Overpay current mortgage or save?

HWoody1983

I'm currently in a property that I purchased for 71k and then I also got an unsecured loan added on for 5k to cover fees and go towards work that had to be done on the house. This was four years ago when the market was sky high as the 1 bed house was in complete disrepair and I was allowed a 110% mortgage. It cost me £15,000 to do it up and endless nights of work for me and my poor dad!!! :eek: It is now only worth the same, if not less than what I paid for it! But, I realise lots of people are in this situation.

Me and my partner are currently saving for a wedding, which we are doing on a very low budget as we are also paying extortionate amounts of money each month to ensure loans and credit cards are paid off by the summer this year!

We have no equity in the house and would like to start a family in the near future, so would prefer a house with at least two bedrooms. Should we save for a deposit or would it be better to make overpayments on the mortgage to increase the equity...which would make us more appealing to lenders???

I would appreciate any advice as I'm clueless!!!

mchale

I'd go with overpayments, most lenders allow up to 10% overpayments PA, so if you can afford any more and lender won't let you
overpay it then save it.

HWoody1983

That sounds like the best idea really...thanks!

GDB2222

HWoody1983 wrote: »

We have no equity in the house and would like to start a family in the near future, so would prefer a house with at least two bedrooms. Should we save for a deposit or would it be better to make overpayments on the mortgage to increase the equity...which would make us more appealing to lenders???

It makes no difference to lenders, just as long as you pay everything due on time. They will look at the total amount of deposit you can put down, which is comprised of equity in your present flat + money saved.

The best investment you can make is to pay off credit cards, secured loans and your mortgage (generally in that order). For every £100 paid off your mortgage you will save around £5 a year in interest payments for every year after that, depending on your mortgage interest rate. That's almost certainly more than you can earn by saving the £100 in a separate deposit account.

HWoody1983

Good to hear GBD2222 as that is just what we're doing so at least we know we're on the right track. We have been making massive payments on debts and cards to ensure we are debt free by this summer (I'm paying £640 a month off my loan at the moment! Only 6 payments left now though!) The loan was to do the house up when i first bought it but wanted it gone asap so have been really working hard to pay it off!!!

After the summer, we will be saving for the wedding (probably about 400pcm) and can then afford to make overpayments of the maximum we are allowed and save anything additional...phew! This is all providing I don't lose my job, have survived three rounds of redumdancies in what was only a team of thirteen to start with but...fingers crossed!! Thanks again x

JimmyTheWig

I agree with GBD2222 - it won't matter in terms of your next mortgage.
Basically, all that the next mortgage company will want to know is how much you want to borrow and how much the place you want to buy is. (As well as how much else you owe that won't be paid off by the new mortgage, e.g. credit cards, loans, etc.)
This will give them a "loan to value" percentage. The lower the better.

Generally, in terms of interest rates, it makes sense to pay off debts before putting money in savings. But worth having a bit of an emergency fund before you start overpaying the mortgage.

AFK_Matrix

Just a quick question, I was thinking of saving the money up for a year so that I have an emergency fund and then at the end make an overpayment on the mortgage less say £2000 (this would be the emergency fund). Is there any advantage to doing an overpayment every month compared to doing a large amount at the end of the year??

Don't mean to high jack your thread HWoody1983 but was just curious.

HWoody1983

Don't worry AFK_Matrix, it's a good question! I'm keen to see what people suggest as maybe it would be more beneficial to just make a large overpayment annually...although, I'm not the greatest of savers, hence why I am just making overpayments on debts etc at the mo, rather than actually saving!

AFK_Matrix

Thanks HWoody1983, I know what you mean about saving!!! But I am making a concerted effort as I want to be financially stable as at the moment money is tight so want to get saving asap.

Uk_Lover

Depends on the mortgage.
Until recently I had a One Account and paid off the mortgage in 10 years.
The way I see it (I'm no accountant) is that for that mortgage the interest is worked out daily so basically the longer you leave the money in there the less interest you pay. So for me it was always better to leave all the money in the account for as long as possible.

sonastin

The way I would do it is as follows:
-rank the interest rates off all debts and savings accounts in order
-direct your money towards whichever has the highest interest rate
-make sure you keep an eye on changes to interest rates and re-rank/re-direct if things change
-keep in mind that you might have an emergency (e.g. boiler repair, car breakdown, etc) which could need urgent finance. make sure you have something in place to meet this need if it comes up. (it could be that you pay for the emergency on the credit card that you've just paid off, which might be more economical than putting money into a low interest savings account "in case" and incurring extra interest on the credit card debt unnecessarily. But don't close down the credit facility until you have another source of contingency funding).

That way you will always be maximising the reduction in interest you pay / increase in interest you earn and making the most of your money.