help! Pay off 5% of my mortgage or not?!!

mikeizz

Hi , im stuck in a bit of a dillema at the moment, i am coming to the of my 2 year fixed deal of 5.34% with a+l.

i am planning to stay on their svr rate for the time being which will hopefully be exactly the same rate.

i purchased my flat for 130k in may 07 with a mortgage of 110k , i payed off 10k last january (as you can overpay with no fee's in january) but due to the downturn in the housing market my ltv is now only 88% so whatever i pay off will not really help me get a better deal at the moment.

Now we come to January again and i have managed to save 8k, my original plan was to overpay 6k (which would save me about £250 over the year) this january and keep 2k just incase i do change to a near lender and have to pay fee's but now im thinking is it better to keep my money and put it in a savings account as im thinking about doing home improvements so could take money from there instead of putting it all into paying off mortgage and not really lowering my ltv for the time being.

i have been fortunate in the past couple of years as i have inherited half of what i have saved and this year will be a lot tighter so would not mind money in reserve.

What do people think?? :j

Radiantsoul

You will get some interest in the bank and so the real cost of holding cash rather than overpaying is less than £250. If having the cash gives you peace of mind then you might prefer to keep your money liquid.

mikeizz

well thats what i was thinking money wise its not much different , the only benefit is to lower my ltv, if the house market wouldnt have crashed would of probably done it , but its a bit disheartning seeing you ltv rate increase even though you are trying to pay it off,
thanks for your message radiantsole appreciate it.

Joe_Bloggs

You will pay tax on the interest you earn in savings accounts if earn you more than your personal taxable allowance (£6035). You will not pay tax on your mortgage overpayments. These overpayments have a net rate of interest of 5.34 x (1.00 + 0.20). This effective rate is 6.408% when compared to savings accounts. So you would have to find alternative savings accounts that would pay you this rate of interest to break even with overpaying the mortgage.
J_B.


The (0.20 ) is for a basic tax payer.

opinions4u

If you don't need the capital as an emergency fund, and can't find a savings account paying more interest (unlikely that you will) and there are no penalties for paying off capital, then get your debt down.

DawnW

Why not compromise and do a bit of both? You are entitled to put 3600 per year in a tax free cash ISA. You could do this and pay the rest off your mortgage.

Bromley86

Check your terms. You may be able to reborrow that overpayment, if needed.

mikeizz

thanks everyone for your replies,

bromley86 i have checked my terms and it does not state that i can take out money from the overpayment, i think im going overpay 5k and hold 3k back which i will put into a savings account with easy access.

Dualcyclone

Are you planning to redecorate your whole place? £3k sounds a lot for that!

I'd put off expensive decorating jobs in favour of reducing the debt while the rates are low; it might save you £250, but with any extra savings you make during the year, you'll have enough money by the middle of 2009 to do what you wanted anyway!

Don't forget to add on any interest you've accrewed that will be payable to you next year, I'd imagine you'd have a tidy amount come April anyway.