Overpay mortgage rather than save now?

AdmanPea

Hi all

Nationwide have written to me to let me know my paltry triple access 1 year savings account has gone from 1.10% to 0.4%. I just do not see the point anymore! I have over 6 months in expenses saved in the account currently but I am just adding to it without real thought at present. 

Given the situation, and the fact that my mortgage interest rate is beyond this, would it just be best to overpay the mortgage now? I am only saving at this point to potentially move into a house along the line anyway. So, I think I'm right in saying this would be better achieved by mortgage overpayment at this point?

Alistair31

Assuming you have sufficient funds set aside for rainy days and your intention with further savings is to go towards a house move then I think your logic is sound, overpay the mortgage if you can’t beat the rate you are paying on the mortgage in savings accounts.

AdmanPea

Thanks both. My plan is to leave the lump sum as is but double mortgage payments instead of putting that into the savings account from now on, at least until things change (long way away)

kinger101

Sounds likes a plan, provided you don't exceed the ERC.  Some lenders and mortgage products will allow you to use the overpayment as a mortgage holiday anyway.  If this is the case, it would extend the cashflow relative to your 6 month expense buffer anyway.

Alexland

How is your pension looking? Is drawing this spare income causing you to pay higher rate tax?

Albermarle

The above advice is sound as long as you are separately contributing to a pension, especially if you have a workplace pension where the employer makes a contribution. 

Thrugelmir

At the current time reducing the mortgage balance is a sound strategy. A guaranteed win. 

AdmanPea

I have a workplace pension that I pay into. It's currently a defined scheme with final salary but by time I retire it will at least be career average! Yeah, I wasn't sure about reducing term or overpaying but I suppose just overpaying gives you flexibility to change if your circumstances change.

I've looked at Dave Ramsey stuff and it's the 15% pension stuff that I'm always unsure on. Like, in his eyes, does my workplace scheme count or am I supposed (according to him) be putting more money into something as well?

Alexland

AdmanPea said:

I've looked at Dave Ramsey stuff and it's the 15% pension stuff that I'm always unsure on. Like, in his eyes, does my workplace scheme count or am I supposed (according to him) be putting more money into something as well?

I doubt Dave Ramsey is familiar with how to optimise your UK tax position and while it's entertaining similar to Jeremy Kyle he seems to focus on people in extreme often unfortunate situations.

If you have a defined benefit pension then consider if it's likely to pay out enough to maintain your desired retirement lifestyle and if it will be available to draw when you want to retire. If not then buying a higher level of outcome (if available) and/or a personal pension might be appropriate.

DiggerUK

As we can see  from the economic storm we are in, paying down debt was always the wisest move.
Fannying around stoozing on savings rates that gave a marginal amount over the mortgage rate is ok, providing at times like this, those savings then go immediately to pay down the mortgage.
There's no need to have an emergency fund at this time, cheap credit card borrowings can cover for emergencies. If access to cheap loans evaporates then rebuild the emergency fund..._ 

bowlhead99

DiggerUK said:

There's no need to have an emergency fund at this time, cheap credit card borrowings can cover for emergencies. If access to cheap loans evaporates then rebuild the emergency fund..._ 

With the unemployment rate rising and businesses closing, the idea that there's no longer a need to have an 'emergency fund' seems a bit reckless. A typical credit card only offers 30-56 days free credit on a purchase before charging you 15-30% APR. And a number of essentials such a rent or mortgage can't be purchased with a credit card (or incur  cash-advance fees).

The advice to rebuild the emergency fund only 'if access to cheap loans evaporates' would seem to be shutting the door after the horse has bolted. It is somewhat harder to rebuild an emergency fund from scratch if cheap loans and credit card transfers have already evaporated, especially if the reason they evaporated for you was a declining credit environment combined with you losing your job or income.

To the OP,  six months' expenses as an emergency fund seems adequate especially if mortgage overpayments build up a pot that can be used to take mortgage holidays or allow reduced payments going forward (Nationwide does this for example) while saving your mortgage interest in the meantime. I wouldn't go as far as to say that 'there is no need to have an emergency fund at this time', which sounds like it goes against all conventional wisdom.