Overpay or Save?

Redbedhead

I think they key to it is finding a balance that suits you. Think about what you want to achieve in the short, mid and long term (doesn't have to be hugely detailed to start with) and then look at your finances accordingly.

For example, we worked out we could clear our mortgage in 4 years. However, that would mean delaying trying for kids and I am 32 this year. We weren't willing to do that. We also wanted a higher level of savings to tide us over while I have maternity leave.

To ensure we are able to finance this plan, our money is allocated as follows:

£1k (£500 from each of us) goes in to our joint savings. This is being used to pay the costs when we move house this year.

What is left over is then split 3 ways:

Mortgage overpayment
Cash ISA
Shares ISA

The cash ISA is for more short to mid term requirements, while the mortgage overpayment and Shares ISA are for longer term plans but could also benefit the mid term plans. i.e. if the cash runs out while I am on maternity leave we can stop paying our mortgage for a few months because of the overpayment reserve we have sat there. It wouldn't be ideal but it would stop us getting in debt.

At 24 in some ways it is more difficult as you may not have sorted out your longer term plans, but you also have time on your hands, so a Stock ISA might be a good long term investment plan until you feel confident in investing in the stock market.

Good luck and well done for thinking about it so early.

One other to thing to consider in all this is pension provisions!

Waldir

temba wrote:

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?

Most savings are not compounded (the interests are added only every year)

If my maths are correct, the compounded interests on a 5.14% mortgage (when interests are added monthly to the balance) are equivalent to 5.26% a year ( the formula is: (5.14%/12+1)^12-1). If the interests are added daily, it gives 5.27%.
So, in your case, if you find a saving account with more than 5.27% (after taxes if not ISA) it's better to go for it than overpay your mortgage. And you get more freedom with your money in a saving account.

Waldir

lizzyb1812

If you do decide to save but are worried about future hefty interest rate rises, remember that you will have your savings pot available to pay off a chunk of your mortgage at any stage that you feel it is beneficial. If, for example, you have £3000 in an NS&I cash ISA earning 5.8%, you can keep an eye on interest rates and if your mortgage interest rate goes over 5.8% then you close your ISA and pay off some of the mortgage.

If/when you do this you can choose to keep mortgage repayments the same and reduce the term, or you can leave the term as it is and reduce your monthly payment

Oh, and at 24 I didn't have a grand plan either

lizzyb

craigo_2

Hi, No im not a higher tax payer... I wish!

I think I'll put 3K in an ISA, save paying tax on the interest. I might need the rest temporarily at short notice, so il probably leave that in an instant access account for now.

I think that I cant make overpayments till Jan anyway, so I will reassess my sitation then, and see what the interest rates are like.

Thanks for the replies!

Kaz2904

Great to see that £7k knocked off 6 years! Be aware that you may only be able to overpay by 10% of the total outstanding balance not the original loan. It does seem to vary.

IFA

So overpaying or saving (assuming same interest rate) have the same effect in amount of money saved? Just wondering because I have an offset mortgage with savings and wondering if it would be better for me to pay off the mortgage with the savings? I seem to recall someone saying having savings is only useful when you meet about half the total mortgage (compound interest works harder?) with an offset mortgage anyway, bit different to the OP

Also having 3 times salary or whatever not a problem because I have income protection and can take 12 mths mortgage holiday.. Income protection only £15 mth

Still confused over the savings vs overpayment argument tbh

Waldir

Yes, overpaying and saving at the same rate are the same.

If you overpay £100 at 5%, that'll give you £5 less to pay on your mortgage.
If you save £100 at 5%, that'll give you an extra £5 in your account.

BUT you need to compare interest rates carefully: mortgage rates are often compounded: interests are added every month, while savings are often not: interests are only added every year. That makes a big difference.

You can convert compounded rates to non-compounded by following this example:

The compounded interests on a 5.14% mortgage (when interests are added monthly to the balance) are equivalent to 5.26% a year ( the formula is: (5.14%/12+1)^12-1). If the interests are added daily, it gives 5.27%.

Waldir

angelavdavis

Waldir wrote: »

Yes, overpaying and saving at the same rate are the same.

If you overpay £100 at 5%, that'll give you £5 less to pay on your mortgage.
If you save £100 at 5%, that'll give you an extra £5 in your account.

BUT you need to compare interest rates carefully: mortgage rates are often compounded: interests are added every month, while savings are often not: interests are only added every year. That makes a big difference.

You can convert compounded rates to non-compounded by following this example:
Waldir

Yes you are right - also some interest rates are set annually too on fixed priced deals - so you won't realise the benefit of overpaying until that review period. Also, you need to take into account that you will pay tax on the 5% savings.

Conor_3

craigo wrote: »

Of course I can only put 3K in an ISA each year....

So what should I do with the rest?

One option may be opening a regular saver (not sure on the best one atm), but would that be a better option than just paying off the mortgage with whatever is left after the ISA limit is reached?

Any advice appreciated....

Craigo.

Well Halifax do a regular saver account that's 10.summat% so even after tax, it's definitely worth thinking about.

Maxi ISAs

You can invest up to £7,000 per tax year in a maxi ISA, which must contain stocks and shares. It can either be made up entirely of stocks and shares, or a mixture of cash and stocks and shares.
If your maxi ISA contains a mixture of both, the investment limit for the cash part is £3,000 per tax year.

save-a-lot

craigo wrote: »

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?

I am unsure of your current deal, but if you remortgage in the future, pick something that allows unlimited overpayments and at that point pay off the capital with what you had been saving, that is if the interest rate on the mortgage rockets