Saving for lump sum 11 January 2022 at 12:16PM edited 11 January 2022 at 1:03PM in Mortgage-free wannabe 7 replies 141 views

danoid

I was out of work for way too long recently and my biggest worry was mortgage payments.

My wife was working and my savings meant we just paid the bills as usual with no issue other than me seeing all my savings dwindle.

I now have a job and I want to save as much as possible to get the mortgage paid off as that is by far the most expensive monthly outgoing.

I’ve never liked spending money for some reason so I can save very easily.

August this year we’ll be remortgaging as our deal comes to an end and most likely get another 5 year fixed, it is then I want to pay the mortgage off as a lump sum in 2027.

I know I’m being ambitious as we have £222k left on the mortgage, but as it roughly goes down £6k a year in 2027 give or take should be £192k left, which is exactly what we need to save between us in 5 years (most likely 6 years tbh).

Now the question, what are the cons of saving for a lump sum? I can’t think of any

A con of overpayment is should anything happen you don’t have a pot to fall back to and the more you pay the mortgage off the less you can overpay which is restrictive, so I’m not really too interested in that

thanks

Moneyminded

Saving and paying off the mortgage in one lump sum means that you won't be saving the mortgage interest on that amount. Whilst you might earn a pittance in interest in a savings account it is unlikely to equal the interest on your mortgage so essentially waiting to make 1 lump sum will cost you more in interest. 

If you are worried about having a safety net should circumstances change in the next 5 years why not ensure you have a good emergency fund of 6 months expenses to tide you over. Once this is saved I personally be sending over payments to my mortgage as often as possible in order to reduce the interest paid (up to any over payment limit). If there are early repayment charges or penalties of any sort it is worth factoring that in also. Most mortgage companies allow you to make 10% over payments per year without penalty so I would be aiming for this and looking to avoid any early repayment charges. 

It's all about choice and personal preference though. 

sabsob

Our mortgage (when it comes through) will tie us to 10% penalty-free overpayment, with a penalty on the rest, for two years, so our cunning plan is to overpay those 10% for the two years, and as soon as the fixed term period ends, throw any surplus at it. It will mean we should be able to build up at least a bit of an emergency fund, and when the time comes, we might decide to hold some back. I totally get needing the knowledge that there will be funds for emergencies - good luck

danoid

Moneyminded said:

Saving and paying off the mortgage in one lump sum means that you won't be saving the mortgage interest on that amount. Whilst you might earn a pittance in interest in a savings account it is unlikely to equal the interest on your mortgage so essentially waiting to make 1 lump sum will cost you more in interest. 

If you are worried about having a safety net should circumstances change in the next 5 years why not ensure you have a good emergency fund of 6 months expenses to tide you over. Once this is saved I personally be sending over payments to my mortgage as often as possible in order to reduce the interest paid (up to any over payment limit). If there are early repayment charges or penalties of any sort it is worth factoring that in also. Most mortgage companies allow you to make 10% over payments per year without penalty so I would be aiming for this and looking to avoid any early repayment charges. 

It's all about choice and personal preference though. 

Is it a case of swings and roundabouts in terms of interest? 

For instance if I can save enough to pay off in 5 years, then I’d have enough to lump sum pay and paid mortgage 20 years earlier, which would mean a huge saving on interest as well

The problem with overpayment in my mind is the 10%, it’s fine at the moment as I have over £200k left, but when my mortgage gets down to £100k I could only overpay £10k and that decreases each year and drags on.

edinburgher

From frequenting this forum, I've come to learn there's no "right" way to pay off your mortgage, it's whatever works for you and your unique circumstances.

There is, however, a mathematically optimal way to pay off your mortgage if you have plenty of excess income to save and it's not to save a lump sum. Say you have a mortgage rate of 2% and receive savings interest of 0.5%. Making overpayments is clearly better for your bank balance as 2% is bigger than 0.5%. How much better depends on the mortgage and savings interest rates that you are talking about and can easily be calculated using some of the free tools on this website.

While the amount that you can repay with a 10% annual penalty free overpayment allowance will reduce each time you pay off 10%, there's nothing to stop you saving at the same time in the highest interest rate savings accounts that you can find. Keep paying the 10% chunks off and one day your savings balance will exceed the mortgage balance. At that point you're best to let your current mortgage rate run its course and then repay once you move onto the bank's variable rate.

You might want to consider your pension provision as part of these sums too - having low outgoings is great, but you'll need an income in retirement too

South_coast

danoid said:

The problem with overpayment in my mind is the 10%, it’s fine at the moment as I have over £200k left, but when my mortgage gets down to £100k I could only overpay £10k and that decreases each year and drags on.

You're only talking about a 5-year timeframe, so I don't think it will be as restrictive as you are thinking (certainly not for a few years anyway). No harm in paying the 10%, plus save for a lump sum in 2027 as well, as others have suggested. That way you've got savings and you've made the maximum interest saving on the mortgage.

OR, if you're worried you won't be able to OP as much as you'd like, you could always check out what the fees would be if you exceeded your OP allowance - I paid the ERC's on mine, as my mortgage was relatively small and the 10% was too restrictive for me. I didn't enjoy paying the fees, but at £10/£20/£30 per £1000 (depending on how long was left of the fix) it was worth it to save on the 20 years of interest I should have paid

powerspowers

Just given this advice elsewhere!

My bank does a fixed term with unlimited overpayment. It’s a tad more interest but not stupid. I’d see if that’s an option and do the maths to work out if it’s cheaper to pay the charges. You can do a mix as well, OP your max and then save to be mortgage neutral. 

I second the advice about looking at your  pension provision

jimjames

danoid said:

Moneyminded said:

Saving and paying off the mortgage in one lump sum means that you won't be saving the mortgage interest on that amount. Whilst you might earn a pittance in interest in a savings account it is unlikely to equal the interest on your mortgage so essentially waiting to make 1 lump sum will cost you more in interest. 

If you are worried about having a safety net should circumstances change in the next 5 years why not ensure you have a good emergency fund of 6 months expenses to tide you over. Once this is saved I personally be sending over payments to my mortgage as often as possible in order to reduce the interest paid (up to any over payment limit). If there are early repayment charges or penalties of any sort it is worth factoring that in also. Most mortgage companies allow you to make 10% over payments per year without penalty so I would be aiming for this and looking to avoid any early repayment charges. 

It's all about choice and personal preference though. 

Is it a case of swings and roundabouts in terms of interest? 

For instance if I can save enough to pay off in 5 years, then I’d have enough to lump sum pay and paid mortgage 20 years earlier, which would mean a huge saving on interest as well

The problem with overpayment in my mind is the 10%, it’s fine at the moment as I have over £200k left, but when my mortgage gets down to £100k I could only overpay £10k and that decreases each year and drags on.

Check the terms of the mortgage, ours is 10% of the original balance so now we're near the end it's a very substantial part of the balance that can be paid off each year.

In terms of overpayments some people (like me) invest the money rather than overpaying and then end up with a pot of money that they could clear the mortgage with if they wanted. Investments should grow faster than the mortgage rate so long term should be better but it's not guaranteed and some people prefer to know/see that the mortgage is decreasing.