Overpayments v Savings

pipo

Having read a few (and admittedly not all) posts on the 'Overpayment Calculator' sticky up there it seems to me that it's better to overpay your mortgage rather than stick it on some savings account. Or am I only seeing one side of the fence here? Are there instances where it's better to build up the money through savings (separate to the rainy day fund) rather than reducing the capital of your mortgage?

We're just about to take on a £136k mortgage and fortunately found ourselves in a position where we can overpay almost twice as much as the original agreed payments each month so i'm trying to see what's best to do with the cash.

determined1_2

Provided you have a large enough safety cushion in savings (3-6-9 months of normal expenditure), then the way I see it is as follows:

If your savings rate AFTER TAX is more then your mortgage rate, then save.

Otherwise OP the mortgage (provided no fees).

You may also want to consider whether you want to fill your ISA each year and what your pension position is like!

Oh, and if you have any other higher interest debts, e.g. non 0% credits cards, pay them off first.

HTH

DaddyStaysAtHome

I agree with the poster above. Depending on your mortgage rate, there are plenty of opportunities to earn more than the typical mortgage rate which means I plow the money into those investment/savings vehicles. Of course, that means there is an element of risk and one should never exceed their risk tolerance whereas paying off the mortgage quicker is almost a risk free return.

E.

StuartGMC

One other consideration is the limit on savings which pertain to means tested benefits if unfortunately you are redundant. I think maximum is £16k, and you can't choose to suddenly drop a large sum into the mortgage to then be able to access benefits (deliberate reduction of assets). However, OP into the mortgage on an ongoing basis won't count against you and your lender will have to treat you reasonably if you are ahead on repayments in such a situation.

pipo

determined1 wrote: »

If your savings rate AFTER TAX is more then your mortgage rate, then save.

Otherwise OP the mortgage (provided no fees).

You may also want to consider whether you want to fill your ISA each year and what your pension position is like!

Oh, and if you have any other higher interest debts, e.g. non 0% credits cards, pay them off first.

HTH

Cheers for that. The only thing I have hanging over me is an existing car loan, which will be paid off within 3 months of the new job hopefully (if the OH doesn't get carried away with re-decorating).

Not even thought about a pension yet (as have been putting my money towards debt repayment), so will look into that.

Think the lender (Halifax) limits us to no more than 10% overpayment (of the current loan value) each month before they start charging us, so i think i'm fairly safe.

The mortgage rate will be 5.99%, although i'm not sure how to work out post-tax savings rates, unless someone can show me how?

pipo

StuartGMC wrote: »

One other consideration is the limit on savings which pertain to means tested benefits if unfortunately you are redundant. I think maximum is £16k, and you can't choose to suddenly drop a large sum into the mortgage to then be able to access benefits (deliberate reduction of assets). However, OP into the mortgage on an ongoing basis won't count against you and your lender will have to treat you reasonably if you are ahead on repayments in such a situation.

I'm planning to make payment holidays if i were made redundant, as the lender allows PHs equivalent to any previous OPs. Kind of defeats the object of overpaying, i know, but it seems that our industry has weathered/is weathering this recession quite well so i'm not really too worried about losing my job. In any case I have a 3-month notice as a contractor so plenty of time to look for another one if the poop hits the fan so worst case is another 3 months after that not being employed.

These, of course, are just plans for the time being. The time of putting it into action hopefully starts next month! Roll on July!

johncolescarr

I think it is sensible to have access to 6 months of outgoings. After this, if you get a better return after tax by overpaying than saving then why not?

I think its important to note that a lot of mortgages do not allow more than 10% capital overpayment per year without penalty, so you may not be able to save up when the savings earn more than mortgage, then put all those savings against the mortgage when it was the other way around.

Of course, you can always wait until your deal is up, then put your savings towards your next mortgage, you will have to pay the arrangement fees anyway.

StuartGMC

pipo wrote: »

I it seems that our industry has weathered/is weathering this recession quite well so i'm not really too worried about losing my job. In any case I have a 3-month notice as a contractor so plenty of time to look for another one if the poop hits the fan so worst case is another 3 months after that not being employed.

Remember you may not get 3months notice/pay; this happened to me in 1992 when following a few years of pay freeze, pay deferral etc the company went bust. Couldn't pay salary and we only got government minimum redundancy (1wk per completed year) so I didn't get the 3months I was due which in lieu of notice would equate to 4months net salary. You state you feel reasonably secure which is great, just don't count on that amount as a "given".