overpay on mortgage instead of saving?

atush

EdGasket wrote: »

And lots of risk e.g. housebuilders, property, banks all down 40% or more at the moment.

Pay of your mortgage first; that's what I did and never regretted it for a moment. You are unlikely to get a guaranteed return on investments that exceeds your mortgage interest!

Again you are thinking a UK centric single share portfolio (which may be why you lost so much).

There are plenty UK big uk businesses that trade in Usd so are up since brexit, and many sectors that are up that you failed to mention (tobacco, miners for a start) so really you need global diversifcation and not a UK centric focus.

tim_n

fenwick458 wrote: »

how do I work out which is the better deal? I know the mortgage interest is less than the savings interest, but the mortgage amount is almost 3.5 time the amount. I would just like to weight things up really, having the money in a current account or a reg saver for a year means i's readily available If i wanted a lump sum of money for something. but in the back of my mind I want rid of that mortgage!

My mortgage is around 170k and I've managed to save £120k


Psychologically speaking I originally wanted to pay my mortgage off too.


Assuming you've got a repayment mortgage, don't ignore the benefit of compound interest. The longer you hold onto your money the more interest you generate whilst your debt gets smaller.


You've got a glorious cash pot. If you lose your job or have an accident, you can use this to make mortgage payments whilst you adapt.


You want to pay it off now, but what if in 6 months time an opportunity comes along which you need a fair bit of cash for and the bank won't loan you anything?

zolakesb

I think to save its a good idea but its always wise to pay your bond in a short period to avoid interest that keep on accumulating.

jimjames

zolakesb wrote: »

I think to save its a good idea but its always wise to pay your bond in a short period to avoid interest that keep on accumulating.

I'm assuming there is spam coming as this makes no sense at all

jimjames

tim_n wrote: »

Psychologically speaking I originally wanted to pay my mortgage off too.

I originally thought that too. The thing that really crystalised it for me was when rates dropped so much.

tim_n wrote: »

You want to pay it off now, but what if in 6 months time an opportunity comes along which you need a fair bit of cash for and the bank won't loan you anything?

That flexibility is a really good point.

I decided not to overpay but to invest in S&S ISA instead. By paying mortgage as normal it has gone down while the investments have gone up. I now have approx. 4x my mortgage invested so could pay it off completely if I so wished but it's far more flexible for me to retain it. Even over the last 2 weeks the portfolio has increased and is now 4x mortgage compared to 3x a few months ago.

u0362565

I'm struggling a bit with the maths here and i think i'm misunderstanding something. Say you had £200k mortgage with int rate 2% and you had a 5% savings account and £10k in it. You'd make £500 on the £10k in one year but the amount built up on the mortgage from the interest accruing would be £4k assuming you're not on a repayment mortgage and even if you are repaying the interest added would be more in monetary terms than the interest from the savings so does it not all depend on the % interest but also the total you have in savings? Or do you just look at the percentages.

tim_n

u0362565 wrote: »

I'm struggling a bit with the maths here and i think i'm misunderstanding something. Say you had £200k mortgage with int rate 2% and you had a 5% savings account and £10k in it. You'd make £500 on the £10k in one year but the amount built up on the mortgage from the interest accruing would be £4k assuming you're not on a repayment mortgage and even if you are repaying the interest added would be more in monetary terms than the interest from the savings so does it not all depend on the % interest but also the total you have in savings? Or do you just look at the percentages.

Yes it is complex, but because you're comparing apples with oranges. Assuming no tax on savings, over 1 year you'd make £512.67 if your interest is calculated daily due to compound effect.


In the meantime if you calculate in the interest on the 10k at 2%, you'd have paid out £202.01 in interest payments on the same amount.


The difference is, if you kept it in your bank instead of putting it to the mortgage, you've now got an additional £310.66 in your bank for next year to compound on, which means more money for nothing.


Regular overpayments in a time of low interest rates on mortgages where get better rates in savings, no matter how small build up over time.


Over 25 year mortgage term, the difference is £11,169.35 you didn't need to pay off.

u0362565

Hmm so in other words i should cancel my overpayments and find a high interest savings account until the interest rates start to look unfavourable? Is there any instances where this would not be the correct action? other than interest rates.

tim_n

u0362565 wrote: »

Hmm so in other words i should cancel my overpayments and find a high interest savings account until the interest rates start to look unfavourable? Is there any instances where this would not be the correct action? other than interest rates.

You should do what you feel most comfortable with. But as I said before, it doesn't hurt to have a large easily accessible cash cushion which is earning more interest than you're paying out.


Martin really has this covered in the link below, but what you're looking at is half the article down "Overpaying vs saving – which wins?" - I would also keep 3-6m of your wages spare regardless (see "Ensure you have sufficient emergency funds")


http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings


Also check the tool "Tool: Should I overpay my mortgage with savings?" - that allows you to work out what your minimum interest rate should be in savings. Mine is 2.8%

u0362565

Thanks for that, that's a very nice article. I'm now looking into regular saver accounts, looks like you can get 6% for a year at least! Might n3ed to see what the rate changes to after that 12 months..