using mortgage as saving account

ab7167

My partner and I have approx £200k outstanding on our mortgage (house worth £240k ish). This is a 2 part one with Nationwide, 1 part fixed at 4.79% until next July (£150k) and 1 part fixed at 4.97% until next November (50k). Amounts are approximate, I can't find the log on details for internet banking! (but are pretty accurate, and the interest rates are correct)

My questions - we can afford to overpay, and are already putting an extra £300 per month into the higher rate part. We can afford to up this to £1000 per month, which is the maximum Nationwide will let us overpay.

As Nationwide will give us the overpayments back at anytime, is it a bad idea to use the mortgage as a kind of savings account? We are both higher rate taxpayers at the moment, although I go on maternity leave in about 5 weeks, therefore my salary will drop, and, as I will only return part time, will not go back to being higher rate. Therefore I calculated that we would have to get a stonkingly high return on a normal savings account to match the benefit of paying off the mortgage quickly. We have approx £3k in an instant access account for emergencies, as Nationwide take 10 days to process a refund of overpayments.

I can't see the catch, neither can partner - is there one I have missed?

Ali

Kaz2904

It's a very good idea to do this because of the tax savings for you. I reckon you would need to earn 8.284% to beat your mortgage rate after tax.
Don't forget to check about a tax rebate when you get to the end of the tax year as you may have paid too much by the end of the year.

CasperBloomberg

We have done something similar, with Northern Rock. We can't work out if the savings offset is only classed as savings so in the event they go bust, we'd lose alot of money under the compensation scheme.
We now realise we've put alot of eggs in one basket, something that isn't recommended for every other savings product on this website.
So, be careful if you're considering putting alot of money into it - or get a clear answer from Nationwide as to how it's treated. :0)

Dithering_Dad

I'm also a higher rate tax payer and have a large mortgage - it was £150k when I first joined MSE, but since I've been in the Mortgage Free in Three Yrs challenge I have whittled this down to £111,548. I have 18k saved in my offset account for emergencies and once this figure was reached I started overpaying my mortgage capital.

I cannot begin to tell you how freeing it is to have reduced my mortgage by such a large amount. By reducing my mortgage, I reduced the monthly payments proportionally and I also arranged cheaper life assurance, utility providers, etc. and have managed to reduce my monthly outgoings by £300. This amount is now paid into a stakeholder for my wife.

If you can easily get your overpayments back in an emergency then I would definitely make mortgage overpaying a priority, especially as you have a large mortgage and have a kiddie on the way.

I'm pretty convinced there is a financial storm brewing on the horizon (i.e. Northern rock, so many people with large debts, US possibly going into recession) and so it's prudent to "batten down the hatches" with a little debt repayment.

ab7167

Ah, the answer I was hoping for - yes, it is a good idea! We have thought long and hard about this and really couldn't see a catch! Nationwide treat them as an "overpayment reserve", not sure what implications this would have if they sold on the mortgage to someone else, although I would imagine we would get some notice of this to allow us to withdraw the overpayments (if we wanted to, of course). I can't imagine Nationwide would go bust quick enough to give us no chance of retrieving our money...

We don't owe any other money at all, apart from using credit cards for everyday shopping (cashback and paid in full every month), both our cars are paid for, we have slush funds for car insurance / tax / servicing / house insurance / holidays / christmas and have a robust budget in place for when I drop to SMP. And we both have decent pension provision.

I sound very anal reading that back! Just pleased that I have an OH who feels the same way about money as I do, living with a spendthrift would drive me up the wall! We have sacrificed quite a lot to get where we are (we're both 29), and some of our friends have been quite scathing about our "week in Norfolk" holiday (one of the best I've ever been on!) at £450 for both of us for the week, instead of a £4k all in Mauritus trip. It's nice to read posts from people who don't think we are completely insane...

I will admit that we are lucky to both work in a skills shortage industry, so pay rises are frequent and large, but we were the same when we started out after uni with massive debts and small wages. We couldn't afford a car or taxis, so we used to do our shopping with a large rucksack and walk 4 miles home! I think that some of your luck, you make yourself?

And the tax thing - I am PAYE at work, so surely that would work itself out by the end of the tax year? Plus I get generous maternity benefits, and will only drop to SMP on 15th of March (if baby arrives on time!), so shouldn't be that much of a problem this tax year.

Sorry for ranting, got to go and set up the standing orders :-)

Thanks for your comments,

Ali

djm1972

Hi,

Be careful; as I have a similar mortgage (unlimited withdrawal of overpayments) but there is the following "gotcha" in the small-print:

"We reserve the right to reduce the maximum borrowing limit to the amount outstanding at any time and without notice."

In other words, they allow unlimited withdrawal of overpayments whilst it's fine by them. On the flip side, they also say that they may increase the maximum borrowing limit, but that's not the point. Because of this, i've established a float of £10K in a regular savings account "just incase"!