Overpaying Mortgage VS Savings

MM2002

Interesting reading. Many people with the same dilemma I'm guessing (Myself included)

I have a 147k mortgage split into 2 parts.(house value 440k ish)
37k on lifetime variable tracker currently at 1.2% (210 per month)
111k on 10 year fixed(Just taken) at 2.39%(17 year term)

Now I can overpay 5% max a month on the 111k, and have the funds from inheritance to do so, but after much consideration have decided to put the inheritance into S&S isa's,3 x 5% bank accounts(nationwide) and 4 x 3% accounts(tesco)

The way I see it, anything that offers more than 2.39% interest is more beneficial that paying off the mortgage. I just need to note that in ten years pay off £8627 that would have been saved by paying annual overpayments, and hopefully either pay more or bag the profits.
I would then have about 2 years left on the mortgage, and hopefully the funds to pay off in full if int rates have gone nuts!

Thrugelmir

MM2002 wrote: »

The way I see it, anything that offers more than 2.39% interest is more beneficial that paying off the mortgage.

Providing that with S&S (for example) you also accept that your capital is potentially at risk.

Bravepants

eskbanker wrote: »

You're not the first and won't be the last to misrepresent regular saver interest as being half the published interest rate on the whole closing balance, but to me it's always far more logical, realistic and helpful to consider it as the full interest rate but on half the final balance, as that's the average over the year.

I'll give the :beer: analogy a miss, it's still :coffee: time for me....

Maybe my terminology is not quite correct, but that's all I was saying really. So thank you.

kidmugsy

Bravepants wrote: »

It doesn't matter what you say, people are still caught out by it.

That's because "people" are, by and large, really rather mutton-headed when it comes to doing arithmetic or thinking things through.

For example, some people are moronic enough to claim simultaneously that (i) regular saver accounts are rotten value for the customer and excellent value for the provider, while (ii) complaining that the amount they can subscribe to the account is limited by the provider.

ViolaLass

Bravepants wrote: »

If I drink a pint a day from Monday to Friday, I will get 5% ABV on Monday from 1 pint, on Tuesday from 1 pint, on Wednesday from 1 pint etc. Previous days' pints don't contribute to the actual additional alcohol in my system; each of the previous pints I have drunk do not add more alcohol. You can quote rates left right and centre but what is important is the actual amount of alcohol in my system.


However, monthly payments do accrue interest and in subsequent months I add a new payment, the previous months' accrue interest too. This is not the same as your analogy.


My point is that you are only allowed to pay in a relatively small amount monthly. You are not FREE to pay in as much as you want and get the 5% interest rate across the total that you have available to pay in. This is fine. But the actual cash you get back in interest (not the rate, but the cash) is equivalent to about 2.7% on the full amount that you have available to drip feed in.

If you have the money available at the beginning of the year, you're welcome to use something other than a Regular Saver (which works on the principle of you paying in money each month, presumably as you earn it).

Zero_Sum

Bravepants wrote: »

If I drink a pint a day from Monday to Friday, I will get 5% ABV on Monday from 1 pint, on Tuesday from 1 pint, on Wednesday from 1 pint etc. Previous days' pints don't contribute to the actual additional alcohol in my system; each of the previous pints I have drunk do not add more alcohol. You can quote rates left right and centre but what is important is the actual amount of alcohol in my system.


However, monthly payments do accrue interest and in subsequent months I add a new payment, the previous months' accrue interest too. This is not the same as your analogy.


My point is that you are only allowed to pay in a relatively small amount monthly. You are not FREE to pay in as much as you want and get the 5% interest rate across the total that you have available to pay in. This is fine. But the actual cash you get back in interest (not the rate, but the cash) is equivalent to about 2.7% on the full amount that you have available to drip feed in.

Regular savers are just like over paying on a fixed rate mortgage. If i can afford to overpay by £250 pcm but dont have the £3k lump sum, they dont reduce my mortgage interest based on money ive not yet over paid.

A 5% regular saver pays 5% AER on the money have in the bank each day.
I find it difficult how people cant grasp this

adindas

Something does not add up here.

How come mortgage of 1.85% is better than saving @5% ??? :huh::huh::huh:
You do not even need to calcualte to know that saving @ 5% must be better than overpaying the mprtgage of very low interest of 1.85%.

Where does the figure of £18,268 come from by overpaying £500 a month in your mortgage ??

You might need to revisit your over payment calculator. ? It is highly likely you double count it.

The comparison figure for 2 year is more likely £12,216 (£18,268 in interest cost of mortgage) vs £12,646 (5% interest earning in RS) so you will be better off in saving by £430.

Simple Rough calculation (annual basis rather than monthly basis, no compounding to simplify the calculation):

- The annual Interest cost of £6,000 Mortgage debt at 1.85% is £111 two year will be £222.
- If you have £6.000 savings at 5%, Annual interest earned is: £300 two year will be £600.

Put it into saving of 5% you will be better off by aproximately £378

Zero_Sum

adindas wrote: »

Something does not add up here.

How come mortgage of 1.85% is better than saving @5% ??? :huh::huh::huh:
You do not even need to calcualte to know that saving @ 5% must be better than overpaying the mprtgage of very low interest of 1.85%.

Where does the figure of £18,268 come from by overpaying £500 a month in your mortgage ??

You might need to revisit your over payment calculator. ? It is highly likely you double count it.

The comparison figure for 2 year is more likely £12,216 (£18,268 in interest cost of mortgage) vs £12,646 (5% interest earning in RS) so you will be better off in saving by £430.

Simple Rough calculation (annual basis rather than monthly basis, no compounding to simplify the calculation):

- The annual Interest cost of £6,000 Mortgage debt at 1.85% is £111 two year will be £222.
- If you have £6.000 savings at 5%, Annual interest earned is: £300 two year will be £600.

Put it into saving of 5% you will be better off by aproximately £378

Who said it was?
What you have remember is regular savers are only 1 year deals. With mortgage overpayments, the savings are compounded over the lifetime over the mortgage.

Id use a 1 year regular saver instead of overpaying, then when the saving account ends, chuck the whole balance on the mortgage

In your example you'd get £300 in year 1 & £300 in year 2 as you'd have to start from zero for savings.

On mortgage you'd save £111 in year 1 then £225 in year 2

adindas

Zero_Sum wrote: »

Who said it was?

Well, see the OP original Post #1

Zero_Sum wrote: »

What you have remember is regular savers are only 1 year deals. With mortgage overpayments, the savings are compounded over the lifetime over the mortgage.

Same with saving as long as you still have that money in saving earning that interest over the lifetime of mortgage, is the interest rate not compounding during that period ???

You will need to compare it at the same time span.

As long as you could still get the saving interest higher than the intetrest you would have saved in the the mortgage, you will always be better off with saving.

adindas

Here we go again.

It is very naive to assume that the bank will pay you interest for the money ypu have not put into saving.

Bravepants wrote: »

It's all very well advertising an "interest rate" of 5%, but they limit how much you can pay in so they don't pay the cash equivalent of a year's worth of interest at 5% on all of the money that you COULD pay in...one HAS to drip feed. They advertise the high interest rate to attract customers, and MoneySaving Expert agrees.

From our very own website:

https://www.moneysavingexpert.com/savings/best-regular-savings-accounts

From the paragraph titled: How can they pay such huge interest rates?

It doesn't matter what you say, people are still caught out by it as evidenced in this thread.

It would be better and clearer if they said, "Pay in your £6k, leave it there for a year and we'll give you 2.7% at the end of the year"...the banks COULD say and do that couldn't they?

But no, 5% looks better on their websites as it's a huge eye catching rate, and some poeple just don't get the implications of being forced to drip feed.

Personally I cannot wait for the day that all this rubbish stops. There used to be a time when you put what you want into a savings account and got the advertised rate for everything that was put in. Nowadays it's all about dividing your money up into £3k chunks and having multiple bank accounts, drip fed from a central point. It's complicated, a hassle and doesn't lend itself to the simple life.