Overpaying Mortgage or save for a lump sum?

Hi all,
We have money in Premium Bonds and have been told the rate is being slashed. We recently bought a house and have a mortgage for 192k on a 2 year fixed rate and we can pay off 10% each year. In my mortgage contract it says 'The overpayment will reduce the balance of the account and the interest due will be recalculated on the first of the following month', so am I right in thinking that our balance will be reduced by 19k if I pay the 10% towards the mortgage instead of leaving it in Premium Bonds?
If not would it be better for me to save a lump sum and when it comes to remortgaging throwing what we saved to get a better rate?
My plan is to leave 15k sitting in a easy access savings account as a contingency fund and look to save around 2k a month to pay off the mortgage quicker.


  • Retter
    Retter Posts: 22
    First Anniversary First Post
    There isn’t a simple answer to your question, just many factors which you probably have to make some calculations on and form some sort of judgement.

    If you pay off the 10% you are correct in that you will no longer pay interest on that sum. Work out what you would have paid on that amount over a given period of time. You also need to factor in what you would have (probably) earned on that amount if you had kept it in premium bonds. There’s a calculator on this site which gives you an idea of what you would expect to earn but it isn’t guaranteed. The more you have the better your chances of making money on premium bonds. The dividend rate is currently 1.4% but is dropping to 1% and I imagine your mortgage interest rate is higher than that. Personally I have had a better return than that on PBs this year but maybe I’m just lucky. 

    The judgement part of it comes into it when you think about what you are more comfortable with... do you want less debt or more easy access money available to you. Your LTV also needs to be factored in. Will reducing your mortgage debt by that amount give you access to significantly better deals?

    Lots of subjectivity but my view is that the less debt you have, the less interest you pay. Less interest = more money you have available to reduce the debt further.

  • Hi and thanks for getting back to me. Worked out via the calculator that we would need a return of 4% on savings to better paying off the mortgage early and that's without the new rates in PB's. At the moment we have a LTV of 80%, so if we take 10% a year off our 2 year fixed rate I'm guessing the market will open up better rates when we come to remortgage in August 2022?
    Thinking I would rather concentrate on using these 2 years to take the mortgage down and see what are options are when we remortgage.
  • getmore4less
    getmore4less Posts: 46,882
    Name Dropper First Anniversary First Post I've helped Parliament
    I treat PB as instant access, cash in arrives in account a few days later, I use the cash in after next draw option and the money arrives in the first week of the month.  
  • I'm looking to leave 15k in PB's and utilise the reinvest option. This will be our contingency fund and everything else will be driven towards paying off the mortgage early
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