Over pay or save

Mattg34

Hello MSE,

I’m curious as to what is the best option for me and my partner. I bought a property last year and got a mortgage of 190k over 35 years.

However I have recently come into a new job and have around 10-20k extra cash a year. Obviously this is a massive amount and I am now looking at upgrading properties.

So my question is, I plan to upgrade in about 2 years, is it better to save my extra money for the deposit or to over pay my mortgage which I can do without fees up to 10%

Kind regards

grumiofoundation

If you are looking at selling the property I don't see any point overpaying the mortgage (assuming interest rate of mortgage similar to interest rate you can get in a bank), if you are going to use the equity in you current property towards the deposit it will make no difference either way?

Mattg34

This is what I was assuming, that it would not making any real difference between the two?

Thank you for your reply

Suffolk_lass

I would do both. Your savings could be redeployed in an emergency, whereas your mortgage is equity within the property that materialises when you move but once paid, is gone (as it were).

If you are saving, make sure that the interest rates you are achieving are as good as possible - and that you are diligent about swapping these when the time-limited premium rates fall away. Most current account or regular savers that offer high rates have a ceiling amount they pay the rate for (eg TSB £1500) and many have conditions for payments in and out nnxdd and minimum pay-in per month (Santander, eg). Lots are time-bound (eg Nationwide) or are 1 year regular savers that pay 5% - (which permit only £250 a month in each and is really 2.5% over the year.

I would be looking to determine how much of my monthly mortgage payment is interest and comparing this with the income I am receiving through the various savings products - it is a good way of seeing the difference that over-paying makes to the total cost of your mortgage, were it to run its term.

You could of course, start saving for financial security or FIRE (Financial Independence, retire early) and there are lots of inspirational examples of people doing this, with many blogs available to see how they achieved this in unexpectedly short times. - Putting more money into your pension (if you can) is banking on your future and attracts tax relief (many increase pension contributions to stop them hitting the next tax rate), but at the start of a 35 year mortgage term that possibly feels a bit far away for now.

If your employer offers a DB (defined benefit) pension scheme you should consider moving any other pension pots into it if allowed (usually a 6-12 month limit for this).

penners324

Up your pension contributions quite a bit. Through your work pension.
Probably just increase the %age of contributions if it's an auto enrollment pension.

Mattg34

Sadly I am in a pension that does not allow increased payments

Wail

There will be costs for moving as well, so a bit of spare cash is not unhelpful.

amnblog

With that kind of income you are presumably a 40% tax payer.

Save funds and you get 60% of the interest net.

Repay debt and you get 100% of the interest saving.

Multiply your mortgage interest rate by 1.7%. If you can find a savings account that pays that I will be surprised.

Suffolk_lass

Mattg34 wrote: »

Sadly I am in a pension that does not allow increased payments

You could start a private one - while you would not receive the employer contribution you can still get tax relief so a 20%/40%/45% refund at the moment (Autumn budget forecasts always talk about this reducing to basic rate relief)