Saving situation opinions please

kerrjp

Hi Money savers,

This is my first post after years of reading the site and forums. My situation is as follows, I am married and have a 3 month old daughter, I have spent the last 10 years pushing forwards in my job and trying to create a good life and home for my wife and child. I am now unsure of what direction to take with my finances for the future.

We have a fairly large mortgage on our home (265k), our mortgage is coming to the end of its fixed period, it is currently interest only @4.79%. I have been offered a new 4 year fixed mortgage @ 2.59% either interest only or repayment. If we stay interest only then we will have about £450 a month extra in savings due to the lower rate, we currently are also able to save about £300 a month from our incomes, we have already made an emergency fund of 2 months expenses and I have a private pension with my job.

So my questions are these:-
1.Is it better to stay interest only and invest the extra money or should I move to the repayment mortgage?

2.If we do stay interest only what would be the best way of investing our monthly savings approximately £750, I have been looking at stocks and shares isa's with the idea of using index tracking funds, but I am a complete novice with regard to investment.

3.I also thought about using the savings to create the deposit for a buy to let property and then let that pay for itself over the next 20 years or so as a long term investment.

Also please consider that I would be using the savings or investment idea to not only save for our future but also to try and create some savings for when my daughter is older.

I am really interested to get other peoples views and opinions on the options open to my wife and I.

apologies for the long post

lippy1923

kerrjp wrote: »

Hi Money savers,

This is my first post after years of reading the site and forums. My situation is as follows, I am married and have a 3 month old daughter, I have spent the last 10 years pushing forwards in my job and trying to create a good life and home for my wife and child. I am now unsure of what direction to take with my finances for the future.

We have a fairly large mortgage on our home (265k), our mortgage is coming to the end of its fixed period, it is currently interest only @4.79%. I have been offered a new 4 year fixed mortgage @ 2.59% either interest only or repayment. If we stay interest only then we will have about £450 a month extra in savings due to the lower rate, we currently are also able to save about £300 a month from our incomes, we have already made an emergency fund of 2 months expenses and I have a private pension with my job.

So my questions are these:-
1.Is it better to stay interest only and invest the extra money or should I move to the repayment mortgage?

2.If we do stay interest only what would be the best way of investing our monthly savings approximately £750, I have been looking at stocks and shares isa's with the idea of using index tracking funds, but I am a complete novice with regard to investment.

3.I also thought about using the savings to create the deposit for a buy to let property and then let that pay for itself over the next 20 years or so as a long term investment.

Also please consider that I would be using the savings or investment idea to not only save for our future but also to try and create some savings for when my daughter is older.

I am really interested to get other peoples views and opinions on the options open to my wife and I.

apologies for the long post

Personally I would forget option 3 completely (not sure what your income is and if it will even allow any further borrowing with your already large mortgage) Its easy to say just get a buy to let and let it pay for itself, but what would happen if your tenants refused to pay and you have to wait months to evict them, go through courts etc... would you have the money to pay for 2 mortgages at the same time? Your extra money would then be eaten up by the buy to let and not put aside to pay your main mortgage.

The 2.59% offer sounds great. I would grab it and change to repayment (I like the satisfaction of knowing its going down as I pay)

I would also increase your emergency money to at least 3 months. 6 months would be my preference.

LardyCake

In your situation I would be looking to repay my mortgage as quickly as possible while interest rates are so low.

FLAPJACK

I agree with Lippy...bulk up the emergency fund to 6 months outgoings at least.

With such a large mortgage it's easy to see the attraction of interest only....however what vehicle have you got which will produce 265K at the end of the term?

If you go for interest only the fact will be in that whatever vehicle you have to provide the final sum it HAS to perform 100% minimum you.

I would go for repayment and use some of the spare cash (the sum you plan to save each month) to overpay, thus vastly reducing period of the mortgage term.

As for BTL I would not really think of this as an option (yet). I would prefer to reduce the mortgage and secure the home you have now for yourself and family.

Don't forget that as time goes by...... you get older your daughter gets older and the mortgage gets less (and assuming you stay in the same property) the "nearly" or mortgage free property will be left to her... and even in these dire times I think in the longrun property will still be an asset which will increase.

Maybe after 10 years of overpaying the mortgage you could think about longterm cash investments.

kidmugsy

If you overpay the new mortgage, are you later allowed to borrow the overpayments back again?

racing_blue

My stance:

1. Stay interest only and invest the extra money. 4 years is too short, go 10 if you can get a good rate. Make sure that your lender allows you to let your house with minimal loading if you choose.

2. index tracker funds in his n hers S&S ISAs... DING! Right first time. Drip feed.

3. If you have money left over after (2)... and you have the stomach for it & when you take a view that property offers value relative to equities and commodities.

In general terms, & without knowing your details obviously

atush

I would increase the emergency savings to 6 months, I would take the repayment option on the new mtg.

I would review how much you are paying into that Pension. How much it is worth now, are you paying in enough to get max employers contribs? Enough to take you out of HRTax?

your spouse- do they work? Do they pay tax? Do they have a pension as well?

For your daughter, start by investing her child benefit into equities (i like investment trusts) via a Junior ISA.

steampowered

Floating or fixed rate mortgage? Under the interest only option you might have to start paying a lot more if interest rates go up...

racing_blue

steampowered wrote: »

Floating or fixed rate mortgage? Under the interest only option you might have to start paying a lot more if interest rates go up...

Offset by higher interest rates on the savings you have been making

kerrjp

Hi everyone thanks for the replies. Just to clarify I have been offered the 2.59% rate on both interest only or repayment fixed for 4 years. I am still un-decided what to do, part of me feels it would be good to look at the buy-to-let option and to use the interest only to allow me to get the deposit together. I am torn between doing that and going repayment and eating my mortgage as quickly as possible. On a slightly morbid note I am likely to inherit enough at some point within 20 - 30 years to cover the 265k mortgage which gives me some security against not repaying it right now.

As for some of the other questions, my company pension is quite good as I pay in 3% of my salary and the company match it plus i get a small bit of tax relief on my 3% of salary sacrifice.

My wife is on maternity leave but will be returning to part time work in July. We are not eligible for any child benefit so cant invest that :-)

I am still very keen to hear any views or ideas on what I should do

oldvicar

Would you say you have a well paid but stressful job?

If so you could invest in yourself to make sure you're up to it - health checks, health club membership etc.

With a young family and huge mortgage, you'll probably want to make sure you have loads and loads of life insurance and permanent health insurance - both for yourself and your wife - before saving deposits for BTL.

Just my 2d's worth.