Mortgage Overpayment - suggest something better

daern

We're currently on a 5 year, fixed rate mortgage, £75k and 3.5 years to go at 1.89%. We're overpaying a carefully measured £800/mo, to target clearing the balance very shortly after the fixed period (and its associated penalties) end.

I can't help thinking, however, that I could do better with my £800 than this. The end goal is still to clear the mortgage, but I don't need to give my bank the money to look after for such a pitiful return. We've got some other low-return savings, a maxed out premium bonds account but otherwise no ISAs or anything.

What should we do and is it worth doing it vs leaving things as they are? Any recommendations?

MorningcoffeeIV

As an easy starting point, put your money into an account earning 5-6% instead of paying off low interest debt. Low effort and far more profitable than your current strategy.

Thinking beyond that, consider ISAs and pensions.

daern

Thanks. Pensions no good (I need the money in 3.5 years after all!) but I guess ISAs could work as it's a fixed period. Is this a potential better option than a regular savings account? Downside would be that I'm not just investing a fixed, lump sum, but rather a regular, monthly amount so I assume this limits options here?

r6mile

Given that you are paying in every month and not a lump sum, you know when you will need the money and it's for a particular purpose, a "notice" savings account might work.

Assuming you will not pay tax on your savings interest, you can get 5.75% with Stafford Railway BS for an account with 120 days notice. Otherwise they have a 5.25% 60-day notice ISA.

Sg28

Look at regular savers to max out the interest on your £800 a month. Once these mature transfer into ISAs

Also why is your current savings low return? Make it high return! As you have 50k in premium bonds (easy access) you could look at fixing your other savings to max the return. NS&I 1 year fix at 6.2% is worth considering.

boingy

Definitely Regular Savers. If you and your partner each open individual accounts you can get an excellent rate for the whole £800:
£200 into Nationwide @ 8% (max £200)
£200 into First Direct.@ 7% (max £300)
Repeat for second person.

You need to open current accounts at each to get access to the regular saver products which is a bit of admin but worth the effort, especially if you feed your "low return savings" in there too, using the spare capacity in the First Direct account.

[Deleted User]

daern said:

We're currently on a 5 year, fixed rate mortgage, £75k and 3.5 years to go at 1.89%. We're overpaying a carefully measured £800/mo, to target clearing the balance very shortly after the fixed period (and its associated penalties) end.

I can't help thinking, however, that I could do better with my £800 than this. The end goal is still to clear the mortgage, but I don't need to give my bank the money to look after for such a pitiful return. We've got some other low-return savings, a maxed out premium bonds account but otherwise no ISAs or anything.

What should we do and is it worth doing it vs leaving things as they are? Any recommendations?

Probably cash ISAs either flexible or fixed rate for 2 x 20k with the remainder added from April until end of the fixed period. I wouldn't bother about monthly savers (personally) as the monthly amount is limited and tax potentially payable 

phillw

daern said:

What should we do and is it worth doing it vs leaving things as they are? Any recommendations?

It depends on what tax band you are. If you are basic rate tax payers, then you can earn £1000 interest before paying tax. You can earn 5.2% just putting that money into an easy access account, if you don't mind opening some more current accounts then you can spread your money with various exclusive savings/regular saver accounts.

I'd also take a look at the premium bonds return and maybe use your ISA allowance with a fixed cash ISA. The rates have cooled a bit in the last month though.

jimjames

daern said:

We've got some other low-return savings, a maxed out premium bonds account but otherwise no ISAs or anything.

What should we do and is it worth doing it vs leaving things as they are? Any recommendations?

Why do you have low rate savings when you can get 5% for them? That's a significant difference.
Same with the mortgage, there is no point to pay off that amount at 1.89% when you could be making more by saving it instead. You're missing out on hundreds of pounds by doing so and far better for that to be in your pocket than the bank.

But you also need to consider your overall position, if you have low rate savings you may also have other financial products that are sub optimum that need to be reviewed. But definitely don't just leave things as they are.

chilswelluk

jimjames said:

Why do you have low rate savings when you can get 5% for them? That's a significant difference.
Same with the mortgage, there is no point to pay off that amount at 1.89% when you could be making more by saving it instead. You're missing out on hundreds of pounds by doing so and far better for that to be in your pocket than the bank.

I don't know if I agree with this, as there are often different factors at play and it does not always come down t o basic number crunching.  I used to move my money about all the time to get the best rate on savings.  These days I just throw it all at mortgage over payments and a pension.  I basically have zero savings.  Years ago I had a lot in savings and I lost my job.  Due to the amount I had in savings I was prevented from claiming benefits.  The money I spent supporting myself while unemployed far outweighed the benefits I derived from savings, compared to if I had been allowed to claim benefits.  If I loose my job now, I have peace of mind knowing that I can claim benefits and have paid a large chunk of my house off and built up a very decent pension pot.

jimjames

chilswelluk said:

jimjames said:

Why do you have low rate savings when you can get 5% for them? That's a significant difference.
Same with the mortgage, there is no point to pay off that amount at 1.89% when you could be making more by saving it instead. You're missing out on hundreds of pounds by doing so and far better for that to be in your pocket than the bank.

I don't know if I agree with this, as there are often different factors at play and it does not always come down t o basic number crunching. 

 

If I loose my job now, I have peace of mind knowing that I can claim benefits and have paid a large chunk of my house off and built up a very decent pension pot.

On a financial site it is all about the number crunching. There is zero reason for having savings at 1% when you can get 5% unless you are so loaded that you don't care about earning money. 
If you lose your job you can use the savings pay the mortgage. There is no financial reason to pay off a low rate mortgage although you make a good point about benefits. That may not be a consideration for many people.