To overpay mortgage or not

savemon3y

Hi,

Just wanted to get people's opinions on this - just in case I am going about it the wrong way:

If the mortgage interest rate is considerably less than the rate in a savings account - is there any point in overpaying the mortgage?
I always thought there was absolutely no point and it is better to put the money in the savings account - profiting from the difference in the net interest rate paid by the savings account and the gross interest rate charged by the mortgage lender.

Then when the rate increase - all you do is transfer the money from the savings account and make a large overpayment.

Thanks!

philhews

From a purely financial point of view then that would be the best way of doing it, yes. However, many people prefer to pay down the mortgage as they wish to remove any debt from their name and feel they may just take the money back out of savings to spend on things whereas once the mortgage overpayment has been made the money cannot be retrieved (this depends on your mortgage type/provider).

It comes down to personal preference essentially and how much the difference in interest is and how good you are at not spending savings.

There may also be a limit on how much you can overpay your mortgage before being charged, so check your terms if this is something you end up deciding to do.

Hope that helps/made sense!

savemon3y

Thanks - that's what I thought.

I guess one drawback of overpaying vs putting it into savings is that the mortgage interest rate is probably going to be the cheapest 'loan' that most people can ever get. Therefore, if people are desciplined about their savings - by transferring the potential overpayment into their savings account means that they have funds accessible (assuming it isn't a long-term bond) in case of a rainy day or if they want to make a large purchase such as a car etc.

In these times of the mortgage lenders making it very difficult to remortgage - this may be a better route to avoid people having to take out a higher interest loan via the bank or credit card.

dimbo61

Lots of things to take into account !
income tax on your savings ? now if your mortgage rate is 3% and your savings rate is 4% before TAX are you better off saving or overpaying !
If you have built up a large overpayment pot of 6/12 months of mortgage payments you can ask your lender for a payment holiday ( as you have overpaid) but if you have over £16K in savings and lose your job then the nice benefits people want you to live off your savings!
So yes you need a good emergency pot in cash ISA,s say 3/6 months of income but after that I would overpay the mortgage.

Thrugelmir

Depending on the interest rate you pay and earn. The actual amount you save can be minimal. 1% on a £1,000 is £10. For many people there are easier ways of saving £10 from the budget than micromanaging ones mortgage. So overpaying regularly and not having access to the money is just as easy.

RosieTiger

The logic behind keeping savings if you are earning more in interest than paying out on your mortgage is clearly sensible. as others have said, it depends on your view and that's a personal call.

I would though put your figures into a mortgage calculator, because yes, it might be at a low rate of interest, but you should also be aware of just how much they will charge you in total over the full period of the mortgage. That's what generally drives those of us who do decide to pay down.

savemon3y

Hi,

Starting to get a bit confused now - I might be missing something important!

Looking purely at the figures - hypothetically speaking if my capital repayment mortgage rate is 1.5% and the savings rate is 3% (after tax has been deducted) and this remains so for the next 25 years - wouldn't I profit by putting my extra money in the 3% (after tax) savings account for this term and pay it all off at the end than by overpaying earlier on?

philhews

Ultimately, yes. But you're presuming that you will not take the money back out of savings, that depends on your willpower/situation in the future. Also some people have a personal preference that means they prefer to be reducing their debt rather than balancing up values of saving vs value of debt.

Looking purely at the figures, you would be financially better off in that situation paying into savings. Like I said, people have different feelings about it and for some the decision is based on more than just pure finances.

savemon3y

Many Thanks!

Lois_E

Another factor to take into account is the effect of savings interest on child tax credit and/or working tax credit, if you get them. Savings interest above £300 a year is counted as income, and you lose tax credits at 38% of it. So to make a fair comparison, you need to compare your mortgage rate with your savings rate net of tax and withdrawal of benefit.