save or overpayment

kammx4

I have an existing mortgage with the nationwide that has another 20 years left to go. I am tied in for another 4 years, but if i leave or overpay more than £500 a month i will have to pay £1500 in fees ,and after that am free to go. The interest rate is 4.95% and the original loan was for £125000.My question is i am about to recieve a lump sum of £30000 and was thinking of over paying up to £500 a month as this is the most i can pay. Is the best way to save money or put the lump sum in a high interest account and use that plus the interest to start in 4 years time with a low mortgage. Help as all the figures are doing my head in

Dr.Lou

If it were me I would over pay the £500 a month every month and put the rest into savings until the four years are up and avoid the £1500 fee.

I'm sure there are many savings accounts on the market which are above 4.95%. Use up your ISA allowance if you haven't done so this year (and do the same for your spouse if you have one).

Also check out the high rate regular savings accounts that are on the market and consider drip feeding into those to maximise your interest. Also, if you have a spouse who is untaxed or on a lower tax rate than you put the savings in thier name (if you trust them)

Sorry if you know all this, they are just my immediate thoughts....I'm sure there will be many more people along soon to give you advice.

kammx4

So the maths are that i would pay more of the mortgage by overpaying £500 than saving the money and putting it down on the new mortgage after 4 years. What sort of interest could i get on this money over 4 years

Dr.Lou

OK, I just put into a savings calculator: £30,000 for 4 years at 5.15% (which is available out there I think with the Indian bank ICICI)

So you would be gaining £6,674.01, if you left the £30K in the bank for 4 years (before tax obviously). After tax is £5,258.02 (if you are basic rate tax payer), £3,725.94 (higher tax payer)

The interest you would have to pay to the bank is £6,395.78 over 4 years on £30K at 4.95%

Difference £6,395.78 - 6,674.01 (non taxed) you are gaining £278 and avoiding the fee.

Difference £6,395.78 - £5,258.02 = £1137 (basic tax) - still smaller than £1500

Difference £6,395.78 - £3,725.94 = 2669.84 (higher rate) (more than £1500 - you are losing money)

I think it very much depends on your tax status, and if you can avoid paying tax on your savings I would go for it (putting the money into savings that is).

kammx4

my wife works part time would it be a good idea to put the money in her name as she pays not much tax, and yes i do trust her.

Dr.Lou

Yes, I would do that - that is what my husband and I do (in a similar situation to you). If she earns less than the minimum permitted before she is taxed (about £4800,PA - check it out on the Inland Revenue website - not sure of the exact amount) get her to fill in the R85 form available from the Building Society to get her interest paid without tax taken off. Again make use of both your ISA allowances every year. Whatever account you choose, check it say monthly to ensure you are earning the max amount of interest possible. I move my money around regularly to get the best deals. You could also look at fixed rate building society bonds with a good rate of interest. Look at the Savings and Investment boards on MSE to see whats good and whats not. Good Luck!