Overpayment??

Plasticman

I'm sure that this is a really dumb question, but here goes.........

I have the option of making overpayments on my mortgage up to £500 per month. I have not considered doing this before as I wanted to put any 'spare' money into a savings account in case of emergencies. I am now happy with the amount I have in my savings account so was looking to make an overpayment on my mortgage.

But, as my savings are earning 5.35% (tax free at the moment) and my mortgage rate is 4.75%, can somebody please tell me if I would be better off to make the overpayment or to keep adding to my savings? I'm sure that the answer should be to make the overpayment, but I'm not sure why!!!!!!

david78

If your savings really are tax free (ISAs I suppose) keep them as savings. Only move them to your mortgage when the interest rate on your mortgage is higher than that for your savings.

At the same time as long as you can save £500 tax free earning a higher rate than
your mortgage continue to do so.

How are you managing to save £500 per month tax free and earn 5.35%?

kinster_2

is you mortgage interest calculated daily, montly or yearly?

Also, wouldn't it depend on the size of your mortgage vs. size of your savings?

edit: size of savings that reduces the amount of mortgage does not matter...

MarkyMarkD

Kinster, as david says, if you can earn more (after tax, or tax-free) on savings than you pay on your mortgage, it does NOT save money to over-pay. The idea that over-paying is ALWAYS the best use of your money is a myth, particularly if you don't pay tax, have a non-taxpaying spouse, or have available capacity within an ISA or other tax-free vehicle.

kinster_2

I know, I do this myself... so no need to point that area out...

david78

The size of the mortgage has no bearing whatsoever.

Plasticman

Thanks folks. Seems like I should keep the money in the savings account for now then! For info, the savings are tax free as my wife is a non-tax payer.