Keep savings or overpay mortgage

System

I would look at overpayment and even penalties for cancellation.
Is there a reason you didn't get a smaller mortgage (using some of the pot)?

user15

I'm getting 3% average across spread across various cash ISA's, and current account (between 2% - 5%)
The mortgage was lot higher when I took it out, and did not have this amount of savings when I fixed my mortgage.

Thrugelmir

Might as well use the money earning 2% to overpay the mortgage.

Pincher

There is an old approach to mortgage, which is to get an interest only mortgage, and have an investment growing at a faster rate, so that eventually it over takes the amount owing, and you get a surplus, after paying the mortgage. Typically, you used an endowment, ISA or even pension.

There is nothing fundamentally wrong with the idea, it's just the system used to steal your contributions to pay for big commissions.

The investment side usually started from ZERO, and the growth trajectory took 25 years' growth at X%, but you are starting from £125k.

People used to pay 5% mortgage interest rate, and hope to get 8%+ return on the endowment. If you can get 5% return over the seven years, and then re-mortgage, you are probably better off than over paying.

If the industry has cleaned up on overcharging, the endowment idea could even come back. Having life insurance bundled with the investment is a good idea, I always thought.

An ISA has no life insurance. Hmm, Endowment ISA?

bigadaj

Not much chance of endowments coming back, only ever sold due to high commissions and high charges and fees.

also at a time when investment professionals probably had a better reputation, and banks certainly did.

High fees and charges also masked by a high inflation and growth rate environment.

At the end of the day the endowment was only ever a managed fund with particular tax advantages for holding long term.

Far cheaper for most people to purchase separate life insurance as well, particularly when employee death in service and other benefits may well be available if needed to be called upon.

Pincher

bigadaj wrote: »

At the end of the day the endowment was only ever a managed fund with particular tax advantages for holding long term.

Hence the idea of endowment ISA, so it does have some tax advantages.

bigadaj wrote: »

Far cheaper for most people to purchase separate life insurance as well, particularly when employee death in service and other benefits may well be available if needed to be called upon.

You need to repay £100k interest only mortgage, whether you die in year 1 or year 25. The life cover is therefore fixed at £100k. As your endowment grows, the insurance pay out reduces, so the liability to the insurance company reduces. You are young and healthy in the early years, so your risk of dying is lower. The cheek of the endowment scheme is, they are paying out using your own money, when you are older and more likely to die.

If you got a standalone policy, for a constant pay out of £100k, surely that would be full fat premium. I suppose you can get a reducing cover policy, to match a repayment mortgage.

Mirno

Remember, you only get your first £1000 of savings interest tax free (ISAs not withstanding, but they tend to be poor interest anyway).
This will erode the benefits of savings.

Consider moving any ISAs (especially if they're the lower interest accounts) to a stocks & shares ISA.

Then, other than having a suitable safety pot of cash, anything under the mortgage rate can be used to overpay and/or moved to a S&S ISA (limits permitting).

Also, if your working and have a suitable pension, consider moving some money to that too.

Thrugelmir

Pincher wrote:

You need to repay £100k interest only mortgage, whether you die in year 1 or year 25. The life cover is therefore fixed at £100k. As your endowment grows, the insurance pay out reduces, so the liability to the insurance company reduces. You are young and healthy in the early years, so your risk of dying is lower. The cheek of the endowment scheme is, they are paying out using your own money, when you are older and more likely to die.

Endowments were built on decreasing term life assurance term policies. Problem for insurers was that the payout was guaranteed in death but not in life (if the investment performance didn't materialise). So in effect the living subsidised those that died. As the premium element within the policy for life assurance was insufficient.

AnotherJoe

I'd still like to know how the OP is getting 3% on £125k cash.

YorkshireBoy

user15 wrote: »

I'm getting 3% average across spread across various cash ISA's, and current account (between 2% - 5%)

I'm missing out somewhere, so I'd like a bit more detail on the split if you wouldn't mind, because with sole current accounts (you mention "I" throughout, not "we") it's a max of £53.5K @ 2-5% AER isn't it?

So have you some really good fixed rate ISAs? Or are there two of you?

And of course if you have Santander in the mix your "average" is going to plummet in November.