Overpay mortgage or keep in savings ?

swayzak

Reaper wrote: »

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.

Thanks

Mine is unlimited overpayment without penalty - only until next April though - which is why I thought I'd try and pay off as much as possible before then.

pupsicola

If you can get a better interest rate on your savings then stash the cash away. Dont tie it up for too long though so when the interest rate on your mortgage goes higher than any savings accounts, you can pay some off.

Ingsy

Surely the amounts, as well as the interest rates, matter here as well?

For example, 2% net savings rate on £1000 a month might give you less interest than what you are being charge on, say £200k mortgage at 0.9%. So surely ther outstanding amount on the mortgage needs to be taken into account? Whatever that is, and if the OP decides to give out that sort of info.

swayzak

Ingsy wrote: »

Surely the amounts, as well as the interest rates, matter here as well?

For example, 2% net savings rate on £1000 a month might give you less interest than what you are being charge on, say £200k mortgage at 0.9%. So surely ther outstanding amount on the mortgage needs to be taken into account? Whatever that is, and if the OP decides to give out that sort of info.

No problem - outstanding mortgage = £145000 (original = 175k)

Savings (not including ISA) = about 20k

Jonbvn

Ingsy wrote: »

For example, 2% net savings rate on £1000 a month might give you less interest than what you are being charge on, say £200k mortgage at 0.9%. So surely ther outstanding amount on the mortgage needs to be taken into account? Whatever that is, and if the OP decides to give out that sort of info.

You have missed the point completely. He should only compare the return on each £1k, regardless of the outstanding mortgage amount. In simple terms:

OP the mortgage at 0.9% gives £9 per annum.
Save at 3% net (example) gives £30 per annum.
Therefore he is up £21!

Ingsy

Ok, going by your example, and the figures the OP gave. Savings = 20k @ 3% = £600 per year. Mortgage is 145k @ 0.9% = £1305 per year interest.

Therefore surely it's a better idea to pay the mortgage down asap?

Unless I'm being thick and missing something really obvious...

Ingsy

This is something I'm interested in, as I'm looking to either overpay or save next year, depending on which is best. My mortgage is much bigger than my savings, so I figure it would be better to pay down, than save, so if this could be explained I'd be much appreciated

Lokolo

Ingsy wrote: »

Ok, going by your example, and the figures the OP gave. Savings = 20k @ 3% = £600 per year. Mortgage is 145k @ 0.9% = £1305 per year interest.

Therefore surely it's a better idea to pay the mortgage down asap?

Unless I'm being thick and missing something really obvious...

You are not being thick, you just have to think outside the box so to speak. This took me a long time to get my head around. However, here goes my attempt

You have £1000. Now mortgage is 0.9%, savings is 2%.

Ok now if you decide to put the £1,000 towards mortgage, the total owed will only go down by £1,000. However, the interest on top which is going up by 0.9%, will only go up £9 less. So if the interest added to the mortgage over the year will, instead of going up £1000 or whatever, will go up £991. Which means you are saving £9 (as the £9 isn't being added).

However, put it in savings, you have £1,000, then £20 interest. Meaning at the end of the year you can put that £1,000 into mortgage, meaning the same capital as above on the mortageg but the interest on the mortgage would be £1,000 (as you didn't put the money in there, that £9 wasn't taken off). BUT you have the £20 interest, which means you could be better off, as you have £20 saved, whereas in the other scenario you would have only saved £9 interest.

opinions4u

Ingsy wrote: »

Ok, going by your example, and the figures the OP gave. Savings = 20k @ 3% = £600 per year. Mortgage is 145k @ 0.9% = £1305 per year interest.

Therefore surely it's a better idea to pay the mortgage down asap?

Unless I'm being thick and missing something really obvious...

Your mistake is to be considering the whole mortgage debt. This amount isn't relevant. It's the total amount available to repay or save.

Let's use this savings amount as £20k:
- Save it at 3% = £600 a year minus tax = £480 a year gained.
- Repay if off debt at 0.9% a year = £180 saved. £300 less than the interest it would have earned in a savings account.


I'll try to explain it another way:
- If you are paying £1,305 in interest on the mortgage, and earn £480 on the savings in interest, the effective cost of the mortgage is £1,305 - £480 = £825.
- If you reduce the mortgage to £125k the interest on that will fall to £1,125. This is £300 more than if you'd used a savings account for that £20k.

Ingsy

Ok, that does make sense. Thanks very much you two!