful for all of your ideas, thank you so much.

dimbo61

please check with your lender re the overpayments and the £15 fee each time. If you can set up a direct debit/ standing order of £1750 each month and also save £300 into an ISA, pay the mortgage and the bills you would be doing very very well.
Overpaying this way is easier as it comes out each month and saves you interest straight away if you have daily/monthly interest !
Start off by filling an ISA with £3600 and look for at least 6/6.5%
GOOD LUCK