Overpayments on mortgage vs (long sorry!)

jayjay33

Hi
Hoping someone can offer some general advice if possible please as there is so much to think about i dont know where to start.

Im currently on maternity leave and so we decided to go interest only for a few months with pregnancy being unplanned. However our monthly mortgage repayment amount was £1037 on a 100% mortgage of £160k. Our 2 yr fixed term ended last month so payment went down to £750.

However the differnece was still not enough to help us survive. So we have gone interest only and payments are now around £350. Our plan is to move house within the 4 years but need a deposit of around £25-£30k. Our options are go back on repayment in May next year and if interest rate is still the same or similar we can overpay by around £400 a month, we have no cap on this or penalities, i have just checked with mortgage company. Issue is we seem to have paid very little off our mortgage in last two years as it all seems to be just interest and i cant see us having anywhere near £25k of equity with the 3-4 year timescale. We are hoping to move to a better area for when baby starts school.

Other option is stay interest only, put the money we save from this (around £700 ish) into a high interest savings account or our cash isa's or split between these? and i have worked out that 36 months of £700 minimum is around 25k, this way we can have just a 10% deposit for next house and some money for moving costs etc. However my concern is we dont pay anything off our curent mortgage.

So my questions are around is it better to overpay on our current mortgage and go back to repyament so paying off an additional £400 a month and reducing the amount of interest on this mortgage. Im unsure of how much we will have paid off in 36 months though as to whether we would have enough equity in house to move or do we stick with putting money in savings account? my concern is i think our house is currently in slight negative equity but unsure how this will span out in 3 years time.

Any ideas anyone as ive gone over things in my head so many times im starting to confuse myself!!

Thanks so much for any advice

Jayjay

Other option

jayjay33

Forgot to say, when we move house, although mortgage payment will be higher my husband is likely to get a new job in next couple of months, he has been headhunted and my wage goes up every year so we will have a combined income of around between £60-£65k between us plus my car and his car will be paid off around time or just after we move house, giving us an additional £550 a month spare. The reason we took a 100% mortgage which im now regretting was we used the equity from the sale of our apartment to pay off my husbands graduate loan, im now realising it would have probably been best to use this as a deposit.

DJ_Mike

Whether you put money into savings, or use that same money to pay off your existing equity, it's the same deal - you're putting money into your name, be it a bank account you can instantly access, or a house to your name (rather than the bank's).

The difference between savings and mortgages is that the bank pays you for savings, whereas with mortgages you're paying the bank back in order to reduce what the bank charges you.

You haven't said what your mortgage interest is, but since you said it was originally 100% LTV, I'm willing to bet it's fairly high.

You are unlikely to find a savings account that pays you more than the interest you'll be racking up on your mortgage.

My advice would be to overpay as much as you possibly can, whenever you can - treat your mortgage like your savings account. You're putting money away that you'll be able to use later to get another house, the only difference is that it's tied up in the house you currently own, so you'll need to sell that one first.

In the meantime, paying off the capital on your existing mortgage will slowly reduce the interest - so you're paying £750 a month in interest now, but in a year or two years that could go down by £50-100 a month - it really depends how much you pay off on the capital.

If you both start raking in a higher income, then put all that extra money into paying the mortgage off even faster.

What interest rate are you on?

jayjay33

Hi thanks for your reply, our interest rate has dropped from 5.94 to 2.49% so its alot better but will depend on how soon interest rates go back up. We now pay 350 interest only or it would be 750 repayment, i know paying as much off mortgage always makes most sense but i dont know short term whats best with needing a deposit within 3-4 years. We dont live in a great area and so reluctant to send our daughter to schools here if we have another option. The next property is a new build again, just noticed they do homebuy direct offers where u get a 70% mortgage and a 30% loan, not sure if that would help us. Decisions decisions!!

DJ_Mike

When you say deposit, I presume you mean the deposit you give to the vendor as a goodwill downpayment on buying a home? These are always negotiable, and if worst comes to worst you could always arrange a "bridging loan" from a bank until the sale of your old house pays you back, at which point you pay off the bridging loan.

You don't need a deposit to take out a new mortgage - the sale of your old home is supposed to cover any difference between your new mortgage and the value of the house you're buying!

Paying back money into your mortgage right now will give you more hard cash when the sale of your current home goes through, and that in itself will cut down the size of the mortgage you need to take out on your next property!

Deleriad

jayjay33 wrote: »

Hi thanks for your reply, our interest rate has dropped from 5.94 to 2.49% so its alot better but will depend on how soon interest rates go back up.

Always best to keep things simple. A paying down a debt over a period of 3-4 years which has an interest rate of 2.49% is functionally equivalent to paying into a savings account which offers 2.49% after tax.

At the moment you can get Instant Access ISAs which give you more than 2.49% so you're a little bit better off sticking the money into an ISA and/or setting up a 5% regular saver.

However, mortgage rates will go back up and when they do you can guarantee that savings rates won't increase at the same rate.

From the looks of things you're better off keeping money somewhere that it can earn at least 2.5% after tax (or tax free) and holding fire with paying down your mortgage until interest rates increase.

Berkshiregirl

DJ_Mike wrote: »

You don't need a deposit to take out a new mortgage - the sale of your old home is supposed to cover any difference between your new mortgage and the value of the house you're buying!

Yes, if there was equity. If you're selling the house for the same value as the mortgage (or at least you're not making a suitably sized deposit) then you've got to have a physical deposit to obtain your next mortgage.

eg Sell house for £100k, repay mortgage of £100k.
Want to buy house for £100k, need deposit of 10%+ depending on lender

I can only see that the difference is covered if you've either held the mortgage for some time and the amount has decreased or if your property has risen in value to give you the deposit.

DJ_Mike

Berkshiregirl wrote: »

Yes, if there was equity. If you're selling the house for the same value as the mortgage (or at least you're not making a suitably sized deposit) then you've got to have a physical deposit to obtain your next mortgage

Sorry, my answer was probably a little vague. However, the OP's question was whether to save for a deposit, or whether to repay the mortgage. Doing either will give you sufficient funds for a deposit on a new mortgage, either because you have savings, or because you'll sell the house and get the money back that you paid into the capital. For instance:

100k OLD mortage - 10k capital paid = 90k

If you sell your old home for 100k, that's a difference of the original 10k you paid off, plus you won't have paid as much interest in that time.

However, noting that you've said you only have an interest rate of 2.49%, you're really able to go either way on this one. You could put £3,600 each year into an ISA of at least 2.58% with Barclays right now, and there's probably better rates besides.

Anything over your yearly ISA limit may as well go into paying off the mortgage, as there's very few non-ISA savings accounts right now that are instant access and will pay you 2.49% or more after tax.

Really, all of this is only going to matter if you can work out how much you'll be able to save/pay off, and how long it'll take. Whether you choose to save by having a savings account or overpaying your mortgage, I hope it works out for you.

getmore4less

Stay on interest only, look for any saving place that is higher than the mortgage rate after tax and save there,

Look at the ISAs and regular savers, Barlcays pays 4.25% gross that should eat up most of the surplus for the next year.

Any surplus that can't earn the mortgage rate overpay.

By keeping some savings you build up some emergency funds in case you have another accident.

Then hope that you are not in negative equity which will reduce the ability to move.