Quick question - pay off mortgage or save up for second home?

Hi, I have a mortgage diary on here but thought I'd just post this as a quick separate question :)

I would like to be financially independent and have my DH and I retire early.
I've been under the impression that I should be throwing everything at the mortgage, but doing some research into being FI and retiring early I'll need a lot of savings and maybe a passive form of income.

So now I'm wondering if I keep paying the minimum payments on my mortgage (see my diary - MissCreative's journey to financial freedom - if you want to know more about the current mortgage itself) and put all extra money into savings account and current accounts with high interest to save up for a deposit for a larger home (because we're going to need to buy one in about 5 years when we have children). Then keep our current flat and rent it out.

Or would it be better to keep paying off as much of my current mortgage as possible and have a very small amount for a deposit on our next home? (Or sell our current flat and have a good deposit on our next home, but then have nowhere to rent out)

For info, we can potentially save (or overpay our mortgage by) about £9000-£10,000 a year, obviously if nothing disastrous happens! And our next home would probably cost us about £250,000 to £300,000.

Wondering if anyone is doing something like this/has done something like this/has an advice on the subject?

I'll keep doing research, but just wondering what everyone on here thinks :A

Thanks! :D
Originally October 2042 // Goal December 2032
Currently at £127,500

End of fix goal: £75,000 by September 2024

Replies

  • Depends on what rate your mortgage is at.

    You can get 3% on the Santander current account (less the fee which is covered by cashback generally) so if this beats your mortgage interest financially speaking you will be better off putting it in there.
    Thinking critically since 1996....
  • MissCreativeMissCreative Forumite
    90 Posts
    Sixth Anniversary Combo Breaker
    My mortgage is currently 4.34%. I know there are current accounts that do 5% or 6% so that's fine. And I know I could put my overpayments in there and then overpay at the end of the year as it's better for interest.
    But that's not really what I'm asking.
    I'm wondering about whether actually paying off my current mortgage is the best thing when we're probably looking to buy another home in 4 or 5 years, and aiming to be financially independent in a couple of decades :)
    Originally October 2042 // Goal December 2032
    Currently at £127,500

    End of fix goal: £75,000 by September 2024
  • phillwphillw Forumite
    4.4K Posts
    Eighth Anniversary 1,000 Posts Name Dropper
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    Or would it be better to keep paying off as much of my current mortgage as possible and have a very small amount for a deposit on our next home?

    It is largely irrelevant.

    If in five years time you have 50,000 mortgage and 25,000 savings or 25,000 mortgage and 0 savings then you are in the same position. If you want to keep the flat then you will need a buy to let mortgage to pay off the current mortgage, if you don't have enough money for the deposit on the new house then you can borrow that from the buy to let mortgage. If you have more than you need for the deposit on the new house, you can reduce how much you borrow on the buy to let.

    The important thing is decrease your mortgage interest rate you are paying now if possible and then try to find a savings account with more interest and save it there. You can get a 6% regular saver and 5% on up to £2000 without much effort. If your mortgage is lower than those, then overpaying is more expensive. If your mortgage is higher than those then overpay it and try harder to find a better deal.
  • MissCreativeMissCreative Forumite
    90 Posts
    Sixth Anniversary Combo Breaker
    Thanks PhillW.
    I'm going to look into switching mortgages this evening -pretty sure with being on 4% and potentially going to 2% I could save quite a bit, and the extra can go into the 6% savings account.
    Will also look at switching to M&S banking because of their £220 offer :)
    Originally October 2042 // Goal December 2032
    Currently at £127,500

    End of fix goal: £75,000 by September 2024
  • edinburgheredinburgher Forumite
    12.3K Posts
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    Being a landlord is far from 'passive' investing from what I have seen. What alternatives have you researched?
  • KhrisjunKhrisjun Forumite
    67 Posts
    Sixth Anniversary 10 Posts Name Dropper
    Please bear in mind if you are considering a second place and then renting your current home you will have the 3% additional Stamp Duty to pay.

    If you purchase a 300k home then your Stamp Duty would be £14k. Whereas if you purchase a 300k home and sell your current home the Stamp duty would 'only' be £5k. So you will be paying an extra 9k just to keep your current property - Depending on your current flats potential rental it could be a considerable amount of time before the profit exceeds the 9k additional cost to buy your new home.

    In my personal opinion it wouldn't be worth doing - The 9k could be invested elsewhere.
  • LadyGnomeLadyGnome Forumite
    683 Posts
    Sixth Anniversary 500 Posts Name Dropper Combo Breaker
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    If you want to get a BTL mortgage for your property in order to rent it out you need to look at the LTV and rent to mortgage costs. BTL lending is tightening up so a LTV above 60% is likely to result in a very expensive mortgage. You also need a minimum of 120% coverage of mortgage costs by the rental and this criteria is also tightening.


    So will paying down your mortgage get you to the point where you can get a more economic BTL mortgage? Is there a good rental market for that type of property in the area? What are likely rentals like and who would be your target market? Also consider the financial impact of the changes to offsetting mortgage interest against tax and changes to the wear and tear allowance due next year (on top of the stamp duty changes above).


    We have a MF rental property which is part of our retirement plan so it can be a good source of reasonably passive income. However, it is not totally passive income and it is not stress free.
    Mortgage
    Start Nov 2012 £310,000
    Aug 2021 £174,115.10
    Reduction £135,884.90

    End Sept 2034 (but I have a cunning plan...)
  • MissCreativeMissCreative Forumite
    90 Posts
    Sixth Anniversary Combo Breaker
    Thanks everyone :)

    Just wanted to get an idea of the costs and workings involved and you've all made great points and I'm going to go away research.

    I think we'll remortgage our flat (if it works out to be much less) and then pop the extra per month, plus what we were overpaying, in a range of high interest accounts, and we'll go from there :)

    Thanks again!
    Originally October 2042 // Goal December 2032
    Currently at £127,500

    End of fix goal: £75,000 by September 2024
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