Mortgage overpayment sums

mouthscradle

Wonder if anyone can explain this to me please...

I'm comparing two scenarios as a means to get the highest deposit possible when we move house next - either in equity or savings.

Overpaying on a 2.5% mortgage by £550 per month for 40 months.
Vs Paying the £550 a month into a 4% savings account for 40 months.

I thought the second option should be significantly better, by over a grand, due to the higher interest rate. But when I work it out in Excel it's only coming out better by about a tenner. And I can't get my head around why. Anyone with a better understanding than me able to explain the reason?

Thanks :beer:

A_Frayed_Knot

SueP should be along any moment soon, she has a snowball calculator, which you can work out both senarios.

http://www.whatsthecost.com/snowball.aspx think there is also another one, but this might help you.

it has something to do with the fact your saving each month - not a lump sum for the 40 months and for o/p the mortgage you gain not paying the interest on the interest you saved each month. Sorry if I just made it more complicated.

midnight_child

The rule of thumb is to save/pay the highest rate of interest first, so on paper 4% saving is the better option. The tax rules are changing and from April you will be able to earn tax free interest of £1000 per year, so unless you already receive a lot of interest that should be ok.

The accounts with high savings rates only pay interest up to a certain balance, but after 40 months you will have over £22,000. You will need to spread this around several places, and you might not be able to get all of your savings at 4%, at which point overpaying may become more of a saving (depending on any payment fees).

However, if you can get all savings at 4% and are not liable for tax on interest, then my fag packet calculation comes out at about £500 difference over the 40 months.

MC

A_Frayed_Knot

I investigated with my figures just a few weeks back - 1.79% mortgage interest against 4% savings - worked out around £80 approx better off saving wise, but psychologically for me much better to see the mortgage balance going down.

mouthscradle

I was originally all for paying it as overpayments, as it would remove all temptation to spend it on something else instead. But then DH pointed out that if we have it in savings, it gives us scope to buy a house that needs some work and do it up exactly how we'd like it. Which does sound appealing, we didn't have the cash for that first time around.