Overpaying mortgage

NH2004

We bought our house in 2014 on a 24 year repayment mortgage. Initially had a 5 year fix and then took out a 7 year fix in 2019 at 1.99%

I’m now in a position where I can afford to overpay the mortgage by £200 month. 

My question is should I do this given the low interest rate on my mortgage or just pay it into a decent savings account?
(I am a 40% tax payer)

Also is it better to pay a regular overpayment each month or just pay a lump sum say once a year?

Slinky

You can get 7 (Santander Edge)  or 8% (Nationwide) with some of the banks on a regular saver for that sort of sum of money. Makes little sense to forego that rate when your mortgage is at 1.99%.  You say 'we'. Are you married to the other person? Are they a 40% taxpayer? If you have other savings in your name that will push you nearer to earning £500 interest a year it could be advantageous to use a 20% tax payer to save the money as they have £1K savings allowance. 

NH2004

Thanks Slinky

Sorry, I say we out of habit sadly my wife tragically died last year. 

I do have other savings so will earn over the £500 limit so will be paying tax on any interest. 

Slinky

NH2004 said:

Thanks Slinky

Sorry, I say we out of habit sadly my wife tragically died last year. 

I do have other savings so will earn over the £500 limit so will be paying tax on any interest. 

I'm so sorry for your loss.

It would be worth doing the sums, I think you'd still be better off earning 7 or 8% and paying tax than overpaying on 1.99% interest.

jrawle

Do you have an ISA? They are even more worthwhile for a higher rate taxpayer.

NH2004

jrawle said:

Do you have an ISA? They are even more worthwhile for a higher rate taxpayer.

Yes I do have an ISA which is maxed out for this tax year  

Altior

The maths is straight forward. Whilst you can get a much better rate via cash savings than the liability, you're better off saving. And if the savings rate is higher post tax, delaying reducing the capital balance of the mortgage for as long as possible (subject to ERC considerations).

Much of the decision making falls outside of the pure mathematics. Many people on here want to clear the mortgage asap, but in reality it's mostly psychological, and the feeling of being 'debt free'.

For example, I'd rather have £100K in the bank paying 6% interest, and have a £100K mortgage at a servicing cost of 2% interest. Others would rather have no cash in the bank and no mortgage [extreme example for clarity, I don't literally mean no cash in the bank!].

You're obviously benefiting from the leverage in this hypothetical example, but also the flexibility of having much easier access to the capital, rather than it being tied up in an illiquid asset.

So there's no right or wrong answer as such. One answer is preferential when it comes to the raw numbers, but there are factors at play outside of the raw numbers. 

There are additional twists to the story, for example especially as a higher rate taxpayer, increasing pension contributions. However that needs a much more detailed review of overall finances and profile. 

Andreg

Yes you should use savings accounts rather than pay down the mortgage.  Even premium bonds are likely to give you more than 1.99% tax free (the prize fund rate is 4.4% from March), so that's better than paying down the mortgage.

You may further benefit from switching the mortgage to interest-only for a six month period and saving the amounts that you would have repaid on the mortgage.  This can be done quite easily now under the mortgage charter, with no impact on your credit score.  Most lenders allow you to request it online.

Make sure your savings are accessible when your mortgage fixed rate expires in 2026 to give you the option to partially repay the mortgage at that time.