Save £500pm or overpay Mortgage?

Bridlington1

Even after the 40% tax has been taken off some non-ISA savings accounts still beat the fixed mortgage. The Natwest and RBS regular savers pay 3.25% gross, which is equivalent to 1.95% after the 40% tax is taken, beating the 1.64% mortgage. If my calculations serve me correctly a non-ISA savings account would need to pay over 2.733333...% to beat overpaying your mortgage, which can be achieved.

What_time_is_it

I'm in a similar position to the OP.
I have focussed on putting more into my DC pension, and then locked some away in a 1 year fix saver which offers a higher interest rate than my mortgage. Mortgage has 2 years left to run so I will reassess in around 18 month.

I'd recommend, in order:
1. extra DB pension (if possible)
2. increase DC pension through salary deductions (if possible)
3. savings account
4. mortgage overpayments

MEM62

Overpay your mortgage and the £500 per month saves you 1.64%.  Invest that in equities and a moderate-risk portfolio should return you 5% in the long term.  Even if the investment under-performs it is still likely to earn you more than you save by paying off your mortgage.

boomboomboom

MEM62 said:

Overpay your mortgage and the £500 per month saves you 1.64%.  Invest that in equities and a moderate-risk portfolio should return you 5% in the long term.  Even if the investment under-performs it is still likely to earn you more than you save by paying off your mortgage.

That’s a great way to think of it but I wouldn’t ‘see’ that 1.64% in my pocket until the mortgage is paid, ie: in a shorter period of time. And if I put it into the mortgage I don’t have access to it if I need it.

boomboomboom

What_time_is_it said:

I'm in a similar position to the OP.
I have focussed on putting more into my DC pension, and then locked some away in a 1 year fix saver which offers a higher interest rate than my mortgage. Mortgage has 2 years left to run so I will reassess in around 18 month.

I'd recommend, in order:
1. extra DB pension (if possible)
2. increase DC pension through salary deductions (if possible)
3. savings account
4. mortgage overpayments

I am probably being dim, what is DB and DC?

I already pay in pretty much the max £40k into a pension each year and so want have some of this cash accessible should it be needed, an emergency fund and/or usable savings for the odd thing here and there that may be unforeseen.

boomboomboom

Bridlington1 said:

Even after the 40% tax has been taken off some non-ISA savings accounts still beat the fixed mortgage. The Natwest and RBS regular savers pay 3.25% gross, which is equivalent to 1.95% after the 40% tax is taken, beating the 1.64% mortgage. If my calculations serve me correctly a non-ISA savings account would need to pay over 2.733333...% to beat overpaying your mortgage, which can be achieved.

Thanks @Bridlington1 for that % figure. I love the idea of the regular saver but want to be able to get to the money if needed.

I wonder if what I should do is save the £500pm for a year in a Cash ISA at ~1.3% then after a year move that lump sum into a fixed saver that allows lumps added in. Or keep the ISA balance and then save the £500pm there on into a fixed saver like you suggest.

Bridlington1

boomboomboom said:

Bridlington1 said:

Even after the 40% tax has been taken off some non-ISA savings accounts still beat the fixed mortgage. The Natwest and RBS regular savers pay 3.25% gross, which is equivalent to 1.95% after the 40% tax is taken, beating the 1.64% mortgage. If my calculations serve me correctly a non-ISA savings account would need to pay over 2.733333...% to beat overpaying your mortgage, which can be achieved.

Thanks @Bridlington1 for that % figure. I love the idea of the regular saver but want to be able to get to the money if needed.

I wonder if what I should do is save the £500pm for a year in a Cash ISA at ~1.3% then after a year move that lump sum into a fixed saver that allows lumps added in. Or keep the ISA balance and then save the £500pm there on into a fixed saver like you suggest.

A lot of regular savers are easy access. The Natwest/RBS regular savers allow unlimited, penalty-free withdrawals so you could access your money whenever it is needed if you went for them.

Failing that there are some high interest current accounts that beat the 2.733333....%. If you haven't had a Nationwide account before, you could open a FlexDirect account and get 5% (pre tax) interest on the first £1500 that you keep in the current account for the first year, then move it elsewhere when the interest rate drops (plus you could get a £125 switching incentive).

There's also the option of opening shorter fixed term savings accounts. I know a few people who are opening new 1Y fixes each time the rates increase so it's worth considering. The 1Y fixes are getting pretty close to the 2.7333333...% mark needed to be profitable post tax so give it another couple of months and this could be an option worth considering.

Albermarle

boomboomboom said:

What_time_is_it said:

I'm in a similar position to the OP.
I have focussed on putting more into my DC pension, and then locked some away in a 1 year fix saver which offers a higher interest rate than my mortgage. Mortgage has 2 years left to run so I will reassess in around 18 month.

I'd recommend, in order:
1. extra DB pension (if possible)
2. increase DC pension through salary deductions (if possible)
3. savings account
4. mortgage overpayments

I am probably being dim, what is DB and DC?

I already pay in pretty much the max £40k into a pension each year and so want have some of this cash accessible should it be needed, an emergency fund and/or usable savings for the odd thing here and there that may be unforeseen.

DB is a Defined Benefit pension ( often known as a final salary pension) which pays a guaranteed pension income , based on how many years you have worked and your salary. It is mainly for public sector workers nowadays.

DC is a Defined Contribution pension, where you build up a pot of invested money. It sounds like you have one of these.

With the max being added to your pension each year, have you paid much attention to how it is invested and your long term strategy for taking it?  This is most likely to be much more important than debating about 1% here or there on your mortgage.

Linton

boomboomboom said:

What_time_is_it said:

I'm in a similar position to the OP.
I have focussed on putting more into my DC pension, and then locked some away in a 1 year fix saver which offers a higher interest rate than my mortgage. Mortgage has 2 years left to run so I will reassess in around 18 month.

I'd recommend, in order:
1. extra DB pension (if possible)
2. increase DC pension through salary deductions (if possible)
3. savings account
4. mortgage overpayments

I am probably being dim, what is DB and DC?

I already pay in pretty much the max £40k into a pension each year and so want have some of this cash accessible should it be needed, an emergency fund and/or usable savings for the odd thing here and there that may be unforeseen.

DC is where you have a pension pot with investments so it is up to you to convert it to income when you retire.  You manage the risk.
DB is where you get a guaranteed income in retirement based on salary and years of service. There is little risk since the income is 90% under-written (100% if already in payment)  by the FSCS should the pension scheme be unable to meet its ocommitments.

boomboomboom

Albermarle said:

boomboomboom said:

What_time_is_it said:

I'm in a similar position to the OP.
I have focussed on putting more into my DC pension, and then locked some away in a 1 year fix saver which offers a higher interest rate than my mortgage. Mortgage has 2 years left to run so I will reassess in around 18 month.

I'd recommend, in order:
1. extra DB pension (if possible)
2. increase DC pension through salary deductions (if possible)
3. savings account
4. mortgage overpayments

I am probably being dim, what is DB and DC?

I already pay in pretty much the max £40k into a pension each year and so want have some of this cash accessible should it be needed, an emergency fund and/or usable savings for the odd thing here and there that may be unforeseen.

DB is a Defined Benefit pension ( often known as a final salary pension) which pays a guaranteed pension income , based on how many years you have worked and your salary. It is mainly for public sector workers nowadays.

DC is a Defined Contribution pension, where you build up a pot of invested money. It sounds like you have one of these.

With the max being added to your pension each year, have you paid much attention to how it is invested and your long term strategy for taking it?  This is most likely to be much more important than debating about 1% here or there on your mortgage.

He’s my pension is a DC. I had an IFA look at my pension and it’s appropriate for my risk appetite and it is designed to taper as I get close to the point of needing to use it. I currently plan to be paying into it for another 15 years. It’s a work-based pension and is with Scottish Widows.