Am I better off putting 50k savings into my next mortgage or not?

NomCJ

Hi, I am due to buy my next home. I currently have £50,000 inheritance in savings at a (taxable) rate of 5.22% AER (that I have made sure is accessible for a house purchase). [At present it returns around £140 per month pre tax.]

My mortgage broker will get me a rate of around 5.32%.
If I were to keep the 50k in savings the mortgage would cost me about £1077 per month, if I used the 50k to reduce my borrowing amount it would cost me around £789 pm.
Do you think it would make sense to keep the money in savings and use this stash to pay my mortgage each month, and therefore cover the next few years mortgage payments without eating into my regular income, or to tie the money up in the house and make the payments cheaper now (but coming out of my regular income)?

The former would mean I could make mortgage overpayments, and I would be banking on interest rates lowering a little over the next couple of years.

Thanks in for advance for any advice/opinion 

Brie

I'd be putting a bit chunk of the £50k towards the new place and continue to pay £1k a month if you can.  The savings on interest should be substantial.  It may also help you get a very good rate at renewal time as you'd be owing so much less.

Hoenir

NomCJ said:

If I were to keep the 50k in savings the mortgage would cost me about £1077 per month, if I used the 50k to reduce my borrowing amount it would cost me around £789 pm.

This then frees up £288 a month which can then be used to overpay the mortgage further. If the entire £50k is earmarked for a future house purchase. Then makes sense to use it to reduce the mortgage balance now. Though this assumes that you've some immediately accessible savings to hand for unexpected financial outgoings. 

Newbie_John

£50k in savings at 5.22% should return £217.50 monthly pre tax, assuming you're on 20% tax - £190.67 after 20% tax paid over £1k. You could put £20k to ISA and save on tax, then another £20k next year to new ISA and save tax.

Anyway, as your mortgage and savings interest rate is comparable - there is really not much difference in what you do. But if we consider details - your 5.22% savings equals to 4.58% after tax and by overpaying you save £320 yearly. If you kept your £50k in 2 ISAs and paid no tax, for example at this Zopa 5.61% fixed for 1/2 years:
https://www.moneysavingexpert.com/savings/best-cash-isa/#twoyearfixed
then you'd be £145 better off that way.

Overpaying - you lose access to your free money, and as you can see you can actually make money (£145) if you don't overpay.

One mistake I did in the past was thinking that overpayment is better as it frees £288 monthly in your example vs. potential saving of £145 - so it's better to overpay. This is not true, look what happens when you pay off your mortgage, if you kept £50k in savings - you still have £50k, if you overpaid - that's gone. So the £288 is made up of interests + part of this £50k that gradually disappears.

I wouldn't overpay a penny. Once you overpay £50k is gone, if you keep it you have a lot of options ahead of you - once your mortgage reaches £50k balance - you can just pay it off in full.

Bigphil1474

The problem as I see it is that you'd probably get used to the savings paying your mortgage but when it's gone you've suddenly got to find the money from your wage. Also, if you suddenly had a change in circumstances, your savings would tide you over if it was a temporary thing like a loss of a job. Given the figures you've provided, I'd probably keep the £50k in savings, manage it to get a better rate, and pay the mortgage out of earnings - if I could afford it. 

Bluebell1000

An offset mortgage might be worth considering...

Sistergold

If you paid your mortgage from your savings instead of from your wages, what will you do with your wages? Makes no sense. Money is money unless you are saying you don’t earn enough to pay your mortgage? The only question I think is whether to keep the savings or pay a lump sum towards your new mortgage? Whatever you decide you will need to make sure you keep enough money as emergency fund equal to X months of your household expenses. 

Exodi

Sistergold said:

If you paid your mortgage from your savings instead of from your wages, what will you do with your wages? Makes no sense. Money is money unless you are saying you don’t earn enough to pay your mortgage? The only question I think is whether to keep the savings or pay a lump sum towards your new mortgage? Whatever you decide you will need to make sure you keep enough money as emergency fund equal to X months of your household expenses. 

My thoughts also, I thought this was a typical 'saving vs overpayment' so was quite suprised it turned into some weird drip-feed overpayment with temporarily subsidised wages plan.

If it was me, I'd make sure I had an appropriate emergency fund (maybe £5k but I don't know the OP's circumstances... people on this forum can go a bit mad and suggest obscene emergency funds), and then put the rest in as an overpayment.

If OP is able to pay £1,077, then I'd encourage them to do that also and reduce the term.