Paying extra off mortgage or saving up 30 December 2012 at 5:18PM in Mortgage-free wannabe 12 replies 1.1K views

thatwilldo

Hi,

This is my first post here and I would value any opinions.

My wife and I are in our 30s, we both have stable jobs and are very lucky to have around £25K saved up in cash from an inheritance. We have saved up ourselves but have had to dip in when we have had our children. We are both members of pension schemes.

We are at the point where we will be able to either save £250 per month or allocate this to making overpayments to our mortgage. I am generally a saver and like to think of saving each month as I feel we have a fairly low term left on our mortgage. My wife wants to allocate the money to the mortgage.

I know the guidance on this site will be to pay off the mortgage, but I wonder if other people can relate to this dilemma - saving up regularly as oppose to paying off the mortgage sooner? I like the idea of building up our savings steadily while the mortgage is reducing and not depend upon saving hard when the mortgage gets paid off.

Brief details of our position is:

House value: £130k
Mortgage balance: £79K
Cash savings: £25k (in cash ISAs and Fixed Rate Bond)
Monthly mortgage payment: £1018 (4.99 5 year fixed rate with 2 years to run before fixed rate ends - overall term is just under 8 years)

Money available to overpay/save: £250 per month

Other debts:

Personal loan £235 per month due to finish August 2013, this will be allocated to buying new car for my wife when the loan finishes.
M&S Credit card: £900 owed but will be payed off in full by mid January.

I hope I have left enough details here and have been concise enough for you to form some judgements.

Many thanks for reading my post.

newgirly

Hi, with a rate of 4.99% that will be very hard to beat in savings so I would pay it off the mortgage if you have a good nest egg to fall back on. But if you really can't agree why not split they money and save and over pay?

Secret_Saving_Squirrel

That seems like a good idea unless you are getting a very high savings rate,

Squirrel

Lois_E

I agree with newgirly, so the big question is how much of a nest egg you might need to fall back on in your particular circumstances. That's where I'd concentrate your discussion with your wife. Start by saving until you've got as big a buffer as you think you need, and then put anything beyond that to your mortgage, at least as long as your interest rates remain as they are.

edinburgher

The standard drill seems to be:

Pay off high APR consumer debts
Save a nest egg/emergency fund
Overpay/save/invest the rest based on whichever is best for you and your family

I'm on a similar rate to you - there's no way savings can better OP at this point, investments are another kettle of fish altogether.

Either way, you'll be free in 8 years, so you're doing well.

daveybea

Without wishing to predict the future - a close examination of your savings needs should allow you to decide on an emergency amount of money to keep. I would then concentrate on a big over payment in one go as you save more more paying in one go than a number of payments spread over the year.
Then if you feel like it any surplus cash each month can be paid back to yourself to bolster your funds and provide for your next year's overpayment.

Lois_E

daveybea wrote: »

Without wishing to predict the future - a close examination of your savings needs should allow you to decide on an emergency amount of money to keep. I would then concentrate on a big over payment in one go as you save more more paying in one go than a number of payments spread over the year. Then if you feel like it any surplus cash each month can be paid back to yourself to bolster your funds and provide for your next year's overpayment.

Do you? I don't think that's the case for me. My mortgage is calculated daily and compounded monthly, and so the sooner I can pay off whatever I can pay off, the more interest I save. But not all mortgages are calculated the same way, so it'll depend on how yours is done.

edinburgher

so it'll depend on how yours is done.

I think that daily interest is the norm these days. That said, people on older mortgages may well benefit from one big payment just before their interest calculation. There was a MSE blog post on it fairly recently.

daveybea

Yes that was my point Lois! If you have the money at the start of the year and have a maximum repayment limit pay as much as you can afford. Then you have the year to save for the next year!
I must point out that the likes of the Halifax have a rolling 12 month period so you do need to ask when you can do another overpayment!

Lois_E

daveybea wrote: »

Yes that was my point Lois! If you have the money at the start of the year and have a maximum repayment limit pay as much as you can afford. Then you have the year to save for the next year!
I must point out that the likes of the Halifax have a rolling 12 month period so you do need to ask when you can do another overpayment!

Oh I see. You were envisaging a situation where you have more cash to OP than the mortgage T&Cs will allow. In that case, of course, pay off the max as soon as you can, so a lump at the beginning of the "year" they use to calculate the limit. I was thinking of my own situation - OPs limited by how much money I have available, and won't get anywhere near any OP limits. So for people like me the best thing is to OP any money available for the mortgage as soon as the money comes in - even if that's in dribs and drabs.

So we agree with each other after all.

daveybea

Yes ! When I started overpaying I used to put a couple of hundred at a time off it and it seems a long journey but it just takes patience !
Good luck!