Overpay in first month or save?

hanb

Hi all,


Wondering what others would do in our situation.


We currently have 2 mortgages (due to having an employee mortgage and then a 'top up') with the first payment being paid today. The top up mortgage is at 2.69% fixed for the next 5 years and we can overpay 10% a year penalty free so for the first year it's £4800.


We're getting 2k cashback for taking out the mortgage in the next couple of weeks and we'll hopefully be getting £1400 back from our rental deposit. We are then in the position to add the rest to be able to pay off the full 10% for the first year. Then spend the rest of the year saving up for work to be done and towards paying off the other mortgage (it's at base rate so .25% just now so better off saving than overpaying that one at the mo)


According to the calculator this would save us about £3950 in interest over the 24 year mortgage and also shave off 3 years 2 months.


The other option would be to put the amount in to a savings/higher interest current account and do that instead but I don't know whether there's that much point or if we should just pay it off the mortgage in our first month which would give us a little moral boost but is it the most financially sensible idea?


Thanks in advance

SavingSteve

Can you earn more than 2.69% after tax in your savings / interest paying current account? That is the question you need to ask yourself.

muhandis

Personally, I would overpay because it's a relatively small amount and a fairly high interest rate at 2.69% which means that I would have to find a place to put it in that is firstly higher interest than 2.69% AND substantially higher so that it is worth any effort/time involved (opening/switching current accounts, etc).

The NW flexdirect (5% on up to £2,500) immediately comes to mind but you'd then have to open one more account (say the TSB one with 5% on £2,000) for the balance. Whether the extra interest of 2.31% (before tax) on £4,800 is worth the effort or not is of course something only you can decide upon.

hanb wrote: »

Hi all,

Wondering what others would do in our situation.

We currently have 2 mortgages (due to having an employee mortgage and then a 'top up') with the first payment being paid today. The top up mortgage is at 2.69% fixed for the next 5 years and we can overpay 10% a year penalty free so for the first year it's £4800.

We're getting 2k cashback for taking out the mortgage in the next couple of weeks and we'll hopefully be getting £1400 back from our rental deposit. We are then in the position to add the rest to be able to pay off the full 10% for the first year. Then spend the rest of the year saving up for work to be done and towards paying off the other mortgage (it's at base rate so .25% just now so better off saving than overpaying that one at the mo)

According to the calculator this would save us about £3950 in interest over the 24 year mortgage and also shave off 3 years 2 months.

The other option would be to put the amount in to a savings/higher interest current account and do that instead but I don't know whether there's that much point or if we should just pay it off the mortgage in our first month which would give us a little moral boost but is it the most financially sensible idea?

Thanks in advance

SavingSteve

muhandis wrote: »

Personally, I would overpay because it's a relatively small amount and a fairly high interest rate at 2.69% which means that I would have to find a place to put it in that is firstly higher interest than 2.69% AND substantially higher so that it is worth any effort/time involved (opening/switching current accounts, etc).

The NW flexdirect (5% on up to £2,500) immediately comes to mind but you'd then have to open one more account (say the TSB one with 5% on £2,000) for the balance. Whether the extra interest of 2.31% (before tax) on £4,800 is worth the effort or not is of course something only you can decide upon.

Agreed, I wouldn't bother opening another account for this marginal difference, only if they happen to have one open already.

getmore4less

Then spend the rest of the year saving up for work to be done

I would save up and get the work done and reap the benfits from that work sooner.

depending on future cash flow and ability to get 0% money you could over pay sooner

Whats the real rate on the work loan after the BIK costs?
Not sure I would ever bother with overpaying that till the other bit is gone it will always be at a higher rate

hanb

getmore4less wrote: »

Then spend the rest of the year saving up for work to be done

I would save up and get the work done and reap the benfits from that work sooner.

depending on future cash flow and ability to get 0% money you could over pay sooner

Whats the real rate on the work loan after the BIK costs?
Not sure I would ever bother with overpaying that till the other bit is gone it will always be at a higher rate

Thanks all!


getmore4less - thanks, the work we need to do is external render and have been advised to wait til spring to do this and due to being a mid terrace, other little bits we want to do we're going to hold off on too as the builder/plaster will need to get himself and materials etc through the house so we thought we might as well wait until that' out of the way.


Apologies if I'm being a bit slow but I'm not sure what your sentence about paying sooner meant?


Our rate on the employee deal, with BIK taken in to account was still much better than anything else. With both mortgages and BIK taken in to account, our comparable % is about 1.3%.


Thanks again

getmore4less

when I say sooner you do a reverse cash flow analysis.

If you need say £2k in May to pay for the render and have free cash flow of £500pm you need to start saving in Jan/Feb before that you can throw everything at the mortgage(except for emergency funds.

if you can hit the 10% and save up enough for the jobs it won't matter,

Any money left over is in the pot for the next 10% when that is available.

hanb

Thanks


Luckily, we still have a good EF of 6 months salary each after being sensible with the house purchase and are able to save £300-£500 a month if we behave(!) so in theory, we can make the full overpayment now save the money for the work we've had quoted for Spring and then be able to squirrel a bit more away ready for the next allowance of OP's.


I think we'll bite the bullet and overpay the full amount. It just seems a worry that once it's gone it's gone but that will make sure we focus and save over the coming months rather than taking it easy because we have the extra money from not overpaying it.


Thanks again all!

getmore4less

If you have 6 months emergency just overpay the 10% now and rebuild that pot from cash flow.

I do two pot in my head
emergency pot
is for an unexpected bill this can be relatively small if you have access to credit and surplus income.

Disaster pot for loss of income
The key amount in is not income but expenses(with cut backs) as long as you don't go much below 6 months of those you are fine, if you can stretch that to a year even better if it is 6 months loss of both incomes and 12m with loss of one(the biggest) then you are well covered unless getting jobs is really hard.

After that funds can be allocated to reduce debt or long term plans, with a good chunk on low rates after the jobs are out the way things like retirement planning(or kids first) get on the list for allocation if resources.