Saving vs overpayments

Nisssha

Hi all,

I think I'm misunderstanding something and would love some input!

I have a fresh mortgage (2 months in), 2 years fixed rate at 1.29% with Santander. I'm allowed to make 10% overpayment a year of the outstanding balance at the beginning of the year.

Santander gave me whole 10% even though my mortgage started in May (which I did not expect, but it's nice to have the option).

My initial plan was to overpay as much as I can while still saving for 6 months EF monthly using 1.5% CHASE account.

Since then I realised I'll be better off saving that overpayment money as well and bulk paying at the end of the year, earning myself some interest. Which led me to the question:

Would it be better to save all overpayment money until fixed period is over and pay it all in then, with accrued interest? I read general advice that it's better to save if interest on the savings is higher (it is), but am I losing anything by not making overpayments in the fixed period? 

Thank you for reading, hope someone can clarify if my logic makes sense!

powerspowers

Your logic sounds good, it makes sense to take advantage of the higher interest savings account and I can’t see any downside to paying a lump at the end of the fix. You’d also have the flexibility to access your savings if neeeded (although that isn’t always a good think if you are tempted to spend them!). 

Good luck! 

Nisssha

Thank you for confirming! I have an additional saving account ready so the money should be safe until the time comes, EF is there to handle any additional spendings:)

Schwarzwald

Given the change in interest rates and the potential increase in rates at the end of your 2 years fixed, I would be wary of making any large overpayment and potentially rather preserve the cash liquidity until you know what the new rates will be in 2 years. The saving in interest until end of the fixed rate likely to be small, but having an additional cash buffer in case your monthly payments go up significantly might be wise.

having said that, I value liquidity and peace of mind by having a cash buffer more than potential interest savings

Nisssha

Thank you for this, it's a valid point to consider. I'm not especially worried, but it comes from my specific circumstances, which I probably should have included in my original post! My current payment is 520 (but I pay 600 regardless, just easier to budget round numbers) and the monthly overpayment I can make comfortably is 1000 on top of the 80. I make ~2600 monthly with lots of job security (permanent contract, specialist field which kept doing very well throught the pandemic, can work remotely, and I'm looking to change jobs next year cause my employer is not doing well enough with pay increases- of course I'll first sign with a new job before handing it my notice, but there is scope for a substantial raise).

I bought a small flat only (since it's a pretty expensive part of Surrey and I couldn't get deals for less than 30% loan to value because I was not living in the UK long enough at that point - just hit 3 years last month!), and I'm only supporting myself and my cat and I'm naturally cheap and frugal so no designer heels over here, lots of charity shopping - good for the envirment, and I care about that a lot!

No car, since I'm at a walking distance to my job. No other debts as well.

Plus I have a flat abroad which I'm looking to sell ASAP (couldn't do it yet without paying 20% tax on it, because of Brexit, but this should add about 80k to my overpayment at the end of the fix). And if things would get bad my parents are more than glad to help (which I do not want at all, but the safety net is there should I need it).

So given all of this privilege I have, I'm only considering this in terms of what is the best way to make/save most money:)