Overpay mortgage or keep in savings ?

swayzak

Hi

I'm a (relatively) high earner and pay higher tax rate.

I have a Smile savings account (miserable 0.25 %) and am just transferring my ISA to the Northern Rock 3.5% account (thanks to this site !!).

My Britannia tracker is at 0.9%.

I have (since taking this mortage out in April 2008) been overpaying fairly regularly - but recall reading somewhere that now interest rates are so low I might be better just putting this into a savings account (but presumably one paying better than 0.25% !).

Is this the case e.g. should I stop overpaying & look for a new savings account ?

If so, I guess when the interest rates rise again there will come a point where overpayment would be the better option.... ?

Apologies but I do get a bit confused about this.

thanks

swayzak

hewhoisnotintheknow

if in doubt go 50 50

then when your savings build up to a nice amount transfer a percentage of them to the mortgage

i overpay a lot, but like to have cash for when the car blows up or something

opinions4u

If your mortgage rate is 0.9%, and you can get 2.52% net by saving, then surely you should save. Take a look at the Barclays Monthly Saver too.

A couple of things:

1) Ring fence the savings account you use and don't spend the money on anything else. It is mortgage money only.

2) Keep an eye on the rate for the savings and be prepared to change providers as and when rates fall (or fail to rise with the market).

3) If the mortgage rate moves above the best net savings rate you can get, then this is the time to withdraw from savings and pay a lump sum (including interest accrued in the savings account) off your mortgage capital.

The key rule here is that if your savings account earns more than you're charged on your mortgage, then save.

swayzak

Thanks

I have kept the Smile savings account because (apart from the "ethical" side) I have found it handy having my current , savings & credit card accounts in same place (although I have transferred my ISA out and around, twice now).

However, with most banks offering easy online access & transfers (and tabbed browsing) I guess this isn't so much of an issue anymore.

I tend to save £1000+ per month (but occasionally take money out, rarely though) so I guess these "regular savings" accounts would not be appropriate ?

EDIT: Thanks opinions4u - you posted whilst I was writing this !

swayzak

Should my higher tax rate be a consideration here e.g. will this offset the earnings from the savings compared to mortgage overpayments ?

opinions4u

swayzak wrote: »

Should my higher tax rate be a consideration here e.g. will this offset the earnings from the savings compared to mortgage overpayments ?

Very relevant.

I quote the AA account paying 3.15% gross above. This is 2.52% net to a basic rate taxpayer and 1.89% to a 40% taxpayer.

I would certainly be looking to maximise easy access cash ISA tax free benefits in your circumstances. The same advice on watching the rate like a hawk applies.

Jonbvn

swayzak wrote: »

I tend to save £1000+ per month (but occasionally take money out, rarely though) so I guess these "regular savings" accounts would not be appropriate ?

I would suggest you save some of the £1k in regular savers and some in instant access account(s).

Don't forget to top up your ISA's, which should be your first port of call as a higher rate tax-payer. From next April you can save £5.1k in cash ISA's.

If you are married and your spouse is a basic rate tax payer, consider opening accounts in his/her name only.

BTW, overpaying a mortgage with an interest rate of only 0.9% would be a poor decision ATM. Of course, be ready to overpay with accumulated savings when the rates change.

Joe_Bloggs

@swayzak
You may need several regular savings accounts to take up £1000 per month. The more you shop around the more savvy you will be. Many of the best cash ISAs are fixed term fixed rate as are many other savings opportunities. You can only deposit the money once. Thus I have to save up for an cash ISA in a regular saver and transfer when it matures.

J_B.

swayzak

Jonbvn wrote: »

I would suggest you save some of the £1k in regular savers and some in instant access account(s).

Don't forget to top up your ISA's, which should be your first port of call as a higher rate tax-payer. From next April you can save £5.1k in cash ISA's.

If you are married and your spouse is a basic rate tax payer, consider opening accounts in his/her name only.

BTW, overpaying a mortgage with an interest rate of only 0.9% would be a poor decision ATM. Of course, be ready to overpay with accumulated savings when the rates change.

Thanks

I certainly fill up with full ISA amount at the beginning of each new tax year (transferred from conventional savings account) - and looking forward to the increase to 5k next year !

swayzak

Jonbvn wrote: »

I would suggest you save some of the £1k in regular savers and some in instant access account(s).

Don't forget to top up your ISA's, which should be your first port of call as a higher rate tax-payer. From next April you can save £5.1k in cash ISA's.

If you are married and your spouse is a basic rate tax payer, consider opening accounts in his/her name only.

BTW, overpaying a mortgage with an interest rate of only 0.9% would be a poor decision ATM. Of course, be ready to overpay with accumulated savings when the rates change.

thanks

I was hoping to balance simplicity with yield ie. close the Smile savings account and find one with best rate which allows easy access ... mortgage overpayments, occasional purchases, paying of tax bill from tax return etc.

I'm not sure I could keep an eye on too many accounts regarding rate changes, times to close & move etc.

Will it be worth the hassle to have a regular savings account & easy access account(s) - on top of current & ISA.

Hmmm .. perhaps I need to finally bite the bullet and sit down with an FA ...

Reaper

One other small thing to consider. Some mortgages only allow you to pay off a certain amount each year without incurring a penalty. If you had one of those it might be worth using up your annual allowance first in case mortgage rates crank up again in the future.