Overpay mortgage or save?

mister_t

With all the rate cuts my tracker mortage repayments have dropped ~£400 since I re-mortgaged in the summer. Assuming my current mortgage rate is 2.29% and my ISA rate is 4.2% is my logic correct in thinking that my surpless £400 would be better off in the ISA than overpaying the mortgage.

Logic tells me this is a no brainer but am I missing someting subtle (or obvious for that matter)? Does inflation come in to it somewhere? If I have missed something, what determins the cut off between choosing to overpay or save?

If the mortgage rate climbs above the ISA rate then I can always do a big overpayment from the ISA pot.

mister_t

Not sure if this should have gone in the mortgages forum or in here?

Lokolo

Its fine here

That is all correct.

Basically say you've got £100

If you put that £100 in mortgage you will save £2.29 (thats how much interest will reduce by)
Put £100 in ISA you will save £4.20 (interest you will gain)

So you will get just less than £2 profit from savings.

However obviously to a lot of people this is an ideal oppurtunity to overpay on mortgage.

If you have enough savings to tide you over for the meantime then you may as well overpay (as long as you haven't got overpayment fees... more info?)
If you want to save and overpay, split it, £200 overpay, £200 in ISA
Or if you want to do the common sense way, put it in ISA.

HOORA

dont forget about the compound interest over many years not just the calculations this year. Overpaying now takes it off the rest of the term compounded.

Look at any decent mortgage calculator - I used this one even though the company will not give new mortgages.

http://new.egg.com/visitor/0,2388,3_54988--View_1028,00.html

do a calculation on overpayments over your term then make a decision.

anselld

HOORA wrote: »

dont forget about the compound interest over many years not just the calculations this year. Overpaying now takes it off the rest of the term compounded.

Doesn't make any difference if the rates stay the same as the savings interest would also be compounded. If the relative rates change in the future to make mortgage payoff attractive then the savings can be cashed in at any time.

dwsjarcmcd

mister_t wrote: »

With all the rate cuts my tracker mortage repayments have dropped ~£400 since I re-mortgaged in the summer. Assuming my current mortgage rate is 2.29% and my ISA rate is 4.2% is my logic correct in thinking that my surpless £400 would be better off in the ISA than overpaying the mortgage.

Logic tells me this is a no brainer but am I missing someting subtle (or obvious for that matter)? Does inflation come in to it somewhere? If I have missed something, what determins the cut off between choosing to overpay or save?

If the mortgage rate climbs above the ISA rate then I can always do a big overpayment from the ISA pot.

2 points occur
- Are you comparing like for like on the rates i.e. has the ISA rate been reduced following the various rate cuts?
- You can only put £3600 into a cash ISA (obviously double if there are 2 of you) what would you do with excess cash? It would probably be better to overpay with that.

cos69

mister_t wrote: »

.... Assuming my current mortgage rate is 2.29% and my ISA rate is 4.2% is my logic correct in thinking that my surpless £400 would be better off in the ISA than overpaying the mortgage

I would go along with that, although keep in mind that once you have paid £3600 into the ISA then thats the allocation for the year unless your married in which case can have a second one in partners name.

As long as your not paying tax at 40% on the interest from savings then, for current interest your strategy seems good.

mister_t

Thanks for all the replies. The ISA rate mentioned (with Ruffler) is after all but the latest cut. No doubt it will drop again but Ruffler managed to hold it at 6.2% till a few days ago.

You have confirmed what I thought and I cannot understand why the advice always seems to be 'pay off your mortgage first' regardless of the mortgage vs savngs rates. This is all on the basis that you don't end up spending the extra savings of course.

To those mentioning the £3600 allowance, there is a Mrs T so her ISA will be filled too.