Overpayment or Savings?? Help please 25 February 2011 at 10:05AM in Mortgage-free wannabe 5 replies 625 views

beccajune

I would like some advice about our current situation. We have a mortgage of £49000 (11 years to go) at 1.39% with our basic repayment at £418.99. We can make overpayments of around £2000. My question is: as savings rates can be found now at higher than our mortgage rate, should I be 'saving' as a form of overpayment? Is the sum as simple as a comparison of interest rates.

Many thanks in anticipation of your help.

Rebecca

LilacPixie

not quite as straight forward.. savings rates quoted are gross rates so unless its an ISA or you are not a taxpayer the interest you receive will be taxed... IMO you should be using you ISA allowance (and other halfs) if you have not already done so at a rate higher than mortgage rate

kabads

Also, what kind of mortgage rate is that? My guess is that it's variable. If it's variable and it goes up then you could be saving more by piling it in to the mortgage. The latest pundits are predicting a rate change in May (although that might change again as the economy is worse than they thought) and so if you do put it in a savings account, it might be better to put it in a quick access account as then you can put it in the mortgage if the rates do go up.

SmlSave

I'd do both Then's its a 50/50 gamble on rates etc

blueberrypie

beccajune wrote: »

I would like some advice about our current situation. We have a mortgage of £49000 (11 years to go) at 1.39% with our basic repayment at £418.99. We can make overpayments of around £2000. My question is: as savings rates can be found now at higher than our mortgage rate, should I be 'saving' as a form of overpayment? Is the sum as simple as a comparison of interest rates.

It's comparison of interest rate on mortgage vs net interest on savings.

Have you used your ISA allowance for 2010/11? If not, put the money into an instant-access ISA. It shouldn't be hard to earn 3% net.

If you have used your ISA allowance, look at ordinary instant-access savings accounts and go for the best rate you can find. There are plenty that will beat 1.39% even after tax.

If and when your mortgage interest rate rises higher than your savings interest rate, you can take the amount you've saved and put it into your mortgage.

Quick example: you've got £1000.

Pay £1000 to your mortgage - over the next year it will save you £13.90 in interest. Your mortgage balance is now £1013.90 less than it would otherwise have been.

Pay £1000 into an ISA earning 3% (or a savings account earning 3% net) - over the next year it will earn you £30 in interest. Take it out and put it towards your mortgage - your mortgage balance is now £1030 less than it would otherwise have been.

Pay £1000 into an ISA earning 3%. In six months your mortgage interest rate has risen to 3.1%, but your ISA is still paying 3%. Withdraw the ISA money (which has now earned £15 - half of a year's interest) and put it on your mortgage. Over the next six months, you save £7.05 in interest on your mortgage (you've saved half a year's interest on the £1015). Your mortgage balance is now £1022.05 less than it would otherwise have been.

(If your mortgage rate were to rise to 3.1%, it's likely that there would also be rises in ISA/savings interest rates - in which case you would not withdraw the ISA funds, but transfer them to another ISA paying more than 3.1%.)

(Numbers done very quickly - not promising they're completely accurate, but you get the idea!)

beccajune

Many thanks for your replies, they are greatly appreciated. I am concerned about rising rates which regardless of other factors I feel will rise sooner rather than later and will delay my plan.

I am aiming to have the mortgage paid off my August 2012 which as a rough calculation of £60 a month interest which I am currently charged is £1080 interest still to pay (I know that has not been compounded).

My husband and I both have very good credit records and secure (as they can be in current economy) employment. With that in mind, I have also thought about using credit cards with long 0% APR on super balance transfers if the total handling fees paid were less than the £1080 interest. This would at least protect me from potential interest rate rises.

What are people's thoughts on this idea?