Overpaying mortgage instead of saving.

JustAnotherSaver

Not necessarily totally instead of as we all need money aside. 
Wasn't sure which forum to put this in but since I'm coming from a - is saving worthwhile at the moment kind of angle, I'll drop it here. 

I read a piece last night about overpaying mortgages. I have to be honest, I hadn't actually paid it any mind until I read that but then I thought with rates as dire as they are, I need to see whether it's something that would be better for me right now. 

I suppose you can never have too much cash because even if you have 50k you may find yourself needing 51k for something - you have no crystal ball. With that said I think I'm in an OK position. I have emergency savings and also money in reserve. 

I'm thinking rather than keep putting in to cash savings and retirement (pension/LISA) whether it'd be better to overpay the mortgage or putting more in to retirement (or a split between the two). 

I know there's no black and white answer so I'm not looking for that, just for advice on the topic really, bit of feedback. Thanks. 

veryintrigued

Even when rates were much better, the feeling of paying ones mortgage off (early) surpassed any warm feeling that I was better (mathematically) saving.

Someone else put it that most of us will only pay your mortgage off once - yet financial disruption (loss of wage etc) could occur many times.

Good luck with whatever you decide.

george4064

I totally understand the lines of your thought, but a few questions I would ask to help you decide:

1. What’s your current mortgage LTV? (Key point is if you made OPs would it bring your LTZ down to a better ‘sleeve’?)

2. What’s your current mortgage interest rate? (As always compare your mortgage rate vs current savings rate, clearly if your mortgage rate was as high as like 5% then I think we’d all know what is the best option!)

As a final thought, have you considered taking out an offset mortgage? Offers good flexibility for someone who doesn’t necessarily need a mortgage but would prefer to have the flexibility to be able to take money out of the offset account at short notice (I would say classic example of taking large sum from offset account would be if markets had tanked and you were to invest the cash that would yield a better return than the offset mortgage rate).

MovingForwards

Work backwards to see what you need.

What is your state pension age, what age would you like to retire, how old are you now, what's the difference between them.

With my planning I looked at how much I spend each month on everything, then stripped out everything to do with the mortgage, work, commuting, savings. That was the amount I needed each month on retirement, based on today's prices.

Next I looked at savings.
Picked the most expensive thing on the property and am working towards having that amount of money.
Worked out how much other things will cost and started saving for them.

I looked at all my pensions and laughed.
Using a pension calculator I worked out how much I would need, based on my stripped down outgoings and what my current pensions would provide. Messed with the numbers to see what I need to put away.
I'm one of the lucky ones where only receiving SP wouldn't cause me any problems, but because I will have a good amount of savings (for me) in the bank I won't need to worry about things breaking / needing repairing and finding the money.

I've been overpaying my mortgage since before they took the first payment and am 6 months in to my 10 plan to clear it.

It really is a numbers game and things shouldn't be viewed in isolation, but as a collective.

Disclaimer - I'm approaching 45, sub-prime mortgage lender, at the start my pensions were worth nearly £11k in total not a year and my income has recently gone up to just over £21k. Because of working, reworking and working the numbers several times over, I'm now looking at retiring early having recently opened a SIPP, moved some of my old pensions over and adding to it each month. Plus I'm building savings to bridge the gap in case I'm able to retire before 58.

unkle

Also look at Offset mortgages

steampowered

It does not make sense to be overpaying the mortgage in an era of record low interest rates. You should consider using savings, aside from an emergency fund, to invest.

Offset mortgages are a nice idea in theory but generally not a good idea in practice, because there is less choice and the overall interest rate can be a bit higher.

Investing has a number of significant benefits:
- Investment returns are higher than the interest you will pay on a mortgage. A stock market tracker is expected to generate 7-8% per year over the longer term. A medium risk investment fund with a mix of stocks and bonds might generate 5-6% per year.

- If investing into a stocks & shares ISA, that is far more flexible, if you ever need to access the money. Money overpaid on the mortgage is tied up in the property and can only be accessed by remortgaging. Money in a S&S ISA can be accessed at any time, in whole or in part.

- If investing into a pension, you will get tax relief. 20% for basic rate tax payers, 40% for higher rate tax payers.

steampowered

MovingForwards said:
I'm one of the lucky ones where only receiving SP wouldn't cause me any problems, but because I will have a good amount of savings (for me) in the bank I won't need to worry about things breaking / needing repairing and finding the money.

Would you not be better off doing this:
- Pay into your pension.
- Receive an instant 20% uplift from the government.
- Withdraw from your pension during your retirement. As it sounds like you are going to be relying on the state pension (worth £9,100 per year if you qualify for the full state pension), you will be below the income tax threshold, meaning that withdrawals will be tax free.

Surely the 20% uplift you get from the government, plus the investment returns you get between now and retirement, are going to be bigger than the interest you are paying on your mortgage? If you say that you are going to rely on your savings, you might as well take a 20% boost from the government for doing that within a pension wrapper.

Or is your plan to start ploughing money into the pension once the mortgage is paid (which gets you the tax relief but a bit less investment returns since the money will be going in later)

grumiofoundation

If you are close to a LTV value band overpaying to jump up into that next band, thereby reducing the interest payment the whole loan can save you a lot of interest. the effective interest rate on that overpayment will be far higher than the 'headline' rate.

Other than that with current low interest rates investing  (whether pension, stocks and shares ISA, LISA) will very likely return more than the saving in interest if you are willing to take the risks. Obviously who knows what will happen with interest rates, if/when they shoot up at some point int he future you may want to have access to the money to overpay at that point.

MaxiRobriguez

JustAnotherSaver said:

I'm thinking that rather than keep putting in to cash savings and retirement (pension/LISA) whether it'd be better to overpay the mortgage or putting more in to retirement (or a split between the two). 

Putting money into your pension comes with a 20%-42% (depending on your scheme and pension vehicle) tax dodge, which is significantly better than avoiding 1-2% interest on the mortgage. 

Personal circumstances may dictate otherwise (for example, if you're close to pension max value) but for the vast majority of people they would be better off pushing as much money into the pension as possible even if it means underpaying the mortgage. This is especially true if you are close to retirement, whereby interest rate changes are likely to be limited in such a time frame which will mean that there is a better prospect that this approach will be more lucrative compared to someone doing it for decades and may, potentially, at some point face interest rates seen 40 odd years ago. 

Rule of thumb of where your money should go once you've built a decent emergency buffer:
- Pension
- S+S ISA
- Pay off mortgage
- Savings

Albermarle

Rule of thumb of where your money should go once you've built a decent emergency buffer:
- Pension
- S+S ISA
- Pay off mortgage
- Savings

This for most people is the rational advice , especially if you have secure employment.

However it is clear that for many people paying off the mortgage is an emotional goal and if you are in insecure employment it could also be the rational route.

Probably for most people in the end it will be a mixture of everything rather than either/or. 

eskbanker

MaxiRobriguez said:
Rule of thumb of where your money should go once you've built a decent emergency buffer:

- Pension
- S+S ISA
- Pay off mortgage
- Savings

There's also a reasonably well-structured process at https://ukpersonal.finance/flowchart/, which might suit those wanting planning assistance, although it doesn't go into the non-financial aspects of mortgage repayment....