Compounding interest is V V scary.

swebber

I've always been a good girl, putting away savings and the like, but unfortunately, renovating a house to sell, then selling house, buying new house and getting married (was a lovely Honeymoon) wiped me out completely.

All debt is now gone and I want to save money.

Hubby and I are going constantly round in circles a the moment though, as our new house needs work, (alot of it) and it isn't going to be cheap, but I'm really, really getting panicked as we don't have any savings anymore, this is the first time in my life it's happened, I even had accounts opened for me when I was born, which are now cleared out as I said.

So, ok were on a even keel, but what do I do with the spare cash we have?

Options are:-

Save some or all of it safely away.
Use it on house (is getting me down)
Put extra into the mortgage.

The figure to be used is £300 per month and come September £400.

Yes I know I could split it three ways, but that's just to easy alright.

Hubby is V keen on getting rid of mortgage early and I think it would be lovely.

deemy2004

Paying down debt should be high on the priority list, so I would go with hubby....

grumbler

To get a propper advice you should give at least the following information:
1. your mortgage interest rate?
2. are you taxpayers?

Walletwatch

grumbler wrote:

To get a propper advice you should give at least the following information:
1. your mortgage interest rate?
2. are you taxpayers?

To add to Grumbler's questions:

--> Is your mortgage an offset mortgage or a plain vanilla one?
--> Are there any early repayment penalties?

muckell

I know you mentioned spliting it three ways, but dismissed the idea. But what about splitting two ways, even £200 and £100.

I totally agree about paying off your mortgage, i would love to be able to clear mine down.

But you also said you don't have any money in savings, which is a little worries, i'd always suggest to anyone to have a "rainy day" fund. About a months salary as a minimum, just incase something does come along, be it major or minor. For example car breaks down or water pipes burst.

Maybe just £100 per month into a high interest savings account (if its offset on your mortgage then even better!).

And then £200 per month straight off the mortgage (assuming you have no redemption penalties for overpayments ect!)

blinko

although im not a financial adviser i think everyone priorities as deemy said is to reduce there liabilities,

so basically pay of your mortgage 1st

grumbler

blinko wrote:

although im not a financial adviser i think everyone priorities as deemy said is to reduce there liabilities

Wrong!
Your assets can often bring you higher interest (even after tax) than you pay for your liabilities. For example 8% after tax give you 6.4% that is more than most of us pay for our mortgages. And a lot of us have discounted mortgages with very low interest rates.

hobbesandco

I agree with grumbler. If you're getting a higher rate of interest post-tax than you would be better off saving than paying off the mortgage. Besides, what would happen if either of you lost your jobs? At least you would have something to fall back on and not lose your house if you couldn't afford to meet your monthly payments.

Saying that I've asked myself the same question many times and I'm compromising by putting 85% of spare cash into savings and the rest into paying off mortgage early.

swebber

Thank you for the opinions everyone.

Still V deep in the confusion zone though I'm afarid.

As a bit of background was asked for, here it is:-

Mortgage:- £95,000 @ 5.75% discounted until Oct 05.

We don't intend to overpay until Oct, when we will switch to a different Mortgage, type is undecided, but we'll seek advice on the best one for our situation then.

Currently using money on the house, just to try and perk it up a bit, as the idea of waiting till the Mortgage is paid off and we have lots of savings to start on it, is frankly V depressing.


Perhaps a truly honest reason why I want to pay off the Mortgage may help you to give advice. I want to have kids, but only when we're in a position, that I can be a stay at home Mum.

Financially we can't afford kids yet and I don't really feel ready, but I've always wanted them one day, so having all or at least a lot of the Mortgage paid off, would mean I could have my cake and eat it.


In regard to savings, I am currently babysitting £6000 for a family member who lives abroad, (please don't ask to many questions about this) but if something terrible did happen, we can use that money.
We also have a Cahoot flexible loan for £9000, which we just paid off, but as it stays open until you ask them to close it, we have that as a back up option.

We're extremely discipled when it comes to money, (even if I can't spell it). but just not knowleable enough to use it the right way.

grumbler

It is very difficult to beat 5.95% with savings, especially if you pay taxes. If your mortgage has yearly, but not monthly limit on overpayments you still can try to save a little (very little). If you open current account with HSBC and pay salary into it you can use their regular saver with 8%. If you put £25-£250 into it every month you can earn 6.4% after tax - more than 5.95% you pay for mortgage. The other and main advantage is that in a year when account matures you still have a choice whether to use this money to repay your mortgage or for something else.
It is not still clear whether you pay taxes. I understand that you should pay taxes on your £6000, but … - you know what I mean. If you do not declare this income and do not have any other income you can fill in some form in the bank and they will not deduct 20% tax from the interest earned. You will get full 8%. An alternative to HSBS is 6.25% tax-free ISA in Firs Direct, but after 6 Oct this rate drops to 4.35%. At this point you must move money elsewhere or make a choice as above.
Even if you pay taxes on £6000 you are still within 10% limit. In this case you can claim back part of 20% tax deducted by a bank.
As far as I understand when discounted period ends your mortgage interest will rise. Your interest rate looks quite high for me. I do not know all your circumstances, but offset mortgages with full flexibility are available with 5.75% (First Direct) and 5.95% (oneaccount). You should find out whether your mortgage offers some flexibility, i.e. withdrawing of overpayments, payment holidays, … In this case you can feel more relaxed when making overpayments as you can withdraw overpaid money in case of need.
EDIT: sorry, my mistake. Must read 5.75% instead of 5.95%.

swebber

Sorry. missed out.

Hubby and I both work full time and pay taxes, (far too much tax).

£6000 is in ISA's.


We are paying a high interest rate, but that is because we have got stung by the interest rate rises. First year of Mortgage was Fixed at something stupidly low like 3%, that was GREAT, then of course our 2nd year tie-in was only discounted and with all the rises, we've ended up paying 5.75%. Lenders SVR is quite high.

I am very keen to stay away from discounted Mortgages in future after this experience, nearly fainted, when I opened the letter from the bank, at the end of the first year.
Made even worse by the fact that it was taken out V end of Oct, so new payment started Nov, just in time for X''mas, lovely.