To overpay mortgage or to increase savings?

B0bbyEwing

My wife sent me a link this week about overpaying mortgages with rates increasing & asked whether we should. Problem is, I don't really know what the long term best financial answer is so am hoping for a little guidance.

Current mortgage situation:


Our existing deal ends September 2023.
We can move this mortgage, without penalty:
May 2023 - if staying with Nationwide
1st September 2023 - if moving to another provider.
An early repayment charge if we leave before this would be approx. £1,600 they say. 

Currently we do not overpay but with reports in the news of rate increases, I wonder if it'd be a good idea. I imagine it's always a good idea but as we don't have an infinite supply of cash, it will be at the expense of something else. 

That something else is likely to be the extra that goes in to our SIPP or LISA.

Currently we set some money aside for cash savings, we have a 6 month emergency savings pot, we set aside for a LISA to max out at £4k per year, we put in to our SIPP and then anything extra that's left over if you will will get put in to the SIPP at the end of the year. 

The idea behind this is we both want to retire ASAP and our pots are not that large as it is due to late start and small contributions. 

So what we're asking ourselves now really is whether we'll be better off letting it run its course, renewing in May/September on another 2-5yr fixed deal (or 10? I've just seen as an option for not massively more than the 5yr) and any spare cash we may have we just continue as we are - throwing it in to the SIPP at the end of the tax year.

Or whether we leave the SIPP & LISA provisions as they are and any extra cash that may be available at the end of the tax year gets thrown at the mortgage (assuming we stay within their overpaying threshold, which we will).

Or ending the mortgage early & doing one of the above with the spare cash at tax year end.

Or something else entirely that I've not considered.

Expotter

From the MSE website: https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

B0bbyEwing

Expotter said:

From the MSE website: https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

Ok I got as far as

Overpaying vs saving – which wins?
If you've got this far, I'm going to assume you're debt free (or your debts are at 0%, or cheaper than your mortgage), you have an emergency fund, you know what the best rate you can get on your savings is, and have a mortgage that allows some level of penalty-free overpayment.

So now you need to check whether you should overpay your mortgage or save the cash elsewhere. Overpaying your mortgage is all about this key decision. And what you should do depends on what makes financial sense. The simple rule of thumb is:

If you can get a higher rate on your savings than you pay on your mortgage, saving wins. But if your mortgage rate is more than your savings rate, then it makes sense to overpay.

A simplified example should help...

If you've £10,000 mortgage debt at 2.5%,
Annual interest cost is: £250

If you have £10,000 savings at 1.5%, 
Annual interest earned is: £150

Pay off the mortgage with the savings and you are £100 a year better off. We've not included tax deductions in the example as the new personal savings allowance means most people don't pay tax on bank interest received.

Sorry this quote thing has done something to my post and I can't type underneath this grey box now as it wont let me put my cursor there.

That link may answer my question but I don't feel like it does because from what I make out it's talking about comparing a set interest rate with a set interest rate which is fairly straight forward. Sure the savings rate may alter if you're on a variable rate or it may not if you're talking about a monthly saver but for any given moment in time, the interest rate is set at what it's at.

But I'm talking about investing.

I suppose it also depends on what you're investing in and for how long. We'll be talking about funds like HSBC Global Strategy [xxx] and Vanguard LifeStrategy [##]. As mentioned earlier, we want to retire ASAP but realistically we're looking at certainly another 20 years, probably another 25, hopefully not 30 but you never know.

I imagine you need to make a judgement call as it's not a savings account interest rate with a given percentage. It's investing which could skyrocket, die a death or anything in between and that's why I'm here - I don't know how to call it. I appreciate nobody does but over such a timeframe, what would generally be the accepted average % return? Or doesn't it work like that? 

RobfromCornwall

Having done zero research, but based on my own experience with a Nationwide mortgage, here are my thoughts:
- 2.14% mortgage interest is higher than easy access accounts and many longer term fixes
- My personal aim is to always be as debt free as possible
- You can (probably) overpay 10% of your initial mortgage loan without ERC 
- My approach would therefore be to overpay as much as is affordable (up to 10% of initial loan) - do this either in monthly instalments or in lump sums (the fewer and the earlier the better)
- Tell Nationwide to reduce the mortgage term and not the monthly repayments

Again, your personal circumstances will dictate what is right for you.  Don't just listen to some bloke on the internet. 

B0bbyEwing

RobfromCornwall said:

- 2.14% mortgage interest is higher than easy access accounts and many longer term fixes

First off, I appreciate your response. This section here though, I feel we're still talking about comparing the mortgage to a cash savings account which isn't actually what my question is. My question wasn't should I put my money in cash savings at a lower rate than my mortgage or overpay my mortgage. 
It was should I put spare cash in to my LISA (Stocks & Shares format)/SIPP, which obviously doesn't have an easy comparison interest rate or should I put it towards overpaying my mortgage. That was the question. I suspect that this time next year when we're approaching some kind of renewal, be it staying with Nationwide or going elsewhere, the rate will be more than what we're paying at now. 

And for the record, as per Expotter's link, I have maxed out high interest cash savings accounts. My emergency pot uses those as does just general savings. 

RobfromCornwall said:

- My personal aim is to always be as debt free as possible

My personal aim is to retire yesterday

RobfromCornwall said:

- You can (probably) overpay 10% of your initial mortgage loan without ERC 

Yes, if I remember correctly, that was the % for us

RobfromCornwall said:

- Tell Nationwide to reduce the mortgage term and not the monthly repayments

This one caught my eye. What do you mean? When you overpay do you have to tell them what you'd like them to do with the cash?
I didn't think it would change the monthly repayments as you've agreed to pay them a set figure each month, no? 

RobfromCornwall said:

1)Again, your personal circumstances will dictate what is right for you.  
2)Don't just listen to some bloke on the internet. 

1) That's why I'm here, trying to tell you what my circumstance is and see what's then best
2) A lot can be learned from some bloke on the internet. It's not all good but it's not all bad either.

MisterMotivated

B0bbyEwing said:

RobfromCornwall said:

- Tell Nationwide to reduce the mortgage term and not the monthly repayments

This one caught my eye. What do you mean? When you overpay do you have to tell them what you'd like them to do with the cash?
I didn't think it would change the monthly repayments as you've agreed to pay them a set figure each month, no?

This is often an option with overpayments; you can either ask them to keep your payments the same and reduce the term, or ask them to recalculate/reduce your monthly payments so that the mortgage still ends on the originally agreed date

jimjames

B0bbyEwing said:

RobfromCornwall said:

- 2.14% mortgage interest is higher than easy access accounts and many longer term fixes

First off, I appreciate your response. This section here though, I feel we're still talking about comparing the mortgage to a cash savings account which isn't actually what my question is. My question wasn't should I put my money in cash savings at a lower rate than my mortgage or overpay my mortgage. 
It was should I put spare cash in to my LISA (Stocks & Shares format)/SIPP, which obviously doesn't have an easy comparison interest rate or should I put it towards overpaying my mortgage. 

It's really down to personal preference but likely to be financially better to pay into the LISA/SIPP as you get tax relief as well as the potential for the investments compounding over the long term. I did that rather than overpay but S&S ISA not SIPP and ended up with a portfolio that was many times bigger than the mortgage balance so could have cleared it if I wanted. It's been a good few years since 2009 but the mortgage balance would have just about cleared by now with overpayments.  Instead I have built up a portfolio that is all tax free.

Bigwheels1111

I overpaid and overpaid and overpaid.
My parents said if I overpaid by £3k a year they would match it.
No tax implications as £3k is allowed per year as inheritance.
11y 4 months to clear mine, what a great feeling.
After renting the house out for 9 years, and quick refurb.
Sold for 4 times what I paid.
Debt free, well set up for the future.

TheAble

It's a personal thing but the decision is a lot more involved than just an interest rate or expected stock market return comparison.
On the one hand, do you want to be retiring 2% debt early when prevailing inflation is pushing double digits? But on the other hand, if you put it into the stock market instead, only for the market to crash 50% and interest rates subsequently go up several % and you get laid off from your job, then that's a problem too. So there's a balance to be struck.
For myself I don't overpay but I can see the appeal from the point of view of reducing risk.

Expotter

Ultimately I guess it depends on how much you value certainty, there are risks either way. 20+ years is a long time and a lot can happen in that time, there's no way of knowing whether tax rules around pensions will be the same as now or what will interest rates be in the future. You won't be able to access any money from pensions for a good while either in case you needed it.

You could ask yourself what's more important to you, owning your home or retiring early? To me personally, it was the certainty that whatever happened I wasn't going to end up homeless, so first I concentrated on repaying the mortgage as soon as possible and then I started putting everything else on pensions. Still managed to stop working at 56, so it can be done either way or with a combined approach, which might be the most sensible option.

grumiofoundation

RobfromCornwall said:

Having done zero research, but based on my own experience with a Nationwide mortgage, here are my thoughts:
- 2.14% mortgage interest is higher than easy access accounts and many longer term fixes
- My personal aim is to always be as debt free as possible
- You can (probably) overpay 10% of your initial mortgage loan without ERC 
- My approach would therefore be to overpay as much as is affordable (up to 10% of initial loan) - do this either in monthly instalments or in lump sums (the fewer and the earlier the better)
- Tell Nationwide to reduce the mortgage term and not the monthly repayments

Again, your personal circumstances will dictate what is right for you.  Don't just listen to some bloke on the internet. 

You really have done no research! 

1 year fixes are >2.8% and 2 year >3% 

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/