To over-pay or not to over-pay

crayola

Hi all

Sorry if this is a no-brainer, but due to the large sums involved I suppose I am seeking re-assurance that our proposed actions are the right ones.

If you currently had good cashflow and reasonable savings (about £40k in the bank) but were anticipating a drop in both in the medium to long-term future, would you make mortgage overpayments now or hang on to savings? I am thinking that overpaying as much as we can afford is the right thing to do as our current rate is good but only fixed for another 16 months. However, I am scared of not having good savings.

We are newish homeowners with a 80% mortgage so I think that selling our house in the next few years would not make financial sense.

We are thinking of overpaying by about £10k this year (currently, we have £195k on our mortgage). The house also needs about £20k worth of work, but we are willing to do this relatively slowly other than a new bathroom, which is urgently needed and will be expensive - we expect to have to budget £8k. At reasonable estimate we can currently save 2000 a month, but this will soon be curtailed due to maternity and other things.

Thoughts?

Thefunkygibbons

I would always overpay

However right now, it is the risk free option. Savings rates are low, equities are all over the place (although there are bargains to be had) whereas mortgage overpayment is equivalent to a tax free and risk free return at your current mortgage rate

pinkshoes

What rate is your mortgage, and how much interest are you getting on your savings?

I'd over-pay the mortgage personally.

crayola

Thanks for that, yes it seems wise but we are in a little bit of a worrying situation health-wise at home, and I suppose I want to be sure the cash is there if need be.

However rationally, I'm thinking we can save 10k up again in another 5 months, so that amount at least should be well spent there.

crayola

pinkshoes wrote: »

What rate is your mortgage, and how much interest are you getting on your savings?

The interest rate on the mortgage is 3.79 and I am not sure off the top of my head what the savings rates are - some of it is in a cash ISA, some in a stocks and shares ISA. All I know from what my partner has told me is that the rate on the savings is pretty poor.

tyllwyd

To be honest, probably not the most MSE way to do things, but I would hang on to your savings for the moment. You aren't on a bad mortgage rate, so you are borrowing the money in an efficient way - if you keep your savings for now, you can review the situation when the fixed rate ends and decide whether to overpay at that point, keep your savings, or spend the money because your financial situation is not so healthy any more! It keeps your options open for a bit longer.

BTW if you have got money in a stocks & shares ISA, I would review that and check that you are happy with the performance of the funds you are invested in.

sonastin

What are the rules on your mortgage product with regards to overpayments:

1) if you make overpayments, are you allowed to withdraw that amount again from your mortgage?
2) if you make overpayments, are you allowed to take payment holidays in future?
3) are you penalised if you overpay too much?

I know that the mortgage I used to have allowed me to draw back down on any overpayments I'd made so for me it was a no-brainer. The mortgage was effectively a savings account with a better rate of interest than any actual savings account. I don't know about my current mortgage as overpayments are currently just a pipe dream!

crayola

sonastin wrote: »

What are the rules on your mortgage product with regards to overpayments:

1) if you make overpayments, are you allowed to withdraw that amount again from your mortgage?

That is a VERY good question! I did not know that this was even possible, so I will definitely add this to the list of things we are going to ask if and when we do it. If so as you say, why would anyone not do that?

Our mortgage is with the Post Office - all I do know is that they do not penalise unless you pay something ridiculous like the whole lot back in one (dream on!) or higher than a percentage we are not in a position to reach.

hcb42

I presume on maternity you are comfortable with income, and paying all your bills, you just wont save enough?

If that's the case I would keep my savings. I like a nice cushion though.

crayola

hcb42 wrote: »

I presume on maternity you are comfortable with income, and paying all your bills, you just wont save enough?

Yes, that's mostly right. My partner currently earns enough to comfortably cover us both but his job future is looking less secure than we'd hope at this stage - that is actually the more serious concern.

On the other hand our monthly payments will be much more manageable for me especially if we overpay a bit now.

I'm coming to the conclusion that some over-payment would be good, but only an amount we can immediately put straight back into savings with what is in our current accounts. We would be able to raise the same amount again before my maternity leave starts.

tyllwyd

crayola wrote: »

....I'm coming to the conclusion that some over-payment would be good, but only an amount we can immediately put straight back into savings with what is in our current accounts. We would be able to raise the same amount again before my maternity leave starts.

If your savings are in an ISA, I'd leave those alone and make the overpaments directly from your current accounts - otherwise you might risk going over the ISA limits for the year.