Extra income - save or over pay mortgage?

portmoon

Hello all,

Up until recently my partner and I were getting by on just one wage.

We are now both working, so will have an extra £1,500 a month.

Obviously it would be tempting to increase our spending or get a bigger place, but we thought we'd have a go at saving as much of the extra wage as we can for a year and then re-assess the situation.

Question is, should we stick the money into savings, or over-pay the mortgage?

Any thoughts appreciated!

dunstonh

Question is, should we stick the money into savings, or over-pay the mortgage?

Probably a bit of everything.

Savings for short term, investments for medium term, pension for long term and overpay to reduce the debt whilst the going is good.

malik999

portmoon wrote: »

Question is, should we stick the money into savings, or over-pay the mortgage?

Any thoughts appreciated!

Compare your mortgage interest with savings interest and you will have your answer.
Typically the answer is pay your mortgage
hth

jamesd

It's a good feeling to know that you have enough money in savings and investments to pay all of your bills for many years. The stocks and shares ISA is one way to handle much of that, getting a broad range of investments while still having immediate access to the money or income from it. Long term investments in a S&S ISA are likely to grow by more than the interest cost of a mortgage as well.

You'd still want many months of living expenses in cash savings as well as any investments.

MyLastFiver

jamesd wrote: »

It's a good feeling to know that you have enough money in savings and investments to pay all of your bills for many years. The stocks and shares ISA is one way to handle much of that, getting a broad range of investments while still having immediate access to the money or income from it. Long term investments in a S&S ISA are likely to grow by more than the interest cost of a mortgage as well.

You'd still want many months of living expenses in cash savings as well as any investments.

Sorry I can't agree that equities make a good "instant access" investment, even a diversified portfolio.

OP - you could see if your mortgage provider offers an "offsetting" feature, whereby you pay into a savings pot which reduces the interest you pay on your mortgage. It's like overpaying your mortgage whilst retaining instant access to the cash.

jamesd

You seem to have misinterpreted what I wrote. I didn't write about instant access, nor did I confine the options to equities.

We agree that equities aren't an instant access investment. If nothing else, it takes at least a few days for settlement. Instant access = going to the bank and getting the cash in a few minutes from the teller or an ATM. It's part of why a lot of accounts no longer claim to be instant access.

Instant access savings accounts are what you need for short term emergency needs and for at least some months worth of spending as well. Mortgage offset accounts can be one good way to hold that.

For the longer term, immediate access investments in a S&S ISA can be used. Things like cash (for limited terms of up to a few years, say, during market disruption). Or corporate bond funds that produce income that is normally reinvested, but doesn't have to be, and that aren't likely to drop in value a lot in a market dip, so you can take some capital out if you need to. Or with more volatility, equity funds, that you might want to defer selling for a while during a dip, but which can be good when the time you have to live on the money increases from months to years. But not directly held gilts, say, because those can only be held in an ISA if their term is more than five years at time of purchase, so you can't get at the capital within a few days.

Things that aren't immediate access include property equity, notice accounts, term deposit accounts and most structured products.

I'm currently using a fair range of equity-based funds in my S&S ISA, as part of my own planning for the long term unemployment case. If that need happens, I'd look to gradually convert much of the investment mixture to less volatile things, instead of things that are there for long term investment growth. But I also have quite a bit of money in savings accounts for short term emergency needs.