make overpayments on mortgage or save?

Cocochanel_2

Hello,


have never posted on a forum before so please be kind ... Me and my husband are in the process of buying our first home (very small deposit, 5 year fix). My main question is:


theoretically, would it be better to make overpayments on the mortgage each month or save for a bigger deposit for when we come to re-mortgage?


Hope someone out there can offer some advice,


Thanks

Thistlewhistle

I'm no mortgage expert by any means but i think it would depend on the terms of your mortgage.

My mortgage allows me to make unlimited overpayments and also to borrow back any overpayments at any point in the future (borrowed back at the same rate).

This effectively means that when I overpay, I am saving at a rate of 4.79% which I would not get anywhere near if I were to put the overpayments into a savings account, even an ISA.

For me, it makes sense to overpay, and not to save whilst I have debt.

I'm sure someone will come along and prove me wrong in a minute but that's what I'd do (subject to the mortgage terms).

Thistle

Southend1

Do you have an emergency fund? You should look to build enough savings for a rainy day (broken boiler/ replacement roof etc) before overpaying.

Imma_Number

You don't need a deposit when you re-mortgage (or get a customer retention deal) because you (hopefully) have equity in your house. Re-mortgage is when you change lenders and involves solicitors, credit searches etc. Customer retention deal is where at the end of the fix you apply for a different mortgage with the same lender (no additional borrowing, just a change of terms)

As you say you had a very small deposit I'm assuming you want to increase the amount of equity you have in your house. One way to do that is to overpay. Another is to put money in savings and use the savings when it comes to the end of your fix.

After 5 years, on a 25yr mortgage @ 6% you'd have paid off approx 10% of the loan without overpaying. On a 30yr mortgage @ 6% you'd have paid off approx 7% of the loan. So assuming house prices haven't fallen you should be near a better LTV bracket.

At the minute savings rates are very low and generally less than a mortgage rate. So overpaying can give a better return than savings. It's important to have an emergency fund though as Southend1 says.

(6% rate chosen for the examples above because it looked about right for a 95% mortgage)

jamesd

Cocochanel wrote: »

theoretically, would it be better to make overpayments on the mortgage each month or save for a bigger deposit for when we come to re-mortgage?

At remortgage time it makes no difference. What matters is the amount borrowed and the property valuation so any way you get to the same amount borrowed has the same effect.

The difference is what happens in the time before you remortgage. The mortgage will have one interest rate, savings accounts another. Just pick the highest interest rate after allowing for any tax on the interest on savings. With a low deposit mortgage it is likely that the mortgage is the highest interest rate and that you would be better off overpaying than using a savings account.

Beluga_2

Since you're going for a 5 year fix on your mortgage, you'll probably have a tie-in period, where you have to pay fees on overpayments. If so, it may cost you more in fees than you save (the fees are usually a percentage of the mortgage amount oustanding - not the amount that you're overpaying).

In that case, just make sure your monthly mortgage payments are not too low (but still affordable if things get tight), and then stash the rest in a good savings account, ready for when the tie-in period ends. If you can make overpayments without penalty then I'd always do that (assuming I had some cash for emergencies). But I suspect you won't have that option.

I've been there too, with only a small deposit and a mortgage with a 5 year tie-in, and I know it's sometimes the only way to buy a house. I still paid it off early though (12 years instead of 25), so hang in there!

pjread

Most mortgages these days allow penalty free overpayment of up to 10% of the outstanding capital in each year even during a tie. At least all the ones I looked at did.

As long as you won't need the cash back as such, I would overpay as much and as regularly as you can. Check there aren't penalties first, but I'd be surprised if there were unless you're overpaying a lot.

edinburgher

Assuming you have some emergency savings and your mortgage rate is higher than you can get from savings, I'd make overpayments if allowed.

If you can make more from savings than your mortgage rate (after tax, so 4% becomes roughly 3.2% etc.) I'd save.

I'd also save if you're considering moving after the 5 years is up. 5 years is a long time when you're in your first home (well, that's our experience nearly 2 years in)

Whatever you do, this is a great forum for keeping you motivated, welcome :T