6% apr savings vs overpaying repayment mortgage

monkey_prints

We have just switched to 2.59% and paid off a lump sum with 22 years to go our payments have gone down to £498 from £950. We can still afford £950 per month and we want to overpay so we are mortgage free in 10 years, are we better over paying monthly at 2.59% interest daily over saving at 6% apr and paying a lump sum every year? (We're aware that as the mortgage reduces the amount we can pay off reduces). What we're confused about is the daily mortgage interest vs the yearly saver one and which will end up being more.
The mortgage rate starts this month for 2 years.

Sorry if I don't have this is the right forum.

noggin1980

save, in fact the better option is to save for the entire 2 years and then decide if you want to pay off another lump sum when you remortgage.

This is better even if you are paying 40% tax on the 6% savings

Thrugelmir

Which account is offering you 6%?

noggin1980

If it were me I'd save for the entire 22 years (assuming the saving rate remains that much higher than the mortgage rate and assuming there isn't a limit on the savings account) Obviously reevaluate the situation regularly.

While you can make more in interest from savings than you save from paying back more I'd continue to do that.

The one thing to be aware of with this approach is that when you remortgage by paying more off then you might drop down an LTV band and make the mortgage rate cheaper. ie if you currently have a 80% mortgage and could after the 2 years drop to a 65% one it would be a good idea to do so as it would lower your interest rate.

monkey_prints

noggin we made a lump sum and are down to 46% loan to value. The mortgage calculator says we will pa £45k in interest over the 22 years and I think the idea of not having to worry about paying a bill in 10 years and that money instead can be saved seems to be something we feel important

What we don't understand is the whole difference between the daily interest as opposed to yearly

monkey_prints

And as for 6% there's one with first direct and one with m&s, you have to have an account with them first so also switching to first direct in order to get £125 after 3 months of £1000 deposits and the max savings is £350pm but there's 2 of us so we can open 2

dimbo61

Is this a regular saver where you pay a set amount each month !
The interest rate is 3% PA before Tax so you might be better overpaying each month.

marathonic

dimbo61 wrote: »

Is this a regular saver where you pay a set amount each month !
The interest rate is 3% PA before Tax so you might be better overpaying each month.

Wrong.... The interest rate is 6% AER.

Keep the £3,600 in one of the many current accounts paying a good rate of interest (3%+) and drip feed £300 per month into a regular saver paying 6% AER and you'll be in better shape.

A lot of people get confused with the mathematics of regular savers thinking that the account should pay interest on money that hasn't even been deposited yet.

There are many, many threads discussing this so I'll not go into it any further unless someone replies before using the forum search tool to read all about it.

midnight_child

You should pay the max into the 6% savings account each month.


As some have alluded to the total interest you get is actually much poorer than paying the whole amount in in the first month (you only earn the full 6% interest in first deposit of the year). However, if you dont have significant savings and its being used to squirrel away surplus funds each month then this would seem a perfect option.


How long does the account run for?
You may find in 12 months that the account matures and you have to start again. At this point you will have a large sum and wont be able to immediately get it all back at 6%. At this point you will need to consider paying towards mortgage or a different type of savings account.


MC

ViolaLass

monkey_prints wrote: »

What we don't understand is the whole difference between the daily interest as opposed to yearly

One is calculated every day, the other is calculated once a year. In practice, both the savings account and your mortgage are probably daily interest accounts, so it makes no difference to you.

Thrugelmir

ViolaLass wrote: »

In practice, both the savings account and your mortgage are probably daily interest accounts, so it makes no difference to you.

On mortgage accounts the interest is compounded monthly (i.e. calculated daily and added to the account once a month). Whereas on savings accounts the interest is often only credited once a year.