Overpaying vs saving

littledino101

Hi all

Got a question about overpaying on the mortgage vs putting that cash into a savings account. We’re currently 2.5 years into a 5 year fixed deal at 1.57% and we make substantial monthly overpayments. I’m wondering whether it would be better to put that overpayment cash into a savings account instead (have just opened an account with Chip which currently offers 4.26% interest).

According to the mortgage overpayment calculator on this site, we would save a lot more by putting that money into the savings account versus making overpayments. HOWEVER does this take into account that in 2.5 years we will be remortgaging, and will (I think?) be more likely to get a better deal if the amount left to pay on the mortgage is smaller? There is a part of me that feels continuing to overpay would be safer somehow? But I don’t have a financial brain at all so might be completely off, and should just go ahead and stick everything in the new savings account.

Please help! 

lojo1000

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

Personally, I would reduce my uncertainty, risk by overpaying the mortgage knowing that should rates remain high, I will not suffer as badly.

Excel is your friend - just have a play with possible rates to get a feel for the impact.

jimjames

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

No prediction needed at all. Savings rate of 4.26% is higher than mortgage rate of 1.57% so overpaying will make you worse off compared to savings. You can then pay off the outstanding balance at the remortgage date using the savings as there is no overpayment limit at that point.

Ryan_Holden

Ha, I am in a similar situation and have asked a different question in another thread.

There are lots of variables that matter, how much you owe on the mortgage, whether or not your savings account is variable rate, wjhich tax bracket you're in for saving, what your overpayment is etc.

Generally though at those rates you will, I bet, be better saving and paying off a lump sum of your mortgage when you come to re-mortgage.

You can use the MSE Savings calculator to figure out what yoru account will yield at the end vs use your lenders overpayment calculator and figure the difference out.

jlfrs01

Technically, given where the interest rates are it would be better to save though any interest will be taxed (if you are a UK tax Payer). 
I'm in a similar position but with a bit more flexibility as I have an off-set mortgage where I keep my savings. I'm not earning anything on the money but it's coming off the interest and I'm also making overpayments.

I think you need to predict what your loan amount will be when you come to remortgage and what the LTV rate is likely to be. Nobody can predict what interest rates are likely to be in 30 months' time but it's only my personal opinion that they'll be higher than the rate you're enjoying now. Maybe use one of the online calculator to try and predict what your payments would be on your likely new mortgage with a speculative interest rate, say something  like 4% or 4.5% just to see what your monthlies might be?

grumbler

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

You don't need to predict anything. Mortgage rate is fixed. And there are fixed rate savings accounts - 6% for two years (minus tax if any). Not sure if you can top-up such accounts, but there are regular savings accounts paying high interest.

Ryan_Holden

grumbler said:

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

You don't need to predict anything. Mortgage rate is fixed. And there are fixed rate savings accounts - 6% for two years (minus tax if any). Not sure if you can top-up such accounts, but there are regular savings accounts paying high interest.

The fix account wouldn't be any good for the OP though as they're looking to save monthly. Most of, if not all the fix accounts require you to slap in a lump sum and then you can't pay anymore in.

With the OP adding monthly, they'd need a notice account for their best chance at a good rate, but those rates are still mostly 5, 5 and a bit, and they're variable so they're entirely at their whim whether or not the maths would work.

lojo1000

grumbler said:

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

You don't need to predict anything. Mortgage rate is fixed. And there are fixed rate savings accounts - 6% for two years (minus tax if any). Not sure if you can top-up such accounts, but there are regular savings accounts paying high interest.

If the term remaining on the mortgage is higher than the current remaining fixed term then you do not know how much interest you will pay post the end of the fix. Hence a need to make an estimate.

littledino101

jimjames said:

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

No prediction needed at all. Savings rate of 4.26% is higher than mortgage rate of 1.57% so overpaying will make you worse off compared to savings. You can then pay off the outstanding balance at the remortgage date using the savings as there is no overpayment limit at that point.

Thanks jimjames, I think this is the simple answer that makes the most sense to me. Put that regular overpayment money in the savings account instead (for as long as the savings rate stays better than the mortgage rate), make the larger lump sum overpayment when the fixed term ends and we remortgage with no overpayment limit - and then at that point, depending on what the new mortgage rate and savings rate are, we then reassess whether saving or overpayments are the better deal going forward. So no need for guesswork now. Pls correct me if I'm wrong but I think this makes sense. 

grumbler

lojo1000 said:

grumbler said:

lojo1000 said:

Your calculation requires you to predict where both savings and mortgage rates will be over the remaining term of your mortgage. That is an unknown and I would say has never been more unknown right now.

You don't need to predict anything. Mortgage rate is fixed. And there are fixed rate savings accounts - 6% for two years (minus tax if any). Not sure if you can top-up such accounts, but there are regular savings accounts paying high interest.

If the term remaining on the mortgage is higher than the current remaining fixed term then you do not know how much interest you will pay post the end of the fix. Hence a need to make an estimate.

I don't understand. ATM you make a decision whether to save or to overpay until the end of the fixed term. To make this decision you need only the rates until the fixed term ends.
When this time comes you make another decision whether to use the lump sum to overpay or not or something in between.

simon_or

With a less than 2% mortgage fixed for another few years, it's a no brainer to divert all surplus cash into savings rather than mortgage overpayments. You're getting 4.35% in easy access and even more in notice accounts!

When you approach the end of your fix, you can use all or some of the lump sum to lower your LTV if you want to do so.