Over Payment Advice

joejoejoe_2

Hi all, wondered if anyone could help steer me in the right direction. The wife & I have a relatively small mortgage (approx 55K) & our hideous 5.79% fix rate has just come to an end. We've this month moved to a tracker which is Base Rate +1.5%, meaning our monthly payment has dropped from £422 to approx £250 p/m with no penalty for overpayments.

We can continue to pay the £422, but we are also saving for a deposit to move to a bigger place, planning to move within the next year (probably within 9 months). Savings are going into an ISA currently paying 3.5% & we aren't going over the ISA yearly limit.

What I can't quite get my head round is this: even though we're planning to move within a year, would we still be better off over-paying the mortgage? Given that there's no over-payment penalty, are we better off ploughing all the cash we currently have in ISA's into the mortgage...? Can anyone help?

day_sie

I would consider myself unqualified to answer your question, but thought I'd share thoughts anyway...

The interest rate on your mortgage is higher than the interest rate on the ISA. When you move, you'll essentially release the equity in the difference between your property value and the outstanding mortgage value which will be treated as 'deposit' on the next property.

As long as you've got 'emergency savings' sorted, I'd overpay the mortgage as I think the returns (or amount of interest due on the mortgage) are better in the long run.

Thrugelmir

As long as you can earn a higher rate of interest on the ISA than the mortgage. Then that's the way to go.

May even be worth postponing your house move and continuing to save. Then you'll be able to put even more down on the new property.

Low interest rates aren't going to last indefinately. So don't assume them to be the norm as they are today.

harvey115

Hi

There are many other things you need to keep an eye on.

- Will your current home sell in time? since the housing market is not at its best
- Will you have enough deposit to get a mortgage?
- Will you be in positive Equity when you sell your house i.e. is your house priced same/higher in the current market from your buy price?
- Is there a lender that will lend you in this circumstances

I think if answers to the above questions are not known fully then there could be issues.

I would say the best thing at this moment in time would be to invest in ISA since your mortgage rate is almost or below the interest rates you can get from an ISA. In about 9 months or an years time if you are able to move then you can just finish off the mortgage by selling the house and using the ISA money for the deposit. Otherwise you can overpay at that point or whenever you see that you are not earning more in your savings account as compared to your mortgage rate.

PS - I am not a Financial Advisor and this is just a personal opinion!!!

Lifes_Grand_Plan

As above, pay into whichever "gives" you the better interest rate.

The only other consideration I would have - if I had cash in an ISA I might get tempted to dip into it, for example when buying a car from other savings... I might get tempted to also use a bit of my ISA to stretch to a better can on a "great deal"....

If the cash is paid off the mortgage then it is mentally (if not in reality) untouchable to me so no danger of me dipping into it.

joejoejoe_2

Thanks for all the opinions & thoughts, having slept on it I think we may as well continue to build our cash savings as there's not much in it either way. Might just go down the middle, overpay the mortgage a bit & save a bit extra. :money:

KTF

Out of interest, who was the BoE +1.5% tracker from?