Overpayment fund

Jarles

I have a mortgage with the co-operative bank and have put 3k in an overpayment fund, I've got another 3k spare now and wondered is it worth putting it in also as the bank said it would work out cheaper but I'm not sure how! Would it be better to put in an ISA are something? At the moment with it in the overpayment fund i can easily get to it which is important at the moment as my long term work situation is a little unsure.

The mortgage is a 2yr fixed at 3.19% which ends in July 2012

dimbo61

All your eggs in one basket come to mind
So why not have £3K in an ISA , you should get 2.8/3% and if things do slow down at work you have a small emergency fund with easy access

redpete

I would put it into the mortgage overpayment fund.

The chances of an institution like the Coop going under and therefore being a worry about having your money and mortgage with them are very slim.

Although the interest rate difference is negligible it is a good discipline for me to pay off the mortgage and having the money in the mortgage account is psychologically more difficult to dip into if I'm tempted, so it is a true emergency fund which I will hopefully not have to touch. (This is more relevant for an interest-only mortgage like I have.)

jamesd

It would reduce your mortgage interest payments so if you take a narrow view and only think of the mortgage it works out cheaper. It's very common for people to take that narrow view.

If you look at a broader picture things can change greatly. How many years could you live on your savings and investments if you lost your job? If it's not years but is only a month or two then you're probably better off putting the money into an ISA to increase your emergency fund.

You write that your employment is uncertain. That's enough to make it a very bad idea to make mortgage overpayments. You may need the money available soon just to make the mandatory monthly mortgage payments. Even though you can today get at the money in the overpayment fund you may find that the money there is available only at the discretion of your lender, who may block access when they find out that you're unemployed.

While its unwise given your employment risk unless you also have a large emergency fund, the UK main stock market grew by an average of 10.5% plus inflation in each of the five year periods between 1978 and 2003. Investing long term can be expected to make you more money than the cost of the interest paid by not overpaying a mortgage.

redpete

jamesd wrote: »

It would reduce your mortgage interest payments so if you take a narrow view and only think of the mortgage it works out cheaper. It's very common for people to take that narrow view.

If you look at a broader picture things can change greatly. How many years could you live on your savings and investments if you lost your job? If it's not years but is only a month or two then you're probably better off putting the money into an ISA to increase your emergency fund.

You write that your employment is uncertain. That's enough to make it a very bad idea to make mortgage overpayments. You may need the money available soon just to make the mandatory monthly mortgage payments.

If the OP's coop mortgage has the same conditions as ours any payments in the overpayment fund can be accessed at any time, it is not a one-way deal. So if there is a need for emergency funds it is available from the mortgage overpayment fund. So not such a narrow view.

Jarles

Thx for the replies

As Redpete says it can be accessed at anytime!
I just wanted to get the best return on it, so am I right to think that the money I save on interest payments having it in overpayment fund are better than the return on an ISA?

jamesd

3.19% is equivalent to after tax interest. If you can get that rate or higher after tax elsewhere then that's a better deal than overpaying. If you can't, then overpaying will be the cheaper way. An ISA at 3.19% is the same. You can probably get a better rate on a few hundred a month using the 8% First Direct regular saver account. if you open a normal savings account there's no account charge. If you also pay in and out £1,500 a month for three months they will even pay you £100 for that work.

Do check that they don't have discretion to withdraw the facility. Some people have been very unpleasantly surprised over the last couple of years when it's happened, though I don't remember any Coop examples. Don't just rely on the marketing literature, that's what those who were caught out relied on.