Overpaying vs emergancy cash

RS89

Hi there,

Wondering if anyone has any views. I've currently got a 5 year fix mortgage with about 4.5 years until the deal period runs out. I pay about 1k a month on the mortgage, and I am allowed to overpay by up to £500 a month.

Now, since I bought my property I've done the sensible thing and saved a few quid in case of emergency.

It occurred to me that 1 of the main reasons for having this emergency fund was in case I was made redundant and couldn't pay for my mortgage.

My mortgage has a feature whereby I can underpay by the same value as any overpayments.

Therefore, I am thinking to use some of this money I have saved, and over pay by say 3k (drip feeding at 500 a month so I don't encounter an ERC) - the thinking being I save on interest and if the worst was to happen and I lose my job I can underpay for 3 months.

Assuming I have sufficient emergency funds left to buy food/water/jack daniels, is there any flaw to my plan I have not forseen? I have no other debts.

Thanks,

R

bigadaj

Whats the interest rate on your mortgage?

If it's less than say 3% then your better off saving and not paying the mortgage. If it's much over 4% then possibly worth paying the mortgage down.

It's normally advised that you have three to six months in savings as a buffer from redundancy, illness or other unexpected events and this is more usefully held as cash rather than in the mortgage.

dimbo61

Once you have a good savings pot of upto £16K ( think benefits) in cash ISA,s then overpay the mortgage every month

RS89

Thanks. The rate on the mortgage is 4.14%.

I guess I should clarify my question as it's not specifically on whether I should overpay (as I know I should), it is actually about whether I should accept a lower emergency cash reserve and overpay, because if I were to lose my job I can underpay by the same amount.

E.g. Lets say I have 10k in savings, for arguments sake, and my mortgage is 1k a month.

If I lose my job, I will pay the mortgage using my emergency cash for like 3 months.

On the other hand if I overpay by 3k, I am saving on interest now, and if I were to lose my job I will not have to pay the mortgage for 3 months.

My assessment of the risks is that I am trading liquidity for savings on interest - but this is not really a risk as like I said, the money will have to pay for the mortgage in the long run anyway.

Am just curious if I am over simplifying it.

R

getmore4less

The other thing to look at is all your regular outgoings, how low and how quick can you reduce those.

That will give you nn idea of what 6 months expences will be.

then look at, redundancy and notice wht will that be.

How long do you think it will take to find work to cover the minimum spends

If you can reduce mortgage payments using overpayments then that is an option to consider, may be aim to have 12months worth of 1/2 payments as overpayments and the other 1/2 as savings, that way you still make regular mortgage payments as a reminder that the money will run out eventualy.

as long as you have equity the longer term fall back to no income is selling.

Do have room for lodgers that is another way to replace income.

6 months JSA.


Personaly I think a good target is funds to cover 12month expences(not income).

How much a month can you currently save.

Remember that spending less is the key to saving and paying off a mortgage.

harvey115

There are two things to consider here:

1) Overpaying:
- Reduces the overall interest on your mortgage
- finishes your mortgage quicker
- Risk of not able to pay mortgage on job loss, so credit report in risk of getting trashed and future borrowing may be at risk

2) Saving:
- You can earn some interest of not the same or above your mortgage interest rate
- Have money at hand in emergencies i.e. job loss
- If anything happens to cash flow, mortgage and expenses are paid through the savings


What you should do is have savings to cover you for 6 months or slightly longer. Anything above this amount should be used as overpayments.
simples...

DVardysShadow

After considering whether it is worth overpaying the mortgage - which for you it is because you won't get such a good return on savings, it seems to me that it would be well worth putting the emergency fund into the mortgage, if you can get enough out fast enough by underpaying in an emergency.

So if you are looking at 6 months unemployment and you can get by on £1250/month [paying the full amount of your mortgage] and you can extract £500/month by underpaying, you need to keep 6 months of £750 = £4500 in your emergency fund, rather than the full £7500.

darkvader

There is a key element you are missing here

1. You are working now and there is an income coming in from which you are paying the mortgage and taking care of living expenses. You have this income to make payments

2. In case you are made redundant, you will have NO inflow but still have to live AND make the mortgage payment, though it will be reduced by the same amount you overpaid

What you need to think about - Is it not better to save FROM the income you get now to pay the same mortgage level if things go wrong rather than not saving now but still having to pay the mortgage, even if its a lower value? You dont get anything back by overpaying now, its just that you will pay £500 less at that point in time - for all you know the £500 saved now maybe of more use to you than paying the mortgage in case of an emergency!

DV