How much to keep in savings when trying to pay off the mortgage?

JodyBPM

I'm on a mission, like you guys, to pay off the mortgage.

Currently we have £29k on interest only, covered by an endowment (likely to underpay by 5K) maturing in 12 years, plus 39K on a repayment basis, which we're initially tackling as our first mortgage free target. I've not 100% decided what to do with the endowment part, as its likely we'll move in the future, and it seems to me that to be in a position with the equivalent in savings to the amount owed on the interest only bit would be more flexible as and when it comes to moving, rather than no mortgage and the promise of £25k or so from the maturing endowment in x amount of years. I will keep the endowment policy running, whatever.

I'm currently at the end of a discounted period, looking to renew the discount for a further 2 years. This means that I need to make a decision now as to how much lump sum to pay off. The reason i do it like this is because of an ERC equivalent to the discount (1%), during each discounted period IYSWIM. I'm also planning to reduce the term on the repayment part at this time so that I continue to pay the same mortage payment each month. We should be able to pay off the repayment part in 5 years. In addition, we save between 3-6K per year. This money is to cover the lump sum repayment.

We currently have £16k in our savings to make an overpayment. I was thinking of paying a lump sum of £12k off, but am worried that leaving just £4k in savings doesn't seem very much. However, we do save 200-500 a month, so savings should build up quickly. Having built up the savings over the last 3 years specifically to overpay a lump sum on the mortgage, I'm suddenly getting cold feet about being left with little savings in case of an emergency (boiler breakdown/car breakdown etc).
We a family in our mid thirties with a 3 and 4 year old, with combined income of around £50kpa between DH f/t, me p/t but no childcare costs to pay, if that puts things into perspective. House value approx £250k.
How much do you think is needed as a safety net? I'm also aware of how much more expensive the children are getting...

Creditcardkid

I believe that the general consensus (and one I have set aside myself) is three months of salary. Some go for three months worth of bills.

Personally, being single and only having one income I have gone for three months salary.

I hope that helps. Good luck with the overpayments

dimbo61

Have you looked at offset mortgages ?
That way you dont have to run down/overpay with your savings !
You should overpay which ever part of the mortgage has the highest rate.
But if you pay £12k off your £39k repayment mortgage you may not get another mortgage elsewhere as most lenders have £30k as smallest mortgage.
What does you mortgage now revert to after discount ends and can you overpay with no limits? GOOD LUCK

dimbo61

First direct have some good deals
I am with YBS

JodyBPM

dimbo61 wrote: »

Have you looked at offset mortgages ?
That way you dont have to run down/overpay with your savings !
You should overpay which ever part of the mortgage has the highest rate.
But if you pay £12k off your £39k repayment mortgage you may not get another mortgage elsewhere as most lenders have £30k as smallest mortgage.
What does you mortgage now revert to after discount ends and can you overpay with no limits? GOOD LUCK

I'm happy to stay with my existing lender, the rate is good, 1% discount off standard variable for 5 years, tie in for only two, and I hope that I will have paid off the repayment part entirely within 5 years (in fact we will be shortening the term to 5 years, so I guess we will definitely have paid that part off then) The interest rates are the same on both parts of my mortgage. I can't remember exactly what the rate is off the top of my head, but I did some research and with the 1% discount it worked out to be pretty much as good as I could get elsewhere, and mainly, its a small local bs and the service is impeccable! Also I trust them, and a 5 year discount with only a 2 year tie in, no arrangement fees etc seems to good to lose for the sake of a point something of a percent difference with another lender IYSWIM.

Valid point re the £30k minimum though, but I would imagine the next time we will need to really look around will be when we want to move, so will be borrowing more.

Would love to have an offset account, but sadly my BS doesn't offer one:(

dimbo61

When you do move to a bigger home consider the offset option and carry on the good work.
Now a real challange would be to clear both parts of the mortgage in 5 years!

JodyBPM

dimbo61 wrote: »

.
Now a real challange would be to clear both parts of the mortgage in 5 years!

It's probably not worth paying off the interest only bit as its on an endowment basis, and will be more flexible to have the cash for fees, stamp duty etc should we decide to move.
We do hope, however, to have savings roughly equal to the amount owed by the end of the five year period

cake21

JodyBPM wrote: »

How much do you think is needed as a safety net?

I would agree with 3-6 months depending on your attitude to risk (I've gone for 6 months because the thought of going to job interviews sends me into a flux, so wouldn't want the additional pressure of running out of money ).

For a real emergency needing more than that I would use a 0% on purchases credit card but something that big should hopefully be covered by my insurance.

Jonbvn

I used to think that 3-6 months was good enough. However, given current economic events, I am no longer so sure. Basically everything now seems so unpredictable. Therefore I now think 6 months to a year is better.

I think that offsets are generally a good idea. However the rates they offer are relatively poor. Given this we do our equivalent offset using savings. However, this is easy for us, since we have a super low tracker.

setmefree2

3 to 6 months is about right I think. BUT everyones circumstances are different, some might want less, others more. Good question:D

Malski

I try and keep 6 months worth of wages aside incase of job loss or even some type of big problem, something like shower/bath leaks, car troubles etc.