Mortgage overpayment?

ghall54

We have a mortgage with Bank of Ireland and are confused about a) whether to overpay and b) whether to overpay monthly or a lump sum

The balance is £120,000 with 30 years to go, currently on 2.99% (SVR)

We are looking to buy a house in the next 6-12 months, so obviously will need to have a substantial deposit available (we have approx 20k equity in current property plus some savings)

So the question is should we use our savings to overpay on the mortgage? I'm unclear as to whether a lump sum overpayment is any better than keeping the cash for the deposit. Also, the potential savings look much higher with a monthly overpayment?

beecher2

If you can get a rate of more than 2.99% after tax then save the money.

DVardysShadow

If you are planning to move in the next 6 - 12 months, make sure you have a war chest to cover the costs of selling, buying, moving and settling in. After that, equity in the house or in savings is no big deal, go for the highest rate as beecher2 says.

dorset_nurse

But don't forget that the rate of inflation means you may still be paying more in interest on the money you owe than gaining on your savings... even if your savings are above 2.99% after tax.

beecher2

dorset_nurse wrote: »

But don't forget that the rate of inflation means you may still be paying more in interest on the money you owe than gaining on your savings... even if your savings are above 2.99% after tax.

Not if you use the money to buy a house - then it is only house price inflation which comes into the equation.

dimbo61

So the best place for your savings at the moment is a cash ISA paying 2.99% or more.
As others have said having money to pay fees up front IE searches, mortgage fees, moving costs, stamp duty etc is better than trying to add them onto the mortgage with a tight LTV!
Good luck

InMyDreams

beecher2 wrote: »

dorset_nurse wrote: »

But don't forget that the rate of inflation means you may still be paying more in interest on the money you owe than gaining on your savings... even if your savings are above 2.99% after tax.

Not if you use the money to buy a house - then it is only house price inflation which comes into the equation.

But surely any inflation is irrelevant in comparing the two methods of saving. Or to put it another way, inflation effects both methods in the same way.

Each month, paying £10 less on on interest or earning £10 more on savings has the same net effect: you have £10 extra that month to do what you want with. The effect of inflation is the same (and only depends on what you spend it on, not which method you used to produce it). If you plough that tenner (or whatever it was) back into your mortgage or savings, inflation continues to be irrelevant in determining your actual returns.

Thrugelmir

dimbo61 wrote: »

So the best place for your savings at the moment is a cash ISA paying 2.99% or more.

Mortgage interest is (normally) charged monthly so the true annual rate of interest is higher.

InMyDreams

Thrugelmir wrote: »

Mortgage interest is (normally) charged monthly so the true annual rate of interest is higher.

This discrepancy is small enough to not worry about too much though. I calculate that to match a mortgage rate of 2.99%, you actually need a savings rate of 3.03% AER (after tax, obviously).

dorset_nurse

beecher2 wrote: »

Not if you use the money to buy a house - then it is only house price inflation which comes into the equation.

If house prices inflate...