Overpay mortgage or save for a deposit on a second home?

scottishweather

I have a conundrum that I've been thinking about for the last few months...

I have just bought a house that will be big enough for the next 4 years, after that I'll need to buy a bigger place due to expanding family etc. I see two ways forward with this conundrum:

Option 1: I can afford to overpay my mortgage by about 50% of the monthly repayment charges, this will substantially reduce the capital and compound interest and help to reduce the debt much faster. In 4 years time I could sell my current place (if the market has picked up) and attempt to buy somewhere larger.

Option 2: Instead of overpaying my mortgage I save for a deposit for second property. In 4 years time I buy a second home with my deposit and rent out my current property. It's city centre, so it shouldn't be a problem to rent out.

Which option is better from an investment perspetive: overpay my mortgage and sell, or save for a deposit, buy a second home and let my current flat out?

Thanks in advance for your responses.

BitterAndTwisted

No debt is better than more debt. Overpay your mortgage now, sell up in for years time and buy another property.

sonastin

Depends on the mortgage interest rate and any savings rate you can find.
3rd alternative: overpay the mortgage now then remortgage to release the equity if you decide you want to keep this place and buy another.
4th alternative: save now then pay a lump sum into this mortgage in 4 years time if you decide you don't want to buy somewhere else at that point.
Depending on the relative interest rates, 3 might give a better return than 2 or 4 might leave you better off than 1.

girllikeme1

If you can get a better savings rate than your mortgage is costing you, then save away. As Sonastin said, it depends on the rates you can get. Just be careful that you don't get charged if you overpay above a certain amount per month.

Having said that, we are overpaying our mortgage currently as the difference is only 0.5% (I feel something else would 'crop up' in the meantime that we needed to spend the money on!).

Either way, you're being sensible with your money and investing it wisely. Good luck!

twirlypinky

I would save enough to pay for agents fees (buying and selling) solicitors fees, stamp duty and the removal men. Stick it in an isa or premium bonds or whatever, then once that's saved, start over paying the mortgage.

but we're all different!