Overpay mortgage or save to regular saver?

trevman

Is it better to over pay £250 a month on a mortgage rate of 2% or save £250 a month to a regular saver of 5%. After 12 months when the regular saver ends, use that lump sum to pay off the mortgage.

I believe it would be better to save and the use that as;
£250 x 12 = £3000 (+ interest of £81, from nationwide)

Mortgage would accumulate £33 of interest as per moneysavingexpert.com/mortgages/mortgage-rate-calculator

So i think i would be able to pay off the same amount after 12 months, plus an extra £48.

Can anyone confirm if this correct?

TrickyDicky101

Yep - 5% beats 2%.

The one thing you need to be careful with is whether that 5% will expose you to a tax liability. As long as you are not a higher rate tax payer then you can earn up to £1000 pa (in non-ISA) interest before it is taxed. If you are higher rate then you can only earn £500 pa interest before it is taxed.

fewcloudy

Yes better to save. Unless...


...you are someone like me!

A £48 extra saving per year is a no-brainer on the face of it. But my way of thinking is that £48 is a small amount of money to reject in order to ensure the mortgage does in fact get to see that extra £3000!

I'm not saying it definitely wouldn't get paid toward the mortgage, but things happen in life and I'm not sure I want the money sitting there available to be spent on something else that will doubtless seem pressing at the time.

So for me, it goes straight to overpay the mortgage each month, and I reckon that (your figures) of 4 quid a month is a price worth paying.

I do realise this will have hardcore money saving experts clawing at their own skin and tearing their hair out, and I'm not worthy to even use this site, must have no will power, not fit to even have a mortgage etc. etc. but I'm only human after all.

juniordoc

If you are more of a worries as per the person above, you could split the money half and half so at least half of the money would become unavailable and go towards the mortgage and half could be available but earning a better interest rate.
But yes you would be better off putting it all in high interest current or savings accounts.

AnotherJoe

The other alternative is pension. (Over)Paying mortgage at 2.5% compared to a pension that attracts a 20% tax saving plus long term likely 7 or 8 % growth is likely to be better financially. It does also lock it away.

trevman

Sorry to dig up an old thread but I'm just revisiting this thought (calculation) and looking at https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator it appears to be better to overpay monthly rather than save and make an annual payment.

based on a £60,000 mortgage at 1.99% for 10 years;

overpaying £250 a month means;
Overpaying would save you £2,104 in interest alone,
and mean you pay the debt off in full 3 years & 4 months earlier.
Normally you repay £552 per month. If you regularly overpay £250, you'd be mortgage free 3 years and 4 months earlier. Your total payment over this period would be £64,119.

saving £250 a month to a regular saver (nationwide 5%), would provide an annual overpayment of £3,081.25, which means;
Overpaying would save you £1,942 in interest alone,
and mean you pay the debt off in full 3 years & 1 month earlier.
Normally you repay £552 per month. If you regularly overpay £3,081, you'd be mortgage free 3 years and 1 month earlier. Your total payment over this period would be £64,281.

this seems to contradict what i originally calculated and what seems to be the general consensus that its better to save. does anyone have any thoughts on this? am i mis-calculating somewhere?

Thrugelmir

Are fixed rates of 1.99% available for 10 years. Do they come with any product fees.

trevman

That was just an example rate/time scale, as that would stay the same regardless of how the overpayment is made I don't think we need to worry about it. As long as the mortgage rate/term/amount is the same for both overpayment methods then we can use it as a fair comparison between the overpayment methods, which seem to indicate that overpaying is better than saving.

Please correct me if I'm misunderstanding.

Thrugelmir

If you can save into a regular saver at a 5% annual rate , i.e. an average of 2.5%. Then it is worthwhile to do so if the interest rate on your mortgage is 1.99%. Using the accumulated limp sum every year to pay down the mortgage.

Historically mortgage rates have exceeded that earnt on savings. These are unusual times. Make hay while the sun shines as the saying goes. As not going to last forever.

trevman

Thanks Thrugelmir, my original post agrees with you, however the overpayment calculator says otherwise. Maybe the calculator itself is wrong.

Mind_Overload

Sorry for bumping an old thread, but I have a similar question.


I'm currently living abroad until June 2019, I can't put into a fixed rate ISA as overseas and I'm thinking of making an overpayment on my mortgage. My lender lets me do 10% a year with no penalty.



Current situation-


my mortgage is my only debt.



£10,000 in open ISA, very low, around 1%


£12,000 in E - Saver 0.35%



The £10,000 is saving towards a pension. But the £12,000 i'm open to move around.



50% shared ownership mortgage.


Owe £43,500 ( 17 years left)


I'm thinking of overpaying approx £4,300 to knock 2 years off my mortgage.


Is this the best idea? or wait until I get home and sort the money out into a higher paying account?


Many thanks