Mortgage monthly payments vs 123 account

InternetKing

Hi there,

I'm looking at buying my first house and have hit an interesting dilemma. Is it better for me to extend the term of the mortgage (the rate stays the same) to reduce my monthly repayments as the interest rate on the mortgage is LESS than I earn on my savings in my 123 current account?

The numbers:

Borrow: £200,000
House Price: £250,000
LTV: 80%
Best mortgage interest rate (2 year fix): 1.89%
Interest from money in 123 account: 3% (2.4 after tax)

At 25 years: monthly repayments are £837
At 34 years: monthly repayments are £665

Therefore am I correct in assuming the extra £172 a month will do me better in my 123 account then it will going on the mortgage?

All thoughts welcome.

Thanks!

Yorkie1

I think it's a gamble to extend your mortgage for 9 years on the basis of an interest rate which is only fixed for 2 years, at a rate unlikely to be repeated over the remainder of the mortgage, and assuming that the 123 account will remain at that interest rate too.

You will also end up paying more interest over the longer term.

amnblog

Pay off your mortgage as soon as you can. Full stop.

InternetKing

Thanks for the responses so far.

The idea would be after 2 years, to get a new fixed mortgage for a lower amount (using the money I had saved, plus the interest to pay off the difference). At this point, I BELIEVE, I would be better off than if I had just paid the higher monthly payments (by roughly 0.5%)

If the rates are no longer as low at this point, I can always reduce the mortgage term going forwards, right?

Nuttydj

Though I'm no expert I'm doing the same thing, actually the money itself is not that big a driver for me, it's the flexibility: by extending the mortgage term you reduce how much you're committed to pay each month, for example in a month when booking a big holiday you may want that lower amount on the mortgage. Plus by keeping it in the 123 account you get cash on hand to create an emergency fund

Just remember 123 only up to 20k and 2.4% post tax is for lower rate tax pays so as long as you fit into that category I would agree with you (even if you don't the flexibility may be worth it), though like I say no expert just my thoughts.

Nick_C

amnblog wrote: »

Pay off your mortgage as soon as you can. Full stop.

I disagree. I am about to take out a new mortgage at 2.49% (lifetime tracker, base rate + 1.99%). I have investments which give me a return of 4% net. When the mortgage interest rate exceeds the rate of return on my investments, then I will pay off the mortgage.

Thrugelmir

Nick_C wrote: »

I have investments which give me a return of 4% net.

Is the return guaranteed? Is your capital at risk?

Thrugelmir

InternetKing wrote: »

The idea would be after 2 years, to get a new fixed mortgage for a lower amount (using the money I had saved, plus the interest to pay off the difference). At this point, I BELIEVE, I would be better off than if I had just paid the higher monthly payments (by roughly 0.5%)

Switching lender i.e. remortgaging in 2 years time may erase some of the gains you have made.

Nick_C

Thrugelmir wrote: »

Is the return guaranteed? Is your capital at risk?

The return is not guaranteed. The capital is at risk.

That is a feature of investments, as opposed to savings.

I'm happy with the level of risk and the £24K of capital gains that I have achieved in the last two years.

If you are risk averse, stick to savings accounts.

Edit: Incidentally, I also have savings accounts that pay 3% net, so the mortgage would still the right decision for me, even without the investments.