Mortgage Overpayments vs savings

Gareth77

Thank you both, this has been so useful

how much can you put in an ISA and why is it tax free vs normal savings?

are normal savings better interest rates than an ISA?

Also - the tax you pay - is this something you put on your end of year tax return? (ie; they don't just take it from your savings account)

arrows123

I'm in almost the same position as you. 1.35% mortgage rate until Oct 2026. I've opened an ISA with Principality at 3.75%. You can save £20k a year in an ISA and the interest is tax free. My intention to bung as much as I can in that until the mortgage fixed rate ends. Whatever I've saved plus the tax free interest I'll pay lump sum off the mortgage before renewing. 

FrankRizzo

Sorry if this is a daft question - if I put £20k into an ISA today, when would I get the interest paid at 3.75% and would this work out to be £750?

Thanks!

Gareth77

arrows123 said:

I'm in almost the same position as you. 1.35% mortgage rate until Oct 2026. I've opened an ISA with Principality at 3.75%. You can save £20k a year in an ISA and the interest is tax free. My intention to bung as much as I can in that until the mortgage fixed rate ends. Whatever I've saved plus the tax free interest I'll pay lump sum off the mortgage before renewing. 

I didn't actually realise there was a 20K limit on an ISA - this that per calendar year.

So far I think Sainsburys offer the best interest rate. 

I'm going to open that on Monday and (I guess) transfer 20K of my savings to it. 

Not sure what to do with the rest. 

From using the calculator I need pay off an additional 60k on the mortage to keep the payments in 3 years time, as the same as they are today (assuming interest of 6%)

simon_or

Gareth77 said:

Thank you both, this has been so useful

how much can you put in an ISA and why is it tax free vs normal savings?

are normal savings better interest rates than an ISA?

Also - the tax you pay - is this something you put on your end of year tax return? (ie; they don't just take it from your savings account)

If you'll pay 40% tax on the interest then a cash ISA is great.

If you may pay 20% tax on all/some of it, then a normal easy access/notice savings account might be as good or better.

If it's very unlikely that you'll pay any tax on the interest then a normal easy access / notice savings account would be miles better than a cash ISA.

christmaslights

Different point of view here. I’ve been overpaying on my mortgage every month ever since I took it out 10 years ago.  Granted that for most of that time saving interest rates were so low that overpaying on the mortgage was absolutely the right thing to do. But even now when savings rates are higher than my fixed mortgage interest rate I’m going to continue to overpay every month for the two years that remain. Part of the reason is psychological. It is very satisfying and a great motivation to be able to see every month in your mortgage tracker spreadsheet (everyone should have one…) that you now own a bit more of your property and are paying the building society a bit less in interest.  But it is also a protection. I could save the money and resolve to use it to pay off the mortgage when the fixed term ends. But stuff happens in life and if a difficult situation did arise I might be tempted to use my savings to resolve it. No danger of any such backsliding if you’ve already made the payments. 

moneysaver1978

you need to check terms in your mortgage deal - there's normally a penalty if you want to overpay.

Also check out https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/ and the calculator.

Yorkie1

moneysaver1978 said:

you need to check terms in your mortgage deal - there's normally a penalty if you want to overpay.

Also check out https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/ and the calculator.

Good advice to check the terms of the mortgage deal, but most mainstream mortgages allow a certain amount to be paid off per year without incurring an early repayment charge.

jj_43

Plenty of people here have been saving rather than paying off the mortgage for the last 10 years. Now they have no savings and still have the mortgage.

jrawle

christmaslights said:

Different point of view here. I’ve been overpaying on my mortgage every month ever since I took it out 10 years ago.  Granted that for most of that time saving interest rates were so low that overpaying on the mortgage was absolutely the right thing to do. But even now when savings rates are higher than my fixed mortgage interest rate I’m going to continue to overpay every month for the two years that remain. Part of the reason is psychological. It is very satisfying and a great motivation to be able to see every month in your mortgage tracker spreadsheet (everyone should have one…) that you now own a bit more of your property and are paying the building society a bit less in interest.  But it is also a protection. I could save the money and resolve to use it to pay off the mortgage when the fixed term ends. But stuff happens in life and if a difficult situation did arise I might be tempted to use my savings to resolve it. No danger of any such backsliding if you’ve already made the payments. 

Just understand that you are wasting money by doing so. There are plenty of people complaining at the moment that they have to pay £100s per month extra due to increased mortgage rates, yet at the same time, some people think nothing of losing £1000s by overpaying rather than putting money into a savings account.

Spreadsheets are great, so why not put your "overpayments" into a dedicated, high interest savings account, and have an additional column in your spreadsheet for it that is subtracted from the amount outstanding? Then you can still have the satisfaction of seeing the total come down.

I can understand the psychological element; you just have to think about it in a cool and clear headed way. I only have a small mortgage remaining, and I calculated I could make around £140 over the year by saving instead of overpaying. Is it worth it? Wouldn't it be nicer to see the mortgage balance going down? But then I thought, it's £140, and all the things I could use £140 for. Free money!

As for self-discipline, someone who is making significant regular overpayments is already fairly disciplined, and I think the majority of people in that situation are unlikely to dip into their overpayments savings account. That scenario is just used as an excuse by people who want to justify to themselves overpaying for the psychological reason discussed above.

As for "stuff happens in life", what will you do when it happens and you have no savings because you've made overpayments? Either you are completely and utterly stuffed, or (more likely) you will manage in exactly the way you would if you had your overpayment money in a savings account, without touching the overpayment money.