Should I overpay mortgage?

KarenEW

Hi there

I'm a newbie to the forum and would like some advice on whether I should overpay my mortgage.

We have a mortgage at an interest rate of 1.34%

We have enough money saved to make the maximum overpayment for this year.

I have always heard the advice that you should pay off debts, in this case out mortgage, before saving money. But you can get a higher rate of interest than 1.34% on some savings accounts. Does that mean I should put the money in a savings account rather than paying it off?

Any advice much appreciated!

Karen

getmore4less

If you can get a better net rate just keep saving.

There will be a problem if rates change as you will have more than the max overpayment available.

Might be time to review longer term plans for debt/savings/investments/pensions

badmemory

Would it be worth a look at the long term savings by paying off what you can this year compared to what that figure would grow to over the same period in savings?

The answer may not be obvious! But you should have an emergency fund of for example 6 months expenses.

dimbo61

Overpaying a mortgage is always a Good Idea however if you can get a better return from a savings accouns such as the Nationwide regular saver and current account both pay 5% before tax !!

getmore4less

badmemory wrote: »

Would it be worth a look at the long term savings by paying off what you can this year compared to what that figure would grow to over the same period in savings?

The answer may not be obvious! But you should have an emergency fund of for example 6 months expenses.

You only need to compare rates.

chunkydog

Having the money in savings allows you quick access if you need it, not all mortgage companies will give you the overpayments back without a full remortgage/additional lending.

juniordoc

No there are loads of better places to put your money rather than overpaying. As long as your mortgage rate stays that low you will be able to make more in interest in savings. Be clever with where you put your money,
In addition to the accounts mentioned above, Tesco will let you have 2 current accounts that will each give you 3% interest on up to £3000 per account.
The Santander 123 is still pretty good at 1.5% on up to £20k and gives cashback on bills, but has a fee so is only really worth it if you can keep the balance above around 12k.

ricky_v

There's a myraid of reg savers and current accounts paying 2-5%. It will require opening several accounts but you can put in just over £1,000/month at 5% into Nationwide/First Direct/M&S/HSBC reg savers for example.

If you don't want to mess about with current accounts, etc then there's some fixed savings that can beat your mortgage rate. Match the period of the fixed interest rate with the period left on your mortgage (e.g if you have 2 years left on your mortgage fix then deposit the money in a 2 year fixed savings account). The advantage of this is that the "overpayment" money is usually locked in the savings account so cannot be used. When the savings account matures then either use to overpay the mortgage (which will be on SVR as the fixed has just finished so no limits to overpayments) and then remortgage, or keep it in savings if the saving interest rate still beats the leading mortgage rates or use it for a forseeable expense. You'll make a profit too after mortgage interest.

dunstonh

I have always heard the advice that you should pay off debts,

That is not correct. You should aim to pay off short term expensive debts as quickly as possible. Not long term cheap debts.

Overpaying a mortgage is always a Good Idea

No its not. Or perhaps a rephrase. Its a good idea but there can be much better ideas too.

Let's consider people who have an easily affordable mortgage with a very low-interest rate but have little or no retirement provision. A pension would be a better option for most of them as the growth rates tend to be 5-7% p.a. and you get tax relief. A higher rate taxpayer even more beneficial to pay into the pension and someone earning in excess of £100k makes pension the no brainer. Also, those earning just over £50k a year losing child benefit can get it back again by paying into a pension. Tax credits can be increased by paying into a pension.

So, there are a number of reasons why overpaying the mortgage is not the best option.

molit

Also consider if you are close to an LTV where the rate drops..e.g. 60% or 75% as this could be factored into the calculation if you are due to remortgage soon

AnotherJoe

What Dunstonh said. Plenty of people overpay to the severe detriment of their pension, especially higher rate taxpayers where it's easy to throw away many ten of thousands in free money (via tax relief even before longer term higher growth than the interest rate is taken into account),

Without knowing the numbers -size of mortage, income, existing pensions, no generic answer is possible.