Mortgage overpayment or savings 10yr fixed

Bella79

Hi all 

I was hoping for a bit of guidance, we are confused what to do for the best. 

OH is 52 I am 43 we still have 21 years on a mortgage, currently in a 10yr fix with Barclays at 3.48% (only 1 month in) Balance is 89,038. We have made 11k in overpayments, I thought this would be the best course of action, because of my husband's age we need to clear the mortgage quicker than 21 year!

However Barclays are still basing my monthly contractual payment on 100k because they don't take into account the overpayments, they said they can "apply" it to the mortgage which would reduce my costs or term, but were are happy with the monthly payment.

So is it worth them having the 11k sat with them (we can withdraw)? Am I better off saving in a savings account? then make lump sum payments if we want to?

We can overpay by around 650pm if we use all our spare cash, but ideally, I would like to build our savings account up, because once we have paid the overpayment that cash is gone and we can not withdraw it if we have an emergency. 

I don't know how long we will have these spare funds every month so I want us to make the most of it while we can. I really don't think we will be here for the full 10-year fixed deal, which will mean a penalty of 4k! but we fixed it because we were worried about interest rate hikes!

Any advice or thoughts would be appreciated.

Thank you 

Bigwheels1111

As a rule you pay off the highest rate of debt.
As you can get 4% or more for savings it’s better than the rate you are being charged.
But mortgage is 8 times savings, I think I would lower the mortgage with over payments.
I could be wrong. 10k at 4% would give £400. 

£3097 in interest for mortgage of £89,000 a year. Roughly worked out.

El_Torro

I think that your emergency fund is the important thing here. Make sure it's the right size and then start thinking about saving or overpaying your mortgage.

Once you do have spare cash to overpay then yes, you can get better rates than 3.48% in savings, at least for now. 

One thing to consider though is the early repayment charge when you leave your current place. The smaller your mortgage then the lower the charge will be, so you will benefit from that. Can't you port your mortgage to your new property? That would save you having to pay the ERC. 

grumbler

Generally, if your savings interest is higher than the mortgage interest there is absolutely no any point in making overpayments. Offset your mortgage with your savings and you'll be better off.

However, savings rates can drop during 10 years, and the amount you can overpay without penalties every year is limited (about 10% of the current balance?).

Altior

If it was me, as 52 is reasonably close to being able to access pension pots, whilst obviously keeping in mind MPAA considerations I'd be looking to take advantage of the tax breaks and working pension contributions into the plan. Once past access age it's even easier if needed in an emergency, at the very least by splitting off some TFLS. As long as it's earned income, contributions will be boosted by 25% minimum. SalSac would be even better, along with employer matching if those are options. 

It doesn't have to be all or nothing so can be a mix of pension, cash reserves eg ISA, S&S ISA and mortgage contributions.

Adyinvestment

Bella79 said:

However Barclays are still basing my monthly contractual payment on 100k because they don't take into account the overpayments, they said they can "apply" it to the mortgage which would reduce my costs or term, but were are happy with the monthly payment.

So is it worth them having the 11k sat with them (we can withdraw)?

Have I understood this correctly? your overpayments are just sat in an account and have no bearing at all on the interest you are paying? being able to withdraw this would seem to suggest this.

If that is the case then there is absolutely no benefit in making overpayments.

EssexHebridean

The usual with mortgage overpayments is to ask them to apply the overpayment against the capital, as this impacts the amount you are then paying interest on. 

Even if you decided not to keep up with significant levels of overpayment, I’d strongly suggest that you continue to at least just round your monthly payment up to the next £50 or similar level if you can - as even this will have a sizeable impact on the amount you pay off, without having a huge impact on your monthly budget. 

Albermarle

Altior said:

If it was me, as 52 is reasonably close to being able to access pension pots, whilst obviously keeping in mind MPAA considerations I'd be looking to take advantage of the tax breaks and working pension contributions into the plan. Once past access age it's even easier if needed in an emergency, at the very least by splitting off some TFLS. As long as it's earned income, contributions will be boosted by 25% minimum. SalSac would be even better, along with employer matching if those are options. 

It doesn't have to be all or nothing so can be a mix of pension, cash reserves eg ISA, S&S ISA and mortgage contributions.

This ^^
Depending on what kind of pension provision you have, it would probably be more worthwhile making lump sum/higher contributions to your pension. At least as part of the strategy. You could then look at using the tax free cash from the pension to pay off the mortgage. 

MorningcoffeeIV

Adyinvestment said:

Bella79 said:

However Barclays are still basing my monthly contractual payment on 100k because they don't take into account the overpayments, they said they can "apply" it to the mortgage which would reduce my costs or term, but were are happy with the monthly payment.

So is it worth them having the 11k sat with them (we can withdraw)?

Have I understood this correctly? your overpayments are just sat in an account and have no bearing at all on the interest you are paying? 

No, you haven't understood it correctly.

The overpayment reduces the interest that is paid. Monthly payments remain the same as the term is not recalculated.

Adyinvestment

MorningcoffeeIV said:

No, you haven't understood it correctly.

The overpayment reduces the interest that is paid. Monthly payments remain the same as the term is not recalculated.

I understand how overpayments are supposed to work, but the OP is saying Barclays "can apply them to the mortgage which will reduce costs or term" which implies that they have not been applied and are not reducing the cost/interest. 

I have made overpayments on my mortgage, but as far as I am aware they are not sat in an account somewhere that I can withdraw from which is also what the OP is saying (they can withdraw 11k)

DireEmblem

There are a couple of things here.

1. Most mortgage accounts you can setup an account to log in and check the balance.  Can you set this up if you dont have it already to check the remaining balance?
2.  Your mortgage interest rate is 3.48%, so if you can earn higher elsewhere, stick the money aside.  First Direct have a 7% regular saver, RBS have a 5% account and I think Barclays and another as well.