What Best to do With my Money??

tleefox

Good morning all - I'm after a bit of advice as to what to do with some money I will be saving from next year.

I am 25 years old and purchased my first home a year ago. At the moment I have a pretty hefty car loan which will be paid off in 12 months time.

Once the loan is paid off, I will have an extra £400 - £500 a month which I will be looking to save.

In a couple of years time I am hoping to be able to buy a second home, and rent out the first.

My question is this, am I better to put the extra money straight into a savings account, and pay off my existing mortgage as normal, or should I over pay on my existing mortgage and release the equity I have built up when I want to buy the second home?

I can overpay on my current mortgage by £500 a month without penalty.

Reason I am asking is I do not know a lot about how easy it is to release equity from a property, or anything about taking out second mortgages.

Any help gratefully received.

berrya1

Although my knowledge is limited and I hope someone else backs this up, but it is by FAR wiser to overpay on your mortage (by as much as you can without penalty) than put the money in savings. Over the long run the benefit gained will far out weigh that available through interest. As a rough "guestimate" for every £500 overpaid is about £1250 saved on the life of your mortgage!! (Based on every £1 borrowed on your mortgage £2.50 will need to be paid back. You will not find a savings interest rate that gets close to this!

A good starter for ten on releasing equity (through remortgaging) can be found in Martin Lewis' Remortgaging guide, available on the main website.

Hope this helps in someway.

lisyloo

My question is this, am I better to put the extra money straight into a savings account, and pay off my existing mortgage as normal, or should I over pay on my existing mortgage and release the equity I have built up when I want to buy the second home?

Mathematically it's quite simple.
Compare the savings account rate (after any tax) with the mortgage rate.

I do not know a lot about how easy it is to release equity from a property, or anything about taking out second mortgages.

A new mortgage would be a BTL mortgage which has higher rates and need a larger deposit. You'd probaby want to take the new mortgage on the new property.
The mortgage depends on the rental income and not your personal income i.e. it has to stack up as a business.
Make sure you allow for agents fees, solicitors, maintenance, repairs, income tax and voids (empty periods) when you work out whether it stacks up.

lisyloo

but it is by FAR wiser to overpay on your mortage (by as much as you can without penalty) than put the money in savings

This is generally true, because generally debt interest outweights savings interest.
However there are some people at the moment with BOE mortgages who have very cheap debt.
For example I have BOE+0.49% which is 0.99%, so I have actually recently WITHDRAWN from my mortgae to put into savings/investments etc. because I can guaranteea better rate elesehwere with no risk.
However this is the execption and not the rule.

blueberrypie

berrya1 wrote: »

Although my knowledge is limited and I hope someone else backs this up, but it is by FAR wiser to overpay on your mortage (by as much as you can without penalty) than put the money in savings. Over the long run the benefit gained will far out weigh that available through interest.

It's not as simple as that these days, with mortgage rates being so low for so many people. Before we can say "savings" or "mortgage", we need to know the interest rates on both. My mortgage interest rate is currently 4% lower than my highest-rate savings - it would be madness to put those savings onto my mortgage.

It's also important to ensure you have access to adequate funds - if you put every extra penny into overpaying a mortgage, what happens when there's an unexpected expense? Not all mortgages allow for "borrowing back" overpayments, and even where funds are available, sometimes they're on a higher interest rate than the mortgage itself.