Deposit advice

xleannex19

Needing a bit of advice with regards to house deposits/paying off current mortgage apologies in advance for the long post!

My partner and I are looking to buy a house in approx 2 years. All going well, we hope have around £200k to put down as a deposit and don’t want to take a mortgage over £300k if we can help it.

At the moment, my partner is overpaying the mortgage in the flat we live in by around £1k a month (current mortgage is sitting around £120k give or take). Initially we planned to maintain this overpayment for the next two years along with building up some cash savings in order to reach our £200k target (This £200k would include reduction in current mortgage eg. We manage to reduce mortgage to £50k (we know the minimum we would get for the flat when we sell is £120k) and build up savings of £130k to make a £200k total).

My partner suggested last night that rather than building up cash savings, we should put every penny into the current mortgage to pay that off and then the money from the sale of the flat will go against buying a new place. However I’m concerned about having all our money tied up in equity.

Can anyone advise?

Providing our current mortgage supplier has no problem with us over-paying to this extent would clearing our current mortgage be the best thing to do? Or should we just carry on the way we are with the over-payment of £1k a month and then build up some cash savings on the side to put against a house?

Hope this makes sense!

kingstreet

How good is your mortgage rate?

Which lender?

Gary123456790

Hi,

I have debated the same with my wife, the conclusion I have come to is:

- Do not overpay if you are on a very low rate as you may make more money in interest on savings (after tax) or are planning any other big expense (school fees maybe?).
- You should keep a slush fund in case of illness, loss of work, car/boiler/parental breakdown as it is difficult to get the money back out of the mortgage again.

We are not on a very low rate and have a slush fund emergencies - any money above this goes into the mortgage. It is very satisfying to see the balance and the interest charged each month come down!

Hope that helps.

Gary.

xleannex19

Current rate is 3.99% with Scottish Widows

We have no children and aren't planning for a few years yet

I agree that it'd be good to have an 'emergency fund' although my partner has money in his business account that can be used if need be

kingstreet

I'd pay down the mortgage by as much as you can. At 4%, you aren't going to get a savings rate higher than that.

xleannex19

Thanks Kingstreet

So if we clear the current mortgage and then save the rest in cash that would be ok?

Or if there is an over-payment cap on the mortgage, we can just pay as much as we can without getting charged and then save the rest in cash

Bufger

Are there any overpayment limits on your mortgage?
Whats the mortgage rate? if its higher than savings rates then its a no brainer.

You need to build up some cash savings for emergencies. Most people recommend 3 months wages and some just go for a 10-20k figure. You certainly wont need 120k in savings, banks will only guarantee a certain amount anyway so you definately dont want to exceed that in any single pot.

kingstreet

xleannex19 wrote: »

Thanks Kingstreet

So if we clear the current mortgage and then save the rest in cash that would be ok?

Or if there is an over-payment cap on the mortgage, we can just pay as much as we can without getting charged and then save the rest in cash

Are you on the SWB standard variable rate now, or are you still in an initial offer, such as a fix?

You need to check. If on SVR you should be able to overpay what you want, when you want. If restricted, don't exceed the overpayment limit or you'll be penalised. Overpay upto the permitted maximum, placing any additional funds in a tax efficient vehicle like an ISA.

xleannex19

Hi everyone

Following on from my original post below, I forgot to mention we are on an interest only mortgage at the moment.

Does the advice given still apply? ie. Concentrate on putting savings directly into clearing the mortgage rather than into a savings account?

Thanks in advance.

kingstreet

Same applies.

Being on interest-only even more incentive to pay down the balance as quickly as you can.