Want to be a mfw but worried?

jamesd

ally18 wrote: »

My mortgages currently stand as follows:
M1 - £62,367.59 @0.68% (Was at £66k this time last year) Paying £50 extra each month
M2 - £17,441.98 @1.49% (Was at £19k this time last year( Paying £45 extra each month

Why on earth are you throwing money away by overpaying on those mortgages instead of putting the extra money into a savings account!?

If you paid £50 into a savings account paying 2.99% after tax you'd get £1.196 a year of interest on the savings. On the 1.49% mortgage the same £50 only saves you £0.745 a year so each £50 paid off instead of in savings is costing you £0.45 a year. Just save that in the savings account and it'll let you clear the mortgage even earlier than you could by overpaying.

It gets worse. First Direct offers a regular saver account that pays 8% before tax for a year, on up to £250 a month. That same £50 paid into that account for the year would get you £3.20 a year in interest, making you £2.45 better off than paying the money off your mortgage.

Have a look at the new mortgage calculator and click on the "Repay mortgage with savings?" tab:

"It's worth paying off your mortgage with spare cash unless you can get a savings rate of... 1.5% as a non-tax payer 1.9% as a basic rate taxpayer"

It's easy to get those rates today so you're better off using savings instead of overpaying on the mortgage. Remember that this lets you pay off the mortgage even faster than by overpaying, because you reach the balance owed on the mortgage faster, then can clear it that much earlier than with overpaying.

Congratulations on the excellent savings work, you just need to make your money work harder for you than it is by overpaying at current interest rates.

jamesd

Like all debts, you pay off the one with the highest interest rate first. You shouldn't be paying off any of the 0.68% mortgage until you've cleared the 1.49% mortgage.

But at current rates you shouldn't be paying anything off either of them because savings let you clear the mortgages faster.

ally18

Thanks jamesd for your comments, I guess to me, I see my mortgage as a debt and a frightening one at that. Every month when I know I have paid off another small amount of the balance, it gives me a sense of satisfaction. I don't know that I would feel that way about just paying the money into a savings account and seeing pence at the end of the year but I suppose it is something to think about. Now I have started seriously thinking about all this. Trouble is I'm a typical librian and it takes me ages to make decisions and then I have to ponder both sides of it. The other side of it is it goes on the mortgage every month, if it goes in a savings account I may find another use for it at the end of the year.
Decisions, decisions.

ally18

Have just spent an hour going through everything in my mind and on paper and have made my decision be it good or bad. Anyway here goes,
Have opened up a fixed rate savings act @ 2.56% net and set up SO for max amount of £250 per month. This is going to be my money transferred from my ISA for the next 5 months as that was only paying 2.06% net. In the meantime, have increased to pay off £500 each month for my car loan, the extra £150 being £90 previous overpayment on my mortgage and £60 which was going to my emergency fund (that can wait awhile). This way I reduce the amount of interest I'm paying (5%) having the loan each month. That should be finished end of May (but with the extra payment from the bills act, will be April). Then with that complete, £250 will carry on into the savings act and the other back into the ISA (or may do something else with it, another fixed rate act).
So end result is that I'm saving my current overpayment of £90 each month into a fixed rate act for a year and will then pay that total off my m2 when it finishes. The remaining amount of £160 will be allowed to accrue for 12 months to be paid off m2 when that one ends. This will assume the mortgage rates are still low and that this still makes sense to me (now ive got my head round it).

The bad news for me at the mo though is i've only physically paid off £5 on m1 and £6 off m2 this month. But.... when I put the payment in my mortgage calculator just now, another month disappeared off the end of m1. :j

I hope all this sounds right, please tell me I've made the right move now.

CathT

I think you are doing things the right way - attacking debt before overpaying and moving savings to higher interest. Will be following your journey.

jamesd

ally18, that's a good improvement. Do remember that you gain from interest compounding on savings just as you lose from it on the mortgage, so it'll still be better to keep the money in a savings account if the interest rates remain higher in a year.

Paying off the car loan at 5% is a better deal than the savings account, so you're right to concentrate on getting that cleared.

So for now, all is good. Next year you can revisit this and see what looks best then.

SmlSave

Hi Ally

You will keep posting on here won't you? After all you are Oping, even if it's into an OP fund

Did you know that Lloyds have a 5% regular saver atm?

ally18

:j Yay, feeling loads better today, thanks for your comments james and cath.

Have set my 1st goal of my journey, hopefully will be able to set the next one this time next year.

To start with, an empty jar has been brought into work today and I'm going to put whatever change I have in my purse in there. This is going to be my physical savings pot to go to an op for m2 each month. (I want to have something to see)

Jar total - £1.50
Car loan (overdraft) - £2990
M2 overpayment in savings act - £90

Have set myself a goal of paying off £3,441.98 off m2 by end 2011, this includes normal mortgage payments totalling £924 and £1080 being put aside in the savings act so total of £1,437.98 to find in addition.

gerbiljo

Good luck Ally, keeping up the diary definately helps, like little bits can make a huge difference, I think being aware is half of it!

ally18

Hi Smlsave and gerbiljo,

Yes, i plan to keep posting every day whilst at work to keep me on track.

Afraid, I have spent money today, the first time this week so not too bad. £3.35, treated myself to a Mr T sarnie, choc, saus rolls to include in kids lunch tomorrow and a paper (for the £5 off at L for shopping). Had a coupon for a candle so got that free as well. The change has gone in jar.
Jar total - £3.20

Not at work tomorrow so will do shopping using calculator and voucher, hoping to spend £30-£35 max. Last of grocery budget for month is £49 so may decide to stock up on tins and stuff with whats left. Have got a £5 argos voucher to use so will go and buy one of numerous xmas pressies and will use the money I save from the voucher to get some bits from £shops for the kids xmas stockings. :T

No kids this weekend so a quiet one, must go to Ikea though to get more candles as they are running out. Going to stick to £10 max, found £40 in drawer at home last night saved from last month, so this will cover this. The rest will stay for future candles. Got home yday to find eldest child had lit half a packet of candles at once plus 6 big ones in front room, because she was cold!!!!! Thats 18 tealights! Needless to say, I blew about 12 out and told her to put warmer clothing on. Didn't go down well!

Pay day next week, not that it makes much difference as all dds go out on that day before pay goes in. Will see how bad it is then, I think I may be more overdrawn than I should be so need to check that out and get back on to a proper footing for 1 Dec.

Have decided on new gas & elect suppliers too so will sort that out next week. Hopefully further funds coming my way next year via quidco, fingers crossed.

Bye for now.

ally