Advice about savings accounts versus overpayments on morgage

philippahunt

Can anyone offer any advice about whether it's better to make an additional payment ontop of your monthly morgage payment or set up regular savings accounts or isas/tessas.

I'm really confused after reading all these articles. I don't have any savings accounts or investments, but pay an additional £100 into my capital re-payment mortgage each month. Apparantly this will reduce it by around £18k and shorten the term by 4 years. Is this better than setting up isas and tessas to help pay it off???
Any advice much appreciated by dim redhead!

grumbler

Generally, if your mortgage interest rate is lower than the net rate you have on your savings, it is better to put money into savings account. With best regular savings accounts you can easily beat majority of mortgages now.

However, final decision depends on how flexible your mortgage is with regard to overpayments. I.e. if you put money into savings account now, are you allowed to make big lump sum overpayments in future?

philippahunt

Thanks Grumbler,

I think my mortgage rate is about 4.5% and it's really flexible with no penalty for making lump sum payments, which is why I've been overpaying. If I pay in an extra £1200 a year, wouldn't the compound reduction be better - I'm not clued up on different types of savings accounts, I find them all very confusing.

grumbler

Compounding works the same way on savings as on mortgage. If you pay money into account with 4.5% net interest, result would be the same if you make additional repayments of 4.5% mortgage.

If savings rate is more than 4.5% net, difference would be very small with just £100 p.m. overpayments. If you put £100 p.m. into best 5.2% ISA (interest is tax-free) you will be about just
(5.2%-4.5%)*1200/2=£4 p.a. better off.

However, when you have the money in ISA, you have more flexibility because you have easy access to the money in case of emergency. Hence, if you have extra money you can save='overpay' more without being afraid of losing access to the money.

If you use best 10% (8% net) regular savings account (A&L, Barclays) you can save about 3.5%*£600=£20 p.a. as against making repayments of the mortgage, and when account matures in 12 months put the lump sum into ISA. Anyway, difference is very small and you decide whether all the trouble is worth this difference.

philippahunt

Thanks again grumbler, I could never have worked that one out for myself. I guess the solution is to try to save more than my measly £100/month and do it wisely.

Thanks for the advice.