Overpaying - can someone advise please?

FinnMcCool_2

Hello,

This is my first post on the site, although I have been lurking for ages and picking up lots of fantastic hints - Thank You! I need advice on overpaying on my mortgage and I am not really of a financial mind, so I was hoping you guys could offer some thoughts...

Do we overpay or Save? I know you must get this question a lot, but here is some more info:

mortgage £185,000
rate at the moment 0.68% (lifetime tracker, 0.18% above Base Rate)
18 years of term left
Have ~£2k savings for emergencies/back-up
No other debts
No charges for overpaying - mortgage flexible

We can afford to overpay £500 a month, some months possibly more. Our original aim is to reduce the term as quickly as we can (especially as rates are so low and before they increase again). The overpayment is what we initially budgetted our mortgage payments to be before the rates dropped, so overall we still pay what we did initially.

I just don't know whether it would be better to save and then when rates change, put it into the mortgage, i.e. would be "gain" more from this or is the reduction in term a better bet?

Any offerings of advice would be greatly appreciated - I just don't know what is the best thing to do and opinions from people who are more savvy at these things than me would help!

Many Thanks, FinnMcCool

littlemrtinkle

i would save in your position because you will get a better interest rate than your mortgage. (plus 2k isn't a lot for emergencies) But the choice is personal. Myself being tied into a fixed rate mortgage i am throwing all my money at paying this off rather than saving.

getmore4less

Save, plenty of places with better rates than the mortgage even if a 40% tax payer.

Review when mortgage rates go up.

Think about ISAs

Current savings seem a bit low for a loss of income situation.

dexter_fan

I would agree - you are better of saving. You can always throw the savings into your mortgage should the rates change. 2K is not that much for emergencies IMO and saving will give you the most flexibility

gallygirl

I agree, you should save all you can. You can notionally offset it on a spreadsheet so you can see your balance going down, but still access if required and gain a little more interest in the process.

This is particularly true as you have no penalties for overpaying - so if mortgage rates do rise sharply you can revisit.

Welcome by the way :hello:

chirpchirp

Everybody appears to be of the same opinion. Save! Congrats on getting such a low interest rate and there I was thinking mine was good!

One word of warning which people sometimes mention on here is to think about your liklihood of redunancy or if for some reason you found yourself without earnings and needed to apply for benefits. Apparently if your savings are more than 16k you are unlikely to receive benefits. If you suddenly pay your savings towards your mortgage before such an event this is viewed as disposal of assets and you still wouldn't be entitled to benefits. However, if you pay the money gradually, straight towards the mortgage, there is no penalty.

My interest rate is 1.49% and I pay some towards an overpayment and some towards savings. This way I benefit from the higher savings rate and I get the buzz of paying some of the mortgage off. I also have personal reasons for not wanting the savings to get too high and for not wanting too much to show off the mortgage (connected to ex-husband!). However, I also want to prove to the mortgage company that I can manage a huge payment in my own right as I would like to have the mortgage out of my ex's name!

If I was in your position I would probably just pay it all into savings, although I don't know how secure your job position is.

dimbo61

Why not do both !
Overpay by £250 a month and save into ISA,s and regular savers at say £250 each !
You have a great rate now but what were you paying before the BOE dropped from 5.5% to 0.5% and what have you been doing with money you are now saving ?
Get into the habit of saving every penny that you would have been paying before october 2008 as rates will go up and it will really hurt if your not prepared! GOOD LUCK

DJ_Mike

I would only slightly agree that your backup funds are insufficient - based on your current interest rate, you have 3 months of mortgage payments in reserve at the moment. Consider putting another £1000-2000 or so in there to give yourself a buffer up to 6 months.

I guess only you are likely to know how stable your job is. But even with job stability, you can make far more money by stowing it away in a higher-rate savings account and letting it mature. Paying off your mortgage right now is denying you of the extra money you can make from interest through a savings account.

Be cautioned that interest rates do change, however.

If your mortgage rate hikes above your savings rate (and bear in mind your savings are also taxed unless in an ISA - so that's your savings rate * 0.8 vs. your mortgage rate), then start overpaying into your mortgage instead (and start diverting money from your savings into your mortgage).

The important thing is that while you can personally make more money through savings than your mortgage bank can make from you, you should absolutely stick to savings.

But if your bank starts making more money than you are, get rid of that debt pronto! (But keep some funds in reserve as others have suggested, so you are safe from redundancy).

FinnMcCool_2

Thanks to all for replying so far, it's been very helpful! So, it's definitely looking like saving is the way to go.

FinnMcCool_2

Thanks to all for replying so far - it is appreciated! It is looking like saving is the way to go!

A few people have mentioned redundancy and having monetary back-up. We both work in the same industry and it is prone to redundancies. We would qualify for some payout if that happened and do have insurance that would pay our mortgage payments for a year if we were made redundant. However, I believe that if you are made redundant and apply for benefits, they take into account any savings. If you pay them straight into your mortgage, they still count that and you lose benefits anyway. I suppose if we saved and talk of redundancy started, we could quickly bung it into the mortgage and hope for the best

I'm still a bit confused though - apologies. The main issue I can't get my head around: If we save the £500 pounds instead of overpaying into the mortgage, would the interest generated on the savings be more of a benefit than the reduction in term (and therefore charged interest on the mortgage)?

The 2k we have in savings is in my ISA and other half doesn't have an ISA or any savings. What we have been doing so far is ploughing everything into the mortgage. This site says you should never save in and ISA and then take the money back out as then you are taxed on it. If we opened up an ISA in other half's name and saved the money there, when the interest rates changed and it made more sense to put money into the mortgage, would it be a good idea to take it out and put it into the mortgage?

Or should we just save in an ordinary savings account? I am trying to get to grip with doing the best thing financially for us, but I struggle with understanding finance!

At the end of the day our main aim is to reduce the amount we owe on the mortgage. If saving instead of overpaying is the best way to do it, I want to do that.

Sorry for such a ramble, but really trying to work out the best thing to do and to understand financial things! Opinions gratefully received!

DJ_Mike

Best thing to do is look at it this way:

If you overpay into a mortgage which has a 0.68% interest rate - for each £100 you overpay, you are saving yourself the interest that that £100 would generate over the next however many years.

Let's take 5 years as a square example. Overpaying £100 on your mortgage now would save you a compounded interest of £3.45 over the next 5 years.

In other words, if you didn't overpay that £100, it would cost you £3.45 over the next 5 years (assuming a fixed interest rate here, but the principle is sound enough). That's rather a pittance and not worth worrying much about!

On the other hand, if you put that money in a savings account, say at a rate of 3%, that same £100 would earn a compounded interest of £15.93 (before tax) over the next 5 years.

So by keeping your money in a savings account, you're making it work better for you. Paying off your mortgage is depriving you of "free" income from having that money elsewhere.

What you must understand is that all my maths above is based on interest rates staying the same - they don't.

But the point to understand is - as long as your savings rate (after tax) is a bigger number than your mortgage rate, you are better off saving!

Then, in the event your mortgage rate ever climbs above your savings rate, then just dump all your savings into your mortgage, and get shot of it - but just not right now!