Over pay mortgage or save?

Anna1912

Hi,
We are thinking of buying a house. However as we live in a flat with no garden, it is a slow seller.
So, we are in the position where we could put money away for pitiful % or we could overpay our mortgage.
We have some money set aside for moving costs and legal expenses and emergencies.

Do you think it is prudent policy or should we accumulate more cash?

MovingForwards

This question pops up almost daily across this section, the mortgage board, savings board and even the pension board.

What is the ultimate aim for this cash? 

AdrianC

So long as you've got a basic cushion of cash saved up, it's all about looking at the interest rates.

Let's say you're paying 3% on your mortgage interest. Every £1,000 borrowed costs you £30/year from your taxed income, so £37.50 (assuming basic rate) from pre-tax.
Let's say you're getting 1%, pre-tax, on your savings... Every £1,000 saved earns you £10/year pre-tax, so £8 taxed.

Paying £1,000 off your mortgage instead of putting it into a savings account, is saving you more than £20/year out of your pocket.

davilown

With such small returns in normal savings, and the still somewhat uncertainty in the country economically wise, it’s a tough choice.

For me, I’d want to build up a nice cushion should jobs go. However after that, paying the mortgage off would be my priority as I just don’t want to owe anyone money.

Obviously, there are so many other factors to thinks about as well - inflation/deflation etc.

If it’s the difference of £30 pm extra in interest earned in savings then I would still over paying the mortgage. That’s only 50% max of a meal out a month.

Anna1912

Buying the house ultimately, we would need to pay quite a large stamp duty.

Cakeguts

Pay off the mortgage because your flat is difficult to sell so you are going to have to accept a lower offer for it.  This will reduce the size of the deposit on your next property so in order to increase it you need to save as much money as possible.  The way to do that is to reduce the interest payments on your mortgage and that is by paying off the mortgage. You also need some savings anyway so do both.

Atomix

Also to consider.... a lot of mortgages will allow you to overpay a certain amount, and in the future it will either reduce your mortgage amount/and length, or if the worst happens, you can use the overpayed money as a 'mortgage holiday' - i think this gets written off when you get to the end of your term.

Salemicus

AdrianC said:

So long as you've got a basic cushion of cash saved up, it's all about looking at the interest rates.

Let's say you're paying 3% on your mortgage interest. Every £1,000 borrowed costs you £30/year from your taxed income, so £37.50 (assuming basic rate) from pre-tax.
Let's say you're getting 1%, pre-tax, on your savings... Every £1,000 saved earns you £10/year pre-tax, so £8 taxed.

Paying £1,000 off your mortgage instead of putting it into a savings account, is saving you more than £20/year out of your pocket.

You don't pay tax on your first £1000/year of savings interest, so this isn't quite right, but the general conclusion is correct.