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Best way to overpay?

edited 16 January 2017 at 12:33PM in Mortgage-Free Wannabe
4 replies 960 views
Rachel_PiersonRachel_Pierson Forumite
75 posts
edited 16 January 2017 at 12:33PM in Mortgage-Free Wannabe
Hi,

I recently took out a mortgage at 2.18%, fixed for 5 years. I think it was a good deal that balanced a reasonably-cheap (but not the cheapest available) rate, with the ability to overpay as much as I want without penalty. (Provided I don't repay the whole thing before 5 years are up.)

I worked out that at my current balance outstanding I could overpay by ~£972 per month and be mortgage-free in five years. Thankfully, I can afford to do so. But it also occurred to me that since the rate is so low, I could get a better rate of interest by putting the cash that would otherwise be used for overpayments into some kind of savings account or investment.

At the moment, I've got two 12-month Regular Saver accounts totaling £800 per month @ 5%. And I've a variety of high-interest current accounts that are holding funds I'm going to use over the coming year for building and maintenance projects on the property. So, when the building work is done and the Regular Savers pay out, I plan to put the savings plus interest into the high-interest current accounts so they can earn more interest than the amount the mortgage is charging.

So far, the high-interest accounts I already have are:

  • Santander 1-2-3: pays 1.5% interest on balances up to £20k, plus cashback on some household bills. So, it's alright for what I need it for right now. But it won't be much use when the building work is complete, as its interest rate is lower than the mortgage. I plan to switch it to an M&S account at that time, to get a £100 gift card (will use for work clothes). And, most relevantly, switching to M&S should give me access to another Regular Saver @ 5%, where I can bring my savings per month up to the £972 figure by saving an additional £172 there.
  • FlexDirect: pays 5% on balances up to £2500 for 1 year only, then some rate lower than the mortgage rate after that. So really I'll only use this one for 12 months unless the rate changes.
  • Bank of Scotland + Vantage: pays 3% if you have £5k in it, less if your balance is less. You can have up to three of these. At the moment, I have only one.

My question is, is there a smarter way to invest the 'overpayment' cash? My thinking at present is that this arrangement will have the benefit of allowing me to 'overpay' in a way that I have immediate access to the cash if something unexpected happens. But I'm still treating the money as 'allocated and spent', and have no intention of touching it or the interest it generates if I don't absolutely have to. e.g., I'd only dip in in the case of unemployment or some catastrophic event like illness that meant I couldn't work.

Replies

  • da_ruleda_rule Forumite
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    At the moment what you've got looks good. I'm not sure if there are any high yielding bonds on the market at the moment (the best I could find on a quick search was about 1.4%). Also, some of it will depend on how much of a lump sum you have available and how risk adverse you are.

    Obviously the Santander account is the only account that's paying less interest than your mortgage is charging, so it might be a case of not using that one. Is the BoS/Vantage account limited to £5k?
  • edited 16 January 2017 at 1:43PM
    Rachel_PiersonRachel_Pierson Forumite
    75 posts
    edited 16 January 2017 at 1:43PM
    da_rule wrote: »
    At the moment what you've got looks good. I'm not sure if there are any high yielding bonds on the market at the moment (the best I could find on a quick search was about 1.4%). Also, some of it will depend on how much of a lump sum you have available and how risk adverse you are.

    Obviously the Santander account is the only account that's paying less interest than your mortgage is charging, so it might be a case of not using that one. Is the BoS/Vantage account limited to £5k?

    Bank of Scotland is limited to £5k, yes. Though you can have three of them (two direct debits required for each), so that effectively makes it £15k you can store indefinitely @ 3%.

    Yes, I think you're right. Santander is ultimately a loser for me. Initially it looked like an OK place to put £20k for just a few months as I have limited Direct Debits coming out to fulfill the account requirements for additional Vantage accounts (and I wasn't aware then that you can have three of them!) But I've recently wised up to the fact I can pay a few £1 Direct Debits to charity, and still end up making money whilst fulfilling the "must have two Direct Debits per account" requirement for the HBOS Vantage accounts.

    I think I'll switch the Santander to M&S after this month's interest. And open two additional Vantage accounts with low Direct Debits to charity to make more out of the £15k there than £20k would with Santander. Plus, £100 gift card from M&S that I spend there anyway for work clothes is a nice bonus.

    The only other thing that crossed my mind is getting an ISA. I know the rates are poor at the moment. But I've a feeling that when the rate goes up in coming years the allowance will go down. People who pay £15k in now @ crappy rates like 1% may well find they get a nice 5-8% per year tax free when interest rates recover (hopefully in 5-6 years.) But not for me for now.
  • da_ruleda_rule Forumite
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    You would be potentially playing the long game with your ISA plan, and as you're potentially only looking at 5 years it might be better to just stick with higher interest accounts and using any extra to clear the mortgage which is at a higher rate of interest than the ISA.
  • juststuff123juststuff123 Forumite
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    Hi Rachel,


    I hadn't realised you could have 3 BOS vantage accounts. I know what I'll be doing this evening! Thanks! I have the Santander 123 and the fee far out weights the cashback to it might be time to ditch after all.


    Here's a list of accounts you might be able to take advantage of:


    I have a lot of regular savers:
    HSBC = 5% up to £250 pm
    M&S = 5% up to £250 pm
    1st Direct = 5% up to £250 pm
    Nationwide = 5% up to £500 pm
    Lloyds = 3% up to £400 pm
    Santander = 3% up to £200 pm


    Tesco current account = 3% up to £3000 balance (you can have 2 of these)


    Have you looked in to stocks and shares or Peer to Peer? I've dipped my toe in to these as a way of diversification - more reward but more risk.
    NEW GOAL:- £200k in Savings be March 2024
    SAVINGS: – £151,635
    COMPLETE GOALS - Debt Free, Mortgage Free, £150k Savings
    Save 12k in 2021 #53 £10,888 / £15,000
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