Given savings rates are so low (~1.35%), does it make sense to overpay our mortgage (2%) instead?

arthurmauk

Hi all, given that savings rates are so low these days, does it make sense to overpay our mortgage instead as that's a higher rate than the highest savings rates on the market at the moment? Thanks in advance!

LobsterMemory

Yes

george4064

This same question has been asked multiple times before, just search for threads in Savings & Investments with 'overpay' in the thread title. e.g. https://forums.moneysavingexpert.com/search?adv=1&search=&title=overpay&author=&cat=17&tags=&comment_c=1&discussion_poll=1&within=1+month&date=

Few things to think about;

1. How do the interest rates stack up?
2. How would overpaying your mortgage affect your LTV? If overpaying would bring you up to a better LTV and hence better terms when you remortgage than you should factor this in.
3. How much flexibility do you want? Overpaying your mortgage makes its very difficult/costly to take money 'out' via equity release or remortgaging, whereas if you simply saved the cash its much more liquid for your own use.

Alternatively you can just do a bit of both, so lets say you're saving £1,000 per month perhaps £500 to savings and £500 to mortgage overpayment.

Linton

For the long term put the money into investments - eg your pensions.  You could reasonably expect a significantly more than 2% return. 

AnotherJoe

What Linton said, the third option, pension is likely to be better than both. 

Prism

The mortgage is one of the last things I would pay off after other debts, cash emergency fund, SIPP, S&S ISAs

Thrugelmir

Most certainly yes. Particularly if your job / career is at risk in the longer term. Then repaying the mortgage quicker is one way of having peace of mind and security. In essence a form of insurance. 

Stubod

..each to their own, and I am sure there are very good reasons for not paying it off, but for us it was always the priority to pay the mortgage off ASAP. Although this was the only debt we had. It was just to give us piece of mind as always hated being in debt for anything.

steampowered

The main options for long term savings are as follows:

1) Pension. Your investment receives an instant 20% or 40% uplift due to tax relief. You receive additional returns tax free based on the stock market (average  6-8% per year).

2) Stocks & Shares ISA. You receive additional returns tax free based on the stock market (average 6-8% per year - or lower if you want to invest in lower volatility investments such as bonds).

3) Mortgage. You save c. 2%. Possibly a bit more if you are about to remortgage and the overpayment pushes you into a lower LTV band.

4) Cash savings. Virtually nothing.

As you will see the long term returns on pension or stocks & shares ISA investments are highly likely to generate superior returns in  the long term than overpaying the mortgage.

ruperts

Savings rates are always lower than mortgage rates, are they not? Otherwise, simplistically, banks wouldn't be making any money.

chucknorris

arthurmauk said:

Hi all, given that savings rates are so low these days, does it make sense to overpay our mortgage instead as that's a higher rate than the highest savings rates on the market at the moment? Thanks in advance!

I have not had anything significant in savings for many years, dividend income rates are so much higher, and taxed less too.