Need some advice about savings / paying mortgage off

trancebabe

hi MSE fans,

I need some help in clarifying my thought process.

I have (since joining this site... thanks to all the folk here) managed to save quite a lot of money and originally, I thought that I would use this to pay my mortgage early.

Mortgage is almost one year old, and fixed rate for 2 years at 6.19%. I can pay upto 10% over and above payments in any one year (Halifaxed repayment)

I have saved more (almost double) than 10% of my mortgage and last week opened a Kaupthing Edge account at 6.55% AER and I'm also going to start up an ISA before end of the TAX year to take full advantage of that, but...

My question is, with a savings account at 6.55% and a mortgage fixed rate of 6.19% for another year, am I better off shoving my 10% mortgage payment along with the rest of the spare cash I might accrue into the K.E. account and unless the KE interest rate goes below 6.19%, leaving it there until my fixed period is finished, then look for another mortgage deal and use my savings to reduce my mortgage?

Sorry if that's a stupid question, but on paper it looks an easy calculation... just not sure if i'm missing something here...

Thanks for your advice in advance
x

talana

The thing you're maybe missing is that KE at 6.55% AER is gross interest.
The net interest you'll receive after tax is deducted is 5.24% (assuming you're a basic rate taxpayer).
So it's really the 5.24% net that you need to be comparing against the mortgage rate, and in the example you give mortgage overpayments win out.
The exception to this is cash ISAs of course. Because they're tax-free, you can directly compare the %AER with the mortgage rate.

My advice would be to max-out your ISA allowance, ensure you also have an easy-access savings fund in case of emergencies etc, then overpay the mortgage with what's left.

KE at 6.55% would be as good a place as any to keep an emergency cash fund, but as I said it doesn't leave you better off than overpaying the mortgage unless you're a non-taxpayer.

YorkshireBoy

trancebabe wrote: »

just not sure if i'm missing something here...

The fact that you'll pay tax on the KE interest perhaps? That would reduce the rate down to a little over 5%.

trancebabe

Lovely... thanks for that, I knew I must be missing something!!!

I opened the KE account because this cash is sitting in my current account earning the best part of nothing and I needed to 'do' something because it's now a lot of money (in my world anyway)!!

So... Stick with plan A and continue to be a mortgage free wannabe it is then...

thanks again
x

Farway

If your mortgage allows it, tell them to reduce the term [years left] after you overpay, and not the monthly repayment

This way you will save years of interest, Working Lunch did a calculation last week, here's the link

http://news.bbc.co.uk/1/hi/programmes/7612593.stm

StrawberryJam_2

I was in the same position as you a few months ago and this is how I progressed, which you will be able to relate too.
1. Regular saver with A&L (12%; 9.6%net) matures in October 2009
2. Remortgage to HSBC (BOE+0.24% tracker) at beginning of 2008 (ability to pay as much as I like, but have yet to start)
3. Cash ISA with A&L (6.0% tax free) £3600 deposited first week in April 2008.
4. Trying to save 6-12 months cash emergency reserve currently between A&L esaver (6.5%; 5.05%net) and newly opened flexible Egg saver (6.3%; ?%net) for depositing my Regular Saver, with aim to collect £3600 so can invest in ISA next year.
6. Switch current account from A&L to HSBC and start new regular saver (8%; 6.4%net) just initiated last week.
7. Future is to manage overpayment to mortgage or to savings, depends on interest rate of mortgage and Net savings rate.

It is good knowing that I have a reserve of money just in case of emergency, dont leave yourself short from enjoying life! as you only live once and you should enjoy today more than thinking about tomorrow.

I have yet to look at investment stocks and shares ISAs, not sure the timing is correct to invest in the market with savings, or that I have enough to do so. I like to spend and shop and enoy life a little too much, but have tried to be wise with where my cash is sitting and hate the thought of paying too much interest on the mortgage so ideally want to save £thousands by overpaying. For me, mortgage overpayment is the next step as have the foundations in place to do so.