When to use savings for overpayments?

jasperskates

Hi everybody! 

We bought our first home (£360k mortgage) earlier this year and thankfully we have a 5 year fix at 1.22%. We have been overpaying £250 a month since we moved in but if I understand right it would be better to put that money in a savings account with higher interest than 1.22%. 

If we do this, when should we put these savings towards the mortgage? Should we use our overpayment allowance at the end of each year, or wait until the end of the fix? We are very unlikely to come close to even half our overpayment allowance each year with what we save, so shouldn’t be restricted by overpayment penalties. 

Alternatively should we keep saving instead of overpaying until the interest rate on the mortgage is higher than the interest rate gained in savings (i.e. even after the fix if the new mortgage interest rate is lower than savings savings rate)?

I think it’s this final option (just keep saving rather than overpaying if the savings interest rate is higher than the mortgage interest rate) but it would be great to check. Also aware that it might be worth paying a lump sum from savings after the fix if we can get a better LTV mortgage rate. 

Thanks for your advice!!

isadreamalie

That's a ridiculously good rate even cheaper than my 1.99% 2017-22 five year fix when I borrowed 230k

I'd overpay as much as you can in the fix as it's a cheap rate... once you come out you will be hit by far larger basic monthly payments 

Snookie12cat

isadreamalie said:

That's a ridiculously good rate even cheaper than my 1.99% 2017-22 five year fix when I borrowed 230k

I'd overpay as much as you can in the fix as it's a cheap rate... once you come out you will be hit by far larger basic monthly payments 

Bit if you can get 2.75% in instant access savings why would you pay off the mortgage. Stuff it in savings and don't pay it off until you come to remortgage at which point you can make a lump sum payment.

jonnypb

isadreamalie said:

That's a ridiculously good rate even cheaper than my 1.99% 2017-22 five year fix when I borrowed 230k

I'd overpay as much as you can in the fix as it's a cheap rate... once you come out you will be hit by far larger basic monthly payments 

Why would you overpay when you have accounts now that offer over 5% in interest?

If I were you I’d spend the next 5 years putting that £250 a month into savings accounts and earn the interest, then pay a lump sum off your mortgage when you come to redo the mortgage. Obviously if interest rates come down again then you could start overpaying again.

Yorkie1

Do make sure you have 3 - 6 months' expenditure in an emergency fund before you consider overpaying or tying money up in savings that you can't get at for a long time

jasperskates

Thank you for your advice everyone! Looks like I’m off to find the best joint savings account for now.

That’s a really good point about the emergency fund, I have saved six months worth of expenses (inc the overpayment budget), and I am trying to grow my emergency fund to six months take home pay. My partner already has this. 

We are fortunate that we could put a years worth of overpayments (£3000) in a fixed account now. We would still have an emergency fund of at least six months of expenses. Would it be better to go for a one year fix or should we keep the overpayment money accessible and easy to move?

Thanks for your advice!! 

housebuyer143

jasperskates said:

Thank you for your advice everyone! Looks like I’m off to find the best joint savings account for now.

That’s a really good point about the emergency fund, I have saved six months worth of expenses (inc the overpayment budget), and I am trying to grow my emergency fund to six months take home pay. My partner already has this. 

We are fortunate that we could put a years worth of overpayments (£3000) in a fixed account now. We would still have an emergency fund of at least six months of expenses. Would it be better to go for a one year fix or should we keep the overpayment money accessible and easy to move?

Thanks for your advice!! 

I would open two. One fixed and one instant access. Instant access can be found at 2.5%or there abouts 

jasperskates

Edit: When I say keep the money accessible - I mean in a savings account earning interest higher than 1.22%. 

housebuyer143

jasperskates said:

Edit: When I say keep the money accessible - I mean in a savings account earning interest higher than 1.22%. 

Please open one paying more than that. Loads of instant access at over 2%. Mine is paying 2.75% and then locked away the bulk of savings for 12 months at 4.8%.
I have a few different accounts with different providers now. 

jasperskates

Sorry I wasn’t very clear - I meant put it in an easy-access account with a good interest rate rather than leave it in my current account doing nothing. ☺️

Thanks for the advice, opening one fixed and one instant access seems like a great idea.