Overpay mortgage v save...how to calculate most efficient?

therealslimcj

Struggling to find search terms for this but please point me to previous resource discussions and close post if need be. 

My mortgage rate is 1.69% fixed until Jan 2024. Happy with this position but rates in market making me reassess current actions. I overpay £100 per month currently and could go to £150, but want to make sure I shouldn't be putting it into savings instead. 

Advice is 'pay into the one with the higher interest rate' but that seems to me to be if wondering what to do with a lump sum, which isn't my situation. I'm wary of saving instead of overpaying if I might lose out on the compounding in mortgage balance being better for me. 

Instinctively I think I should be stopping the mortgage overpaying, and going for a 2.5% instant access savings OR the 4%+ 1 year lock instead, but don't have the figures to back that up. Is there a useful calc I can use? Also, sense checking my thinking above would be appreciated. 

sancahojo

The interest income and interest expense are both compounded (as long as you choose savings account where interest is paid monthly) - so you can compare them like for like. 

Thing to consider is the tax implication on your interest earnings. You need to take that into account depending on your tax band. Otherwise, look into a savings ISA.

sancahojo

https://www.moneysavingexpert.com/savings/savings-calculator/

therealslimcj

Thanks @sancahojo

Am I overthinking this, then? I was worried I was missing something where the longer term basis of mortgage outweighs it somehow, but it seems to be that:

1. £100 per month into savings or overpaying mortgage is as simple as comparing the interest rate
2. Key thing is to ensure savings account interest is paid monthly
3. It may be worth an ISA instead of a savings account dependent on interest rates (I'm a basic rate tax payer)

So I put in that current overpayment of £100 into the savings calculator you shared, for 1 year 3 months (to the end of my fixed rate, at which point I will reassess), based on conservative 2.5% interest rate (instant access) savings account and it said £1,525.27 at the end of the period. Changing just the interest rate to 1.69% gives £1,517. So I'm £8 better off over the next 1 year 3 months by putting that money into a savings account then the mortgage, with tax taken into account; is it that simple?

At that amount, it's not really worth it but the 4% rate with a bit more money could be, but just want to check my working. 

therealslimcj

Presumably I should select 'no tax' on savings when putting in figures for the mortgage, @sancahojo?

sancahojo

therealslimcj said:

Presumably I should select 'no tax' on savings when putting in figures for the mortgage, @sancahojo?

depends on your income - here is a good table to guide you

sancahojo

therealslimcj said:

Thanks @sancahojo

Am I overthinking this, then? I was worried I was missing something where the longer term basis of mortgage outweighs it somehow, but it seems to be that:

1. £100 per month into savings or overpaying mortgage is as simple as comparing the interest rate
2. Key thing is to ensure savings account interest is paid monthly
3. It may be worth an ISA instead of a savings account dependent on interest rates (I'm a basic rate tax payer)

So I put in that current overpayment of £100 into the savings calculator you shared, for 1 year 3 months (to the end of my fixed rate, at which point I will reassess), based on conservative 2.5% interest rate (instant access) savings account and it said £1,525.27 at the end of the period. Changing just the interest rate to 1.69% gives £1,517. So I'm £8 better off over the next 1 year 3 months by putting that money into a savings account then the mortgage, with tax taken into account; is it that simple?

At that amount, it's not really worth it but the 4% rate with a bit more money could be, but just want to check my working. 

Your logic seems right to me

housebuyer143

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/?utm_source=facebook&utm_medium=social&utm_campaign=mortgages&source=FBORG-MORTGAGES&utm_content=1664974550

This was just created. Is exactly what you are looking for?