Overpaying Mortgage VS Savings

kev2009

Hi all,

I'm in a similar position to the OP. My Mortgage is a little bit less than the OP and I have 2 more years to go on a 5 year fixed rate at 2.34%. My LTV is under 60%. With the potential for interest rates to start increasing and pushing mortgage rates up (I've heard rumours interest rates are expected to be 3-4% by then but obviously no guarantees, it coudl be higher or lower), I am considering making 2 over payments (1 ech year) over the next 2 years to try and potentially offset a rise in my monthly mortgage payments in 2 years time. However, maybe saving the money instead is a better option?

Kev

pjcox2005

kev2009 wrote: »

Hi all,

I'm in a similar position to the OP. My Mortgage is a little bit less than the OP and I have 2 more years to go on a 5 year fixed rate at 2.34%. My LTV is under 60%. With the potential for interest rates to start increasing and pushing mortgage rates up (I've heard rumours interest rates are expected to be 3-4% by then but obviously no guarantees, it coudl be higher or lower), I am considering making 2 over payments (1 ech year) over the next 2 years to try and potentially offset a rise in my monthly mortgage payments in 2 years time. However, maybe saving the money instead is a better option?

Kev

As posters above have said you need to consider all options in relation to current position. Unlikely a mortgage over payment will be the greatest saving but for many it gives an emotional security.

What savings, investments and pensions do you currently have as that will be key to any decision?

kev2009

Thanks for your reply pjcox2005. I currently have 2 x regular saver accounts, 1 savings account, 2 x current accounts, 1 of which pays me a bit of money back for bills etc that go out and I have 1 pension which is with the company i work for. I don't have any ISA's as I closed those when i bought my property and used that money as a deposit to enable me to get a mortgage at a rate I could afford. Oh I also have a few shares of which i get some dividends from but that is all.

Kev

stardust09

kev2009 wrote: »

Hi all,

I'm in a similar position to the OP. My Mortgage is a little bit less than the OP and I have 2 more years to go on a 5 year fixed rate at 2.34%. My LTV is under 60%. With the potential for interest rates to start increasing and pushing mortgage rates up (I've heard rumours interest rates are expected to be 3-4% by then but obviously no guarantees, it coudl be higher or lower), I am considering making 2 over payments (1 ech year) over the next 2 years to try and potentially offset a rise in my monthly mortgage payments in 2 years time. However, maybe saving the money instead is a better option?

Kev

I had the same dilemma then I thought that as I can make overpayments freely at the end of the fixed term (i.e. no overpayment limit and/or penalties), I'd be better saving the money in something like a 5% regular saver (thanks, First Direct!) and then have a lump sum at the end of my fix, which I can then decide to either use to overpay the mortgage or save for other purposes once I know what the interest rates will be at the time. I've got 4 more years to go on a fixed rate mortgage of 1.99% and a debt of £53k.

Lomcevak

surreysaver wrote: »

I agree with this. A mortgage will be the cheapest long-term loan you will ever have, and it will often be cheaper to invest or save money in accounts that pay a higher amount of interest than you will save by paying off your mortgage. As as long as you are disciplined enough to manage your money in this fashion, that may well be a better option.

I agree with the comments about pensions / investing (and personally my mortgage overpayments come after fully using my pension allowance), but I think in these low-interest times we've tended to forget that an oppressive mortgage is a horrendous millstone if your personal circumstances change.

My view is that it needs a dispassionate assessment of personal circumstances - could you pay the mortgage at 4%? 6%? what if you lost your job? could you get another one quickly? at the same salary level? etc. Obviously that's different for each of us, but if it looks ugly then getting the mortgage under control might be a higher priority than the strictly-mathematical approach where with a good credit rating and <75% LTV you can borrow at rates below your reasonable expectation of investment returns.

Bleg

Putting the £500 per month into a savings account at daily interest at 5%

5% is an annual figure NOT daily

A 5% annual rate is the equivalent of approximately 0.0137% daily

Fatbritabroad

Lomcevak wrote: »

I agree with the comments about pensions / investing (and personally my mortgage overpayments come after fully using my pension allowance), but I think in these low-interest times we've tended to forget that an oppressive mortgage is a horrendous millstone if your personal circumstances change.

My view is that it needs a dispassionate assessment of personal circumstances - could you pay the mortgage at 4%? 6%? what if you lost your job? could you get another one quickly? at the same salary level? etc. Obviously that's different for each of us, but if it looks ugly then getting the mortgage under control might be a higher priority than the strictly-mathematical approach where with a good credit rating and <75% LTV you can borrow at rates below your reasonable expectation of investment returns.

Also good advice id say. I got divorced 4 years ago and had a mortgage at over 5 times my salary as i wanted to keep the house which for someone as Cautious as me was a horrendous amount of money. I took In lodgers and with pay rises and the equity Increase i am down to less than 3.5 times which ive now fixed for ten years so am hoping for interest rate increases .worst case in ten years time my mortgage will have gone down from 280k to 230 anyway and hopefully ill be on a similar wage or more! And will have enough saved up to make a serious dent in the debt or maybe even clear it completely. That is the plan any way

kev2009

stardust09 wrote: »

I had the same dilemma then I thought that as I can make overpayments freely at the end of the fixed term (i.e. no overpayment limit and/or penalties), I'd be better saving the money in something like a 5% regular saver (thanks, First Direct!) and then have a lump sum at the end of my fix, which I can then decide to either use to overpay the mortgage or save for other purposes once I know what the interest rates will be at the time. I've got 4 more years to go on a fixed rate mortgage of 1.99% and a debt of £53k.

Thanks stardust09 - My first regular saver has just come through from last year and i got less than i expected, i think because I paid in after the day i opened the account as opposed to the first of every month so the interest is effectively half what i thought i'd get

wow 53k - congrats! I wish i was at that figure.... I'm with Santander and I seem to recall that even there variable rate mortgage had a limit on what could overpay each year. My fixed has a max of 10% a year.

Kev

kev2009

Lomcevak wrote: »

I agree with the comments about pensions / investing (and personally my mortgage overpayments come after fully using my pension allowance), but I think in these low-interest times we've tended to forget that an oppressive mortgage is a horrendous millstone if your personal circumstances change.

My view is that it needs a dispassionate assessment of personal circumstances - could you pay the mortgage at 4%? 6%? what if you lost your job? could you get another one quickly? at the same salary level? etc. Obviously that's different for each of us, but if it looks ugly then getting the mortgage under control might be a higher priority than the strictly-mathematical approach where with a good credit rating and <75% LTV you can borrow at rates below your reasonable expectation of investment returns.

Thanks for your reply Lomcevak. I have been using a mortgage spreadsheet I downloaded and I've worked out IF (and its a big IF) I can pay 10% over payment next year and also 10% the following year before my fixed term runs out, interest rates could go up to around 4% and I would effectively be paying the same amount, if they went up to 6%, I believe I could afford it also, especially with potentially 2 more years of salary increase, fingers crossed.
If i lost my job, I have enough money in savings to pay for 1 year of which hopefully i get a new job soon but I doubt I will get the money I earn now as a lot of my industry is moving abroad and the pay has all dropped through out the sector, only people who got in before me are still on good money, mine isn't bad, don't get me wrong but I suspect if i did loose my job, i'd find it difficult to get a new job as my current employer doesn't really provide training and we have stopped using more commonly supported applications. I also wanted to fix for 10 years when I took my mortgage out as I thought well interest rates were fairly low so fix to avoid any increase but I was advised against the 10 year fix and to go for 5 year fix by a mortgage broker so i went with him recommendation. Next year i will see what need to do to get another fixed mortgage, I believe Santander may give m some offers but never done it before so will see. Hopefully they will be favourable and avoid the hassle of switching to someone else. I will probably fix again for 5 years and then re-assess where I am then. My thinking is to try get the mortgage down low like yourself and then when and if interest rates increase, it wont be a disaster for me, fingers crossed.

I have low LTV, less than 60%, possibly nearer to 50% LTV but i'm unsure what my property is worth as I've not had it valued and no similar house has been sold recently. I also have no bad credit or anything, all my credit cards and loans are and have always been paid as required.

Kev

YorkshireBoy

kev2009 wrote: »

My first regular saver has just come through from last year and i got less than i expected, i think because I paid in after the day i opened the account as opposed to the first of every month so the interest is effectively half what i thought i'd get

It sounds rather more like you don't realise how interest is calculated, as opposed to when you paid in.

I suspect you thought you'd get, say, 5% on the final balance. Sadly, or perhaps realistically, you only earn interest on the money when it's in the account.