Overpaying vs saving?

Quixoticity11

Hi, I’m not the most financially literate, so just checking my plan here with you sensible people - hope that’s ok!

I bought my first house un June, I borrowed 160,000 at an interest rate of 2.65% fixed for 5 years.

I have been putting an extra £100 a month aside, with the intention of overpaying my mortgage by this amount, once I’m sure I can afford it.

However, I have read that you should only overpay the mortgage if the interest rate is higher than a savings account.

I can get a 1-year fixed ISA with a rate of around 3%.

So, does this mean that I would be better off paying my monthly £100 extra into this savings account, and continue to do so far the next 5 years, so long as the interest rate is above 2.65%? Then, when my mortgage fix comes to an end, I use the lump sum to overpay at that point?

I hope this makes sense - does it sound sensible to you?

housebuyer143

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

silvercar

Quixoticity11 said:

Hi, I’m not the most financially literate, so just checking my plan here with you sensible people - hope that’s ok!

I bought my first house un June, I borrowed 160,000 at an interest rate of 2.65% fixed for 5 years.

I have been putting an extra £100 a month aside, with the intention of overpaying my mortgage by this amount, once I’m sure I can afford it.

However, I have read that you should only overpay the mortgage if the interest rate is higher than a savings account.

I can get a 1-year fixed ISA with a rate of around 3%.

So, does this mean that I would be better off paying my monthly £100 extra into this savings account, and continue to do so far the next 5 years, so long as the interest rate is above 2.65%? Then, when my mortgage fix comes to an end, I use the lump sum to overpay at that point?

I hope this makes sense - does it sound sensible to you?

Sounds sensible, it also gives you the advantage that you have the money saved should you need it.

Quixoticity11

Thanks both for your replies!

MFWannabe

Quixoticity11 said:

Hi, I’m not the most financially literate, so just checking my plan here with you sensible people - hope that’s ok!

I bought my first house un June, I borrowed 160,000 at an interest rate of 2.65% fixed for 5 years.

I have been putting an extra £100 a month aside, with the intention of overpaying my mortgage by this amount, once I’m sure I can afford it.

However, I have read that you should only overpay the mortgage if the interest rate is higher than a savings account.

I can get a 1-year fixed ISA with a rate of around 3%.

So, does this mean that I would be better off paying my monthly £100 extra into this savings account, and continue to do so far the next 5 years, so long as the interest rate is above 2.65%? Then, when my mortgage fix comes to an end, I use the lump sum to overpay at that point?

I hope this makes sense - does it sound sensible to you?

Rather than an ISA I would look at the top interest savings account, they will pay more than 3%

MasterplanC

Quixoticity11 said:

I have been putting an extra £100 a month aside, with the intention of overpaying my mortgage by this amount, once I’m sure I can afford it.

[...]

So, does this mean that I would be better off paying my monthly £100 extra into this savings account, and continue to do so far the next 5 years, so long as the interest rate is above 2.65%? Then, when my mortgage fix comes to an end, I use the lump sum to overpay at that point?

Yes, I think roughly your plan sounds sensible, whenever the savings interest rate is larger than the mortgage interest rate, it makes more sense to save. However, my understanding of fixed rate accounts is that you can't pay money in during the year (as you were talking about £100 extra per month), so maybe look for a regular saver account or an easy access one instead for this monthly 'overpayment'. This might also make your money more accessible in the case you need it, if it's fixed for a year it might be harder to get to depending on the conditions of your account.

Aside from this, if your mortgage has early repayment charges during the fixed term and you might think about selling the house before the fixed term is up, then making use of the allowed overpayments could help you.

Quixoticity11

Thanks for the advice! 

dimbo61

Martin Lewis and the MSE website has always advised having 3/6 months of savings in a savings account just in case.
If your self employed or on contract working then double that.
However we have used regular saver accounts to build up funds and also over paid every month on the mortgage.
It's a habit once started.
Say you could overpay £100/200/400 a month and clear some of the mortgage debt over the next 5 years.
Would this get you into the next LTV bracket 75% or even 60% LTV ?
Most fixed rate residential mortgages allow 10% overpayments each year which is alot of overpayments but check the T and C,s of your deal.
It's a marathon not a sprint to become mortgage free. 
We did it in 8.5 years rather than 22 and saved over £50,000 in interest.

BikingBud

dimbo61 said:

Martin Lewis and the MSE website has always advised having 3/6 months of savings in a savings account just in case.
If your self employed or on contract working then double that.
However we have used regular saver accounts to build up funds and also over paid every month on the mortgage.
It's a habit once started.
Say you could overpay £100/200/400 a month and clear some of the mortgage debt over the next 5 years.
Would this get you into the next LTV bracket 75% or even 60% LTV ?
Most fixed rate residential mortgages allow 10% overpayments each year which is alot of overpayments but check the T and C,s of your deal.
It's a marathon not a sprint to become mortgage free. 
We did it in 8.5 years rather than 22 and saved over £50,000 in interest.

£50k that would have disappeared in interest and you can can now spend more selectively.

Great target, great achievement, enjoy the freedom.

grumiofoundation

Quixoticity11 said:

Hi, I’m not the most financially literate, so just checking my plan here with you sensible people - hope that’s ok!

I bought my first house un June, I borrowed 160,000 at an interest rate of 2.65% fixed for 5 years.

I have been putting an extra £100 a month aside, with the intention of overpaying my mortgage by this amount, once I’m sure I can afford it.

However, I have read that you should only overpay the mortgage if the interest rate is higher than a savings account.

I can get a 1-year fixed ISA with a rate of around 3%.

So, does this mean that I would be better off paying my monthly £100 extra into this savings account, and continue to do so far the next 5 years, so long as the interest rate is above 2.65%? Then, when my mortgage fix comes to an end, I use the lump sum to overpay at that point?

I hope this makes sense - does it sound sensible to you?

Your logic is correct (only risk to saving vs overpaying is you spend the money!).

However a 1 year fixed ISA wouldn't be suitable for monthly deposits. 

Anyway as said above why not put £100 a month into an account paying higher interest - e.g. 5% see below.

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