Pay a lump sum off my mortgage or put it into savings?

sota

Hi all.

First time here and i have terrible trouble getting my head around matters of finance, so please be gentle...

I've recently come into a little money, £10,000 to be exact, and would like to know whether it would be better to pay this amount off my mortgage, or to invest in some form of long term savings (I have no real need for the money at this moment in time)?

I do have a little money put aside for emergencies in a regular savings account.

I have a relatively small mortgage left with Alliance and Leicester of £26,500. The monthly payments on this are £300 per month (which includes an extra £100 overpayment I make) and will be paid off in 8 years 4 months. My current interest rate on this mortgage is 4.69%.

I phoned Alliance and Leicester yesterday and asked how long the term would be reduced by if I increased my payments again by another £120 per month (making a monthly total of £420 - obviously). I was told this would bring the term down to 5 years 8 months.

So the big question is (at last I hear you say!): Should I pay the £10,000 off my mortgage AND make the extra £120 a month overpayments, or would i be better trying to find a decent, long term (say 10 years) savings plan, stick the whole £10,00 into that, and pay the extra £120 a month into that?

My wife doesn't like the idea of putting it towards paying the mortgage. She wants to put it into savings. But with interest rates for savers being so bad, it seems a waste of time to me. Surely we'd be better off reducing the mortgage, or am i missing something?

Sorry to go on a bit, but you can't give advice if you don't know the facts (as my grandad used to say).

Thanks in advance for any advice.

opinions4u

1. Make sure you have a contingency fund to cover 3-6 months net pay ... just in case life is cruel to you.
2. Assuming you have no spending plans (car, holiday, home improvements), no other debts at a higher rate and the lender doesn't charge an early repayment penalty, the best thing to do is pay down the mortgage.

It may be that your wife wants to have a bigger contingency cushion ... do your sums, she might be right. And there's always the compromise ... half in to savings and half off the mortgage.

getmore4less

The rate is quite high at 4.69%.

Might be worth looking at a new mortgage.

First Direct have a low fee offset that would reduce the costs and still give access to the savings.

If we say £500 for switching costs £99 fee, valuations, legal etc.
using an 8 year term which is close to your cuurent estmate.
Current £26.5k @ 4.69% 8 y £332pm.
FD offset £27k @ 2.59% 8 y £312pm

With your expected payment of £420 you get down to around 6 years
Current £26.5k @ 4.69% £420pm. 73months
FD offset £27k @ 2.59% £420pm 70months

With your expected payment of £420 and 10 paid off/offset you get down to around 6 years
Current £16.5k @ 4.69% £420pm. 43months (last payment £309)
FD offset £17k @ 2.59% £420pm 43months (last payment £169)

So you can save money with a remortgage and still have access to the money if needed (based on £500 total cost to change)


The ideal size for your contingency fund will depend on income sources risk of loss of income and outgoings.

Offset is one way to solve the problem