Savings or mortgage overpayments?

TLOSmudge

Now I think this is a really silly question, but this is my first post so be nice...

We're about to buy a house. Currently we have a bit more disposable income than our mortgage payments will be so we were planning to overpay regularly. Surely if we can get a better interest rate on savings than we are paying on our mortgage we would be better off saving (and then throwing a lump sum at it when we remortgage)?

Or is this too simplistic a way of looking at it?

StuA1964

Your thought process sounds logical however most savings products have interest rates lower than the mortgage rates - this is how the banks make money.
You could get better returns for your money through stock market investments, but these can go down as well as up and if this is money you do not want to gamble with then it's is probably best to play safe and put it in a savings account or pay off your mortgage.
Before you pay it off your mortgage, make sure your mortgage is on daily interest. If not then you will be better putting the extra in a savings account and paying the lump sum off at the end of the year when your annual interest is calculated.
Hope this helps. I always find motgages etc a minefield. Fortunately my wife works for our Building Society so she manages that side of things for us.

grumbler

TLOSmudge wrote:

... Surely if we can get a better interest rate on savings than we are paying on our mortgage we would be better off saving (and then throwing a lump sum at it when we remortgage)?

Yes, if you mean net interest rate on savings. Many mortgages can be beaten now by best cash ISAs that pay interest tax-free. And you will have more flexibility. If you are taxpayers you can save up to 2*£3K every tax year. If one of you is not a taxpayer you can use other accounts regestered on his/her name to receive interest gross.

cloud_dog

Depends how your mortgage provider manages the overpayment. Nationwide for example allow overayments up to £500pm with the overpayments reducing the o/s balance but also they are allocated to a seperate pot. This allows you to build up an amount of money to draw on if you ever needed to.

Its not as flexible as a normal current / offset mortgage account but you do get similar benefits with a degree of flexibility. Depends who your mortgage provider is and what their T's&C's are.

cloud_dog

EdInvestor

It's also better long-term to hold on to any ISA money, these days ISAs make an excellent alternative pension without any of the downsides

oneilldo

If I have a £200,000 mortgage thats 6% and I can overpay without further charges and for aguments sake I come across 10k.
Is it better to pay 10K off the mortage and hence only pay 6% interest on 190,000k or invest this elsewhere. Surely because of the amount involved it makes more sense to pay a chunk of the mortgate instead of trying to save for a year and get 7% return

grumbler

oneilldo wrote:

Surely because of the amount involved it makes more sense to pay a chunk of the mortgate instead of trying to save for a year and get 7% return

Why? For me it makes more sense to get 7% on £10k than to save 6% on £10k. The difference (profit) is £100. Unfortunately I dont't know where to get 7% net on £10K now ...:think: Tell me, please.

ReportInvestor

I suppose that you can now get 10 Year fixed rate mortgages around 4.7%, so that slightly alters the question.

But paying down the mortgage is still more of a sure thing .

oneilldo

grumbler wrote:

Why? For me it makes more sense to get 7% on £10k than to save 6% on £10k. The difference (profit) is £100. Unfortunately I dont't know where to get 7% net on £10K now ...:think: Tell me, please.

Sorry nor do I, I confused myself.

SAP_Saver

I am about to become a First Time Buyer and Would also like to overpay my Mortgage I would like to pay 3 times the amount my required payments. I am not all that good with mortgages? I understand my benefits will be that if I over pay on Month 1 my required payment for Month 2 will go down?

grumbler

SAP_Saver wrote:

I am about to become a First Time Buyer and Would also like to overpay my Mortgage I would like to pay 3 times the amount my required payments. I am not all that good with mortgages? I understand my benefits will be that if I over pay on Month 1 my required payment for Month 2 will go down?

AFAIK, no. My monthly payments are corrected once a year. If you are going to make such big overpayments it is worth thinking about taking a mortgage over a period shorter than usual 25 years. For example, my mortgage is for 13 years. Otherwise, consider offset mortgage, YBS, for example.