Overpay or not?

steven07968

Hiya, just after some advice.

Got a letter through from the company that my mortgage is with (First Active), to say that my 3 year fixed rate deal comes to an end at the end of March.

Upon completion of the fixed rate deal, I'll be moved on to the long term variable, which is currently 1.60% :T

This will bring my payments down by circa £100 a month. The minimum overpayment is £200. So, do I overpay, or put the £100 into an ISA or other savings account???

Thrugelmir

Can you obtain a better rate than your mortgage in a notice free savings account. If you can then its the better option at the moment.

Many best accounts aren't instant access or are topped up with an annual bonus.

steven07968

Surely an ISA for example will pay more than 1.6%

Not mithered about access, as would just use it to save up a deposit should I save the money rather than pay it directly off my mortgage.

Thrugelmir

steven07968 wrote: »

Surely an ISA for example will pay more than 1.6%

Not mithered about access, as would just use it to save up a deposit should I save the money rather than pay it directly off my mortgage.

An ISA is just a tax free wrapper. Sometimes better rates are obtainable (after deduction of basic rate tax) through ordinary savings accounts.

If it isn't instant access and say BOE base was to rise in June. Then you get no benefit neccesarily from saving the money rather than paying off the mortgage.

I assumed that you were looking for the best return.

steven07968

Thrugelmir wrote: »

An ISA is just a tax free wrapper. Sometimes better rates are obtainable (after deduction of basic rate tax) through ordinary savings accounts.

If it isn't instant access and say BOE base was to rise in June. Then you get no benefit neccesarily from saving the money rather than paying off the mortgage.

I assumed that you were looking for the best return.

I'll level with you mate, I don't understand all of this stuff, so am unsure

Just that I can either pay additional money to reduce my mortgage, or save the £100 and try to make myself better off than I would be with paying money off the mortgage.

So I need to somehow work out how much I reduce my mortgage by in a year, by overpaying. And then compare that against saving each month. Suggestions as to what I need to do to work out the best way forward for me?

Thrugelmir

steven07968 wrote: »

I'll level with you mate, I don't understand all of this stuff, so am unsure


Ask as many questions as you wish. Trying to give you the information to make an informed decision that you are comfortable with. There's often no right or wrong answer.

Just that I can either pay additional money to reduce my mortgage, or save the £100 and try to make myself better off than I would be with paying money off the mortgage.

So I need to somehow work out how much I reduce my mortgage by in a year, by overpaying. And then compare that against saving each month. Suggestions as to what I need to do to work out the best way forward for me?

The Principality Building Society is offering an ISA with a rate of 2.8% for one year. (instant access).

www.principality.co.uk

After one year you would have to review the account. As the interest rate drops to 1.8% currently. So possibly move the money elsewhere.

blueberrypie

steven07968 wrote: »

I'll level with you mate, I don't understand all of this stuff, so am unsure

Just that I can either pay additional money to reduce my mortgage, or save the £100 and try to make myself better off than I would be with paying money off the mortgage.

So I need to somehow work out how much I reduce my mortgage by in a year, by overpaying. And then compare that against saving each month. Suggestions as to what I need to do to work out the best way forward for me?

Think of it this way:

If you pay £1000 off your mortgage now, that's £1000 you won't be charged interest for. After a year, you'll have saved yourself 1.6% of £1000, which is £16.

If you save your £1000 in a savings account which pays 3% net (i.e. after tax, or tax-free), after a year you'll get 3% of £1000 in interest, which is £30.

So you can see that the second option is more beneficial.

Savings choices:
Tax-free - you'd be looking at ISAs. There are several paying 3% instant access or one-year fixed rate.
After tax - if you pay income tax at the basic rate, to get more than 1.6% (which is what you need for it to be better than overpaying) you need an annual interest rate of about 2%. Again, that's easily found.

A third alternative, since you'd be paying in a bit each month, would be a Regular Saver - have a look at the Savings section of this site for more info on how they work.