Which savings vehicle?

wayforward_2

Hi

My husband and I are on an interest only mortgage with no repayment vehicle.

We now have a small amount of money each month to put towards trying to at least bring the balance down when it becomes due. We have been offered to extend the mortgage for a further 10 years so have 25 years make some inroad into a £350k balance!

My question is - what is the best way to do this - make overpayments directly to the mortgage company? Pay into an ISA every year? Take out a fixed rate savings plan? An endowment (if they even exist any more!)

We will start off with £200 per month but this will increase over the next few years to hopefully about £500.

Any thoughts would be appreciated.

psychic_teabag

What is the interest rate on the mortgage ? Is there any kind of penalty for making overpayments ?

Do you have an emergency fund ? (If you were to overpay the mortgage then found yourself short, presumably you couldn't get it back from the mortgage people.)

lisyloo

Any thoughts would be appreciated.

What's your overall plan?
Are you going to ever pay it off or just sell at the end?

What's the interest rate on the mortgage? I have a tiny rate so don't both paying mine off. The solution depends a lot on your rate.
Basically straight comparison to ISA rate.
i.e. go for mortgaeg/ISA depending no which rate is the higher number.

bigmatt1174

What were your original plans when taking out a £350k Interest Only mortgage with no R/V? How were you going to pay it off?

As already mentioned - if you are on a deal at present you may be penalised if you over pay - the majority let you overpay, but some don't so you need to first of all check this out.

The most tax efficient savings plan are ISA, but you have two choices - a straight forward CASH ISA or a Stocks and Share ISA where invariably there will be equity based savings and depending on your attitude to risk will decide which way you need to go.

Build up the emergency fund first - min of 3 months expenditure as a guide, and then start to repay your mortgage via your RV or overpaying.

wayforward_2

We are on an SVR of 5.75% - and have always known that the sale of the property would be necessary to repay the capital.

Thanks

grey_gym_sock

similarly, looking at MSE mortgage overpayment calculator - http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator - it says if you overpaid £500 a month for all 25 years, and the rate remains 5.75%, you'd nearly pay the mortgage off - the final balance would be £14,935.

while your mortgage rate is relatively high, overpaying is probably the best option (providing you have enough emergency money already). after overpaying for a while, your LTV would fall, so you'd generally qualify for a cheaper mortgage rate, and then you might consider other options for saving/investing.

Jegersmart

An interest-only mortgage is a bad idea in most scenarios, was there a reason why you went for that initially? Are you able to switch it to a repayment mortgage? If not why not?

J

bigmatt1174

Jegersmart wrote: »

An interest-only mortgage is a bad idea in most scenarios, was there a reason why you went for that initially? Are you able to switch it to a repayment mortgage? If not why not?

J

Why is it? Unless you know the whole case you cannot say this - Interest Only can be viable for many reasons. In years gone by there are many people who would not have got on the housing ladder if they hadn't had the option to go on I/O.

Jegersmart

bigmatt1174 wrote: »

Why is it? Unless you know the whole case you cannot say this - Interest Only can be viable for many reasons. In years gone by there are many people who would not have got on the housing ladder if they hadn't had the option to go on I/O.

As stated, in most cases I would say it is a bad idea but that is why I asked the OP some questions regarding that. What are the "many reasons" why this is viable as far as you are concerned?

J

bigmatt1174

1. Existing savings vehicle in place which will cover the mortgage
2. Portfolio of BTL properties which can be sold in future years to pay debt
3. Young professional starting out on career with known pay increases and in 2-3 years time a switch to repayment would be affordable
4. Large amount of equity in the property and downsizing in later life to a smaller, mortgage free property
5. Known inheritance in trust that is payable in a number of years

I originally asked the OP what was their RV and it was sale of property.

Rafter

Do you have any equity in the property and do you have a decent credit rating?

If so, you should be able to do a lot better than a 5.75% APR.

Check the key facts illustration on the loan to see what overpayments you can make without penalty any year - generally on an SVR there shouldn't be any though.

In your position I would......

Try to remortgage to get that horrible interest rate down and you should be able to afford to move to a repayment mortgage as a result.

Failing that, make overpayments as and when you can afford it to build up equity, get your loan to value down, improve your credit rating etc so you can remortgage in due course.

Failing that, decide whether having such an expensive property is actually necessary and consider downsizing so you aren't having to work harder than you would otherwise for the next 25 years to pay lots of interest on a big loan.

Good luck

R.