Better to save or pay off interest only mortgage?

Lotta

Soon I will be having an fixed interest only mortgage of 211.400.

The interest only payment will be 915 GBP.
If I had gone for a repayment mortgage I would have payed 1260 GBP.

I am planning to save the difference between these amounts and any other money I can save and the after 2 years when the fixed term ends to re-mortgage and at that moment chuck all the savings at the mortgage.

However, would it be better to just immideatly re-pay on the mortgage and overpay as much as I can along the way as well? The mortgage allows 10% overpayment.

Any advice appreciated.
Lotta

Lotta_Littlies

Hi Lotta (good name )What's the rate on the mortgage? If the rate on the mortgage is higher than the interest rate you'd get by putting any overpayments in an ISA/Savings account then you'd be better off paying it straight off the mortgage. If the mortgage interest rate is lower than you'd get from an ISA/Savings account, save first and make a lump sum payment with the extra interest you've received along the way at the end.

Lotta

Lotta

The mortgage interest rate is currently 5.19%.
My ISA has an interest rate of 6.05%.

Kaz2904

Doesn't it make a difference with regards to knocking chunks off the capital owed?
Your overpayment of £345 per month in your ISA account will be worth £8,777.70 after 2 years so take that off the mortgage and you would owe £202622.30 (not counting remortgage costs).

If you pay £345 to your mortgage account each month then at the end of the 2 years you would owe £202,974.13.
The trouble with this is that it is not 100% accurate so I would say it may be better to save the money in a higher interest savings account espescially as you can get good returns on many accounts such as the 12% A&L premier direct savings account and there are even good current accounts at the moment. The only thing you need to consider is- once your ISA is maxed out you will pay tax on your savings- not good if a higher rate taxpayer. If you were to lose your job then any savings will be taken into consideration against your benefits. There's plenty I haven't mentioned but those are the two that spring to mind- Oh and spending it!

jamesd

6.05% (with no tax) is greater than 5.19% so it's better to use the ISA than overpay.

You should also consider investing via the stocks and shares ISA option, since that over the long term is expected to pay more than saving or overpaying, letting you clear the morgage more quickly.