Overpay Vs save

tony3619

Luckily I just secured a 2 year fix at 4.84% which lasts until June 2025

If I was to have say £150 a month to either over pay the mortgage or put in a bank to save for the next 2 years which is the better idea? 

I understand the saving rate will be lower than the interest rate so the easy answer is overpay but the idea of having money in the bank to use to possibly pay against 6% mortgage rates in 2 years time seems just as important so as to not fall behind on payments 

dwsjarcmcd

It depends what other savings you have.  If the answer is none or not very much, I would save it to provide you with a buffer for any future 'shocks' that may come your way e.g. you need a new boiler.

If you already have decent provisions for future shocks, I'd overpay.

missyp123

If you have little savings maybe consider saving £50 pm then over paying the other £100 or the other way round. 

Personally I’ll always want a chunk of money for emergencies. 

If you end up with a chunk in the bank before your 2 years is up you can always pay it into your Mtg as a lump sum. Or use it to pay your next product fee. 

tony3619

missyp123 said:

If you have little savings maybe consider saving £50 pm then over paying the other £100 or the other way round. 

Personally I’ll always want a chunk of money for emergencies. 

If you end up with a chunk in the bank before your 2 years is up you can always pay it into your Mtg as a lump sum. Or use it to pay your next product fee. 

I never thought about overpaying as a lump sum! Thanks 👍

missyp123

As long as it doesn’t exceed the overpayment % set in your terms it’s fine to do this. 

Plenty on the forums to read through. 

Iv not done a lump sum myself, I’m planning to overpay monthly giving me peace of mind that I won’t spend it! As long as I have savings for an emergency I’m happy . 

jonnypb

There are regular saver accounts that give you over 6% interest so I would do that personally.  You can always then pay off a lump sum when the 2 year fix finishes with the money that you saved.

SouthLondonUser

From a purely mathematical standpoint, it depends on how much you would earn on your savings net of tax vs how much you pay on your mortgage.

Let's say that you earn 4% on your savings and you pay no tax. Then it's worth saving if the mortgage rate is < 4%

Let's say you earn 4% but pay 20% tax, so you earn 3.6% net. Then it's worth saving if the mortgage rate is < 3.6%

In reality, however, it comes down to a combination of the calculations above and how much savings you have vs you want to have.

It is typically deemed wise to have from 2 to 10 months worth of expenses saved up and easily accessible. Of course not everyone will be lucky enough to be able to have so much in savings, and of course everyone's circumstances will differ, but that's a broad indication.

E.g. if your boiler or  car breaks down, you don't want to be in a situation where you have minimised your mortgage interest cost until now, but then cannot pay these essential bills.

simon_or

Once you have a rainy day fund, and if you don't have anywhere better to put the extra money in (S&S ISA, pension) then dump everything into your mortgage.

nic_c

So what size a rainy day fund, without being too over cautious?
I've saved well over half of what I get as an annual salary whilst my mortgage rate was under 2%, but now remortgaged at just over 4%. So do I now start over paying that, divert some of the savings as a lump sum into that, or keep making the fund bigger until I reach what?

tony3619

See my issue is when you overpay your mortgage and you choose to reduce the term the monthly payment pretty much stays the same if when you do a product transfer the interest is roughly the same. 

Yes you are obviously mortgage free quicker but if the goal is to get your monthly payments down it doesn't do much.

I'm.also in the position I'm shared ownership so I have the rent portion to worry about. 

Newbie_John

Then reduce your monthly payments rather than length of the mortgage?