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

grumiofoundation

ruperts said:

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

Plenty of fixed rate mortgages for <1.5% plenty of fixed rate savings >1.5%. 

george4064

ruperts said:

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

Not always. But you are right in pointing out that there isn't much profit margin for banks at the moment thanks to ultra-low interest rates, its harder to take a cut for yourself when rates are sub 1% than if rates were around 5%!

Also remember that banks have access to a lot of capital that customers hold with them that are paying either no interest rate or sub 0.2%! That provides the bank with cheap capital which they can subsequently loan out for much more than that, also banks work on capital ratios.

For example a bank might have a deposit of £1,000 but they are allowed to loan out a multiple of x2, so every £1,000 increase in deposits results in a further £2,000 available for loaning which makes either side of the interest rates less important because a bank could have a deposit of £1,000 paying 2% and on the other side a loan of £2,000 where the customer is paying only 1%. Since both are paying £20 per annum in interest then the bank is breaking even.

AnotherJoe

Stubod said:

..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.

The problem with that is that it misses a non-obvious but large debt, the debt to your future self in the  form of a pension you owe that person,
 Everyone is familiar with the concept of paying offa debt, but you should regard your pension as a debt to your future self that needs to be paid off by the time you retire. 

The fact it's accumulated and owed to yourself  fools people into thinking it's not a debt like a mortage, but it's just as real and most likely larger 

Stubod

The problem with that is that it misses a non-obvious but large debt, the debt to your future self in the  form of a pension you owe that person,

 Everyone is familiar with the concept of paying offa debt, but you should regard your pension as a debt to your future self that needs to be paid off by the time you retire. 

The fact it's accumulated and owed to yourself  fools people into thinking it's not a debt like a mortage, but it's just as real and most likely larger 

Don't disagree, but when we had our mortgage the interest rates were over 10% and as soon as we had paid it off we used the money to put into ISA's instead, just made more sense to us at that time.

ian1246

Pension has to be a priority, but assuming thats already reasonably provisioned for, its up to you. I also face a  similar dilemma - i ve got a public sector pension (30years old) & wife (28) is soon putting £300+ in her NEST pot a month, plus employer & tax rebate contributions. On top of that she's accumulated around 5 years in a teaching assistant pension.

So pension is reasonably sorted. We could chuck more money into it... but the thing is, we re trying to start a family. Overpaying the mortgage makes great sense in this context - more equity to put towards a larger house, or if we stay where we are, the option to reduce monthly payments if things become tight later on with children.

Then there is the ISA question - in my job, generally i have to retire by 60. That means ideally Wife retires at 58.... in such circumstances, ideally we d like to leave her pension alone to continue to be invested for another 10 years. That means the future equivalent of a minimum of £60,000 of savings in todays money (£6000 per year) for her to have as disposable income (my pension would cover the basics)... again: the earlier we invest, the easier it will be to hit this.

But it all comes down to priority. Only you can make that decision. For us it will be overpaying in the future... but once we are in our "forever" home, likely go back to being pension & ISA!

world_without_end

AnotherJoe said:

a non-obvious but large debt, the debt to your future self in the  form of a pension you owe that person,
 Everyone is familiar with the concept of paying offa debt, but you should regard your pension as a debt to your future self that needs to be paid off by the time you retire. 

The fact it's accumulated and owed to yourself  fools people into thinking it's not a debt like a mortage, but it's just as real and most likely larger 

To be picky, it's an obligation of some sort, but definitely not a debt. A debt is when you owe specific amounts, on specific dates, and if you can't/won't pay, there are consequences such as having to pay specific larger amounts (in penalties or interest) or being taken to court and having your assets seized. I don't think my future self will be taking me to court for not saving enough in a pension, and afterwards perhaps sending the bailiffs round!

It would be more accurate to say that my future self has an equity interest in my assets. I don't owe my future self any specific amount, but we will both have to make do with the assets I've accumulated, and if they're not enough, we'll both be poor.

Similarly for the cost of having children. Like those silly articles saying having a child costs £250,000 or whatever. Clearly, if you don't have that kind of money, you won't be spending it on a child. But you and your child will both have to share whatever assets and resources you do have. So again, it's more like an equity interest.

Thrugelmir

The Bank of the England under the Term Lending Scheme has provided mortgage lenders with £127 billion at BOE base rate. The scheme closed to new borrowing in February 2018. Borrowers have 4 years to repay the funds borrowed, i.e. by February 2022. The BOE's aim was to pass through low interest rates directly to borrowers. Explains the plethora of low 2 year fixed term rates available. 

Just one of the many schemes that the BOE has used to provide liquidity to the financial markets since the GFC of 2008. The effects of which linger on and on.