Overpay or Save?

craigo_2

Hi,

Sorry - I know this question has been asked before....but anyway....

I have saved up ~7,000 pounds with the intention of overpaying my mortgage. I am only allowed to overpay once per year, it must be in Jan, must be at least 500 pounds and must be less than 10% of the balance of the mortgage (98k), so less than 9,800.

So - I satisfy all the criteria above, but need to decide if this is the most beneficial thing I could do with these savings.

The mortgage is fixed for the next 4.5 years, at 5.14%, but is a 35 year repayment period. Over paying would reduce the payment term to 29 years, as I want to keep the montly repayments the same as they are now.

Im not sure I have completely thought through the long term financial implications of doing this... I would like to be mortgage free as soon as possible, but would I be ultimately better off if I invested this in an ISA or other high interest savings account instead?

I need to decide quickly, as I can only make the overpayment in January.

Any advice appreciated!

Redbedhead

Would you be using all your savings to make the overpayment? Personally I like to have a buffer of savings (it is normally suggested to be 3 times salary, although I do 3 times outgoings) which you can access easily.

ukgaz

You could pay of 5K and put the other 2 in an ISA. You could use this 2K if any emergencies crop up or try to build it up over the next few years ready for another overpayment

I personally would not use all of it

lizzyb1812

It depends .......

On the interest rate you could get on an ISA/savings compared to mortgage interest rate

On how secure your employment is

On your health

On the interest rate on any debts you might have

On how you see your future

On how good your budget is for the coming year - any likelihood of large unforeseen expenses like the car going Kaput

In one of the stickied threads, the one about paying down your mortgage in 8 years, there is a mention of a "grand plan" or "grand purpose" or something. What is yours? That should give you your answer.

Me, I went for balance. I'm self-employed so I feel I need a substantial savings reserve - now I've got that I'm paying off the mortgage as quick as I can so I can stop working as soon as possible.

HTH

lizzyb

craigo_2

Thanks for the replies!

Im not sure what interest rate I can get on ISAs, but the sudden increase of the base rate has got me thinking it might be a little higher now. My employment is secure, and im almost as sure im fairly healthy too - im 24 and reasonably sensible....most of the time. Only joking, im always sensible.

I wont be running a car untill April, as until then I have a company (rental) car. I do have a car but its SORN'd at the moment.

I have saved up around 5000 of the afore mentioned sum in the last 3 months so I am fairly conident that I will be able to do so again to pay for the cars insurance, tax, and MOT etc, which will be needed in April. 7000 is the majority of my savings, but it doesnt quite leave me with nothing, and I will be paid again very soon (which I have not included in the figure).

As for a grand plan - I dont really have one of them. . Ever since I got the mortgage I've wanted to get rid of it! I have aspirations of having it paid off (assuming I dont get another one) by the time I am 40. Does that count as a grand plan?

Thanks again for the info. I am swaying towards paying as much as possible off, but perhaps I will hold a small amount back to be on the safe side.


I am still a little confused as to the pros and cons of overpaying.... Security aspects aside for the moment - Is it more financially beneficial to plough every penny back into the mortgage, or is it possible to come off better by saving it? I dont fully understand whether the compound interest effect of having the extra mortgage for such a long time would outweigh any income made from the interest on savings or not.

tom188

If the net interest rate in your tax bracket beets the mortgage rate, then save, if not repay.
Cash ISAs, where the interest is tax free can sometimes have higher rates than your mortgage company charges you. In such cases it can be beneficial to save.

craigo_2

I see, I didnt realise it was quite so straight forward. Perhaps I should do both an ISA and a mortgage over payment then....:cool:

I think I'll discuss it some more with my parents - I always do what they tell me to anyway - See, told you I was sensible. :rotfl:

Thanks!

snaphappy

Does this advice stand for those with endowment mortgages who are on longterm incapacity benefits? I took out an endowment mortgage in 1992, but became too ill to work in 1995. It is unlikely I will be fit for work for years to come. I have an endowment shortfall - should I pay extra when I can on my mortgage, save some money in an ISA or just panic? I get incapacity and income support benefits, the dss pay a 'standard rate of interest' towards my mortgage and I have to pay the rest of my monthly mortgage interest payment and endowment payment. Should I switch my mortgage? It is cheaper for the DSS to pay my mortgage than to pay for me to live in rented accommodation.I have spoken to several advisors, but none of them are sure what answers to give me.
Thanks for any help!

temba

tom188 wrote:

If the net interest rate in your tax bracket beets the mortgage rate, then save, if not repay.
Cash ISAs, where the interest is tax free can sometimes have higher rates than your mortgage company charges you. In such cases it can be beneficial to save.

Hello. Tom is that right? I always thought that the compounded interest (which is significant when talking interest on 10s of 1000s) was relevant when working out these sums. I thought that meant it was almost certainly financially better to overpay than to save.... but..... savings have compounded interest too.... Oh no, am I just getting confused?

save-a-lot

craigo wrote:

Im not sure what interest rate I can get on ISAs, but the sudden increase of the base rate has got me thinking it might be a little higher now.

NS&I Direct ISA
http://www.nsandi.com/products/disa/news.jsp

now at 5.8%, that beats your mortgage rate

craigo_2

now at 5.8%, that beats your mortgage rate

Certainly does, but I guess im as confused as temba with respect to how much impact the magnitude and duration of the size of the mortgage has on the amount of interest paid back over the whole term....

Another thing I thought about is: If interest rates sky rocket out of control, in say 5 years time - I will have wish I'd over paid as much as possible earlier when I had the chance and avoided paying high rates on quite so much...

I guess its always a gamble, whatever you do eh?