Savings or mortgage overpayments???

fannyanna

Hello

I’m looking to get some opinions on whether we should overpay our mortgage or not (the alternative is to just put the money into savings). I did initially type out a back story to this but the post ended up being an essay – although I’m happy to provide more information if it would be helpful. One key bit of information though is that we’ll hopefully be selling up and moving into rented accommodation within a year. We’re in negative equity but aren’t prepared to stick around and wait it out so we’ll take the financial hit.

We currently have a couple of financial commitments but from October 2011 we’ll have £1,200 a month which we’ll be able to save or overpay out mortgage with. If we decide to overpay it would be by £600 as I’d like to put half of it in savings.

Here’s some information about our property and mortgage:

Property value: realistically I think £99,000 (we bought for £115,000 in 2007)
Mortgage balance: £104,662.67
Unsecured loan balance: £1,421.60 (we’ll settle this in October)
Monthly payment: £406.48 (this includes payments for both the mortgage and unsecured loan)
Term remaining: 372 months
Interest rate: 1.990% above Bank Base Rate
Overpayments of £500 or more: Mortgage T’s & C’s state “the amount you owe, and so the interest you pay, is recalculated and reduced immediately. This provides you with the benefits immediately”.

I don’t really know how to work out what makes the most financial sense. That’s my reason for posting – I’m basically trying to get an idea of what other people would do in our circumstances (although I appreciate that if I want actual financial advise I would need to see a financial advisor).

A big thank you in advance to anyone that's kind enough to give any input

fannyanna

I think I may have just found myself an answer by using the mortgage overpayment calculator on the sticky.

Can I just check that I've got this right.

If we overpayed by £600 a month the mortgage calculator says our mortgage balance would reduce by £9,551 after one year.

Now I don't know how to work out how much interest we'd earn on saving £600 per month but I'm sure it's not going to be more than £2,351.

So it would seem that overpaying our mortgage (even in the short term) is going to be more efficient money wise than it would be to put our money into a savings account.

fannyanna

Actually......

In just paying the normal mortgage payments over a year our mortgage would reduce by £2,252.

So if the overpayments reduced the mortgage by £9,551 we'd only really be saving £99 as the £2,252 would need to be paid anyway and the overpayments would be £7,200. We could just put that £7,200 in savings and probably get a similar return.

Trentenders

Your mortgage is at 2.499%. So long as your savings after tax earn a higher rate than this, then it's 'better' to save rather than overpay.

However...

1. You won't earn a huge amount more form savings than your mortgage
2. It is a bit of effort to ensure that you are constantly getting the best rates available
3. You might be tempted to spend your savings on a new car, etc. as the money is readily available to you (although this can also be a good thing IYSWIM)

I'm in a similar position to you mortgage rate-wise. For what it's worth, my partner and I are each filling our ISA allowances for the year, plus I have a regular saver account with First Direct (8% before tax, I think, limited to ?£300 pcm). Anything left after that will go into mortgage overpayments. Once the regular saver account has been going for a year, I'll transfer all of that into the mortgage too.

There isn't a right or wrong answer, so long as you do one or the other (save or overpay). With rates as low as they are, the timing is perfect for you to make good inroads into the balance. Good luck with it.

debtdesperado

Afternoon Fannyanna... If you're in negative equity and will be selling, when you say you're happy to 'take the financial hit', have you thought how you are going to fund the hit?

If you have a mortgage of, say £100k, and have paid off £5k (so the outstanding mortgage balance is £95k), but you sell the property for £90k, you have to find the balance of £5k to pay to the bank to redeem the mortgage on the day you sell it, otherwise the sale won't complete. (If you haven't got the ready cash, sometimes the bank will let you take out a loan to cover the shortfall, depending on the amount, or you might be able to tack the deficit onto the mortgage of your new home, if you were buying - but even that is unlikely in this financial climate).

This is why people get trapped in homes with negative equity - because they can't afford to make up the difference.

Personally, I would start overpaying the mortgage now, regardless of whether you already have the savings to fund the shortfall when you sell, but keep your mortgage payments at the same level.

fannyanna

Trentenders wrote: »

1. You won't earn a huge amount more form savings than your mortgage
2. It is a bit of effort to ensure that you are constantly getting the best rates available
3. You might be tempted to spend your savings on a new car, etc. as the money is readily available to you (although this can also be a good thing IYSWIM)

Thank you for your post. These are good points - especially point 3. We've just got new cars (well new second hand ) so it won't go on that but I could see us booking a holiday with some of the money if it was just sitting there.

debtdesperado wrote: »

Afternoon Fannyanna... If you're in negative equity and will be selling, when you say you're happy to 'take the financial hit', have you thought how you are going to fund the hit?

Thank you for your post too.

Whilst I do envisage we'll have saved enough money ourselves to cover any shortfall the bank of Mum and Dad have generously offered to provide us with a loan if required.


At the moment we think our plan will be to settle the unsecured loan in October and then from November onwards pay £600 into the mortgage and then £300 into each of our ISA's.

That way we'll definately be paying towards the shortfall for when we come to sell but will also have some money in savings for any emergencies.