Mortgage Overpayment vs Premium Bonds

mynyddrider

Hi everyone,

We currently have £97,000 left on our mortgage and a term of 13 years. With an interest rate of 1.54% which is locked in for another 3 years.

We also have approx. £25,000 sat in Premium Bonds.

Would anyone have any words of wisdom for the following?

• Do we keep topping up the Premium Bonds (£250 is a month at the moment).

or 

• Draw down a lump from the Premium Bonds (10% of our mortgage balance) and make an overpayment.

Any advice would be greatly appreciated.

(If it matters, we're both mid/late 30s)

eskbanker

If you're only paying 1.54% on your mortgage then it seems a no-brainer not to repay more than necessary - you'd perhaps benefit from saving the money somewhere better than premium bonds though.

refluxer

If you pay tax on savings interest, are you making use of your ISA allowance ? I would be doing that before saving in Premium Bonds, personally. 

You can currently get up to 5.25% in a fixed rate cash ISA (or 5.09% in easy access), both of which are substantially higher than you're likely to win (with average luck) on Premium Bonds, which looks to be an equivalent rate of 3.70% from £25k, judging by the calculator on this page : https://www.premiumbondsprizes.com/#25000

Archerychick

Agree with the others. It does not make sense to overpay your mortgage with that rate. I would maximise my tax free savings allowances before premium bonds but I like the idea of a chance to win a decent amount!

mynyddrider

Archerychick said:

Agree with the others. It does not make sense to overpay your mortgage with that rate. I would maximise my tax free savings allowances before premium bonds but I like the idea of a chance to win a decent amount!

This is also our thought. While the odds are clearly stacked against us with the Premium Bond lottery, this is still a chance for a payout.

refluxer said:

If you pay tax on savings interest, are you making use of your ISA allowance ? I would be doing that before saving in Premium Bonds, personally. 

You can currently get up to 5.25% in a fixed rate cash ISA (or 5.09% in easy access), both of which are substantially higher than you're likely to win (with average luck) on Premium Bonds, which looks to be an equivalent rate of 3.70% from £25k, judging by the calculator on this page : 

That link is excellent. Thank you very much for sharing.

Based on those percentages, it is essentially a call on if we are happy to loose the 1.55% interest rate (5.25% minus 3.70%) to be in with a chance of winning on the Premium Bonds.

With on our current savings, we'd be down £387.50 a year....more if we don't hit the 3.70% return from Premium Bonds.

mynyddrider

One thing to add.

While I am a higher-rate earner my wife is currently unemployed.

I assume there is no reason the ISA can't be in her name to avoid the reduction is allowance I would get?

refluxer

mynyddrider said:

One thing to add.

While I am a higher-rate earner my wife is currently unemployed.

I assume there is no reason the ISA can't be in her name to avoid the reduction is allowance I would get?

You each get an ISA allowance of £20k each tax year.

If your wife isn't currently working then it's worth noting that she can earn up to £18,570 in combined earnings and savings interest before paying any tax on savings interest... 

https://www.moneysavingexpert.com/savings/tax-free-savings/

ISAs benefit people who do pay tax on their savings interest the most but if she's likely to get a job in the near future, then getting savings into ISAs might still be wise and the difference between the equivalent ISA and non-ISA accounts isn't that great, at the moment at least (ISA savings accounts have often paid a fair amount lower than their non-ISA counterparts in the past).

Albermarle

mynyddrider said:

Hi everyone,

We currently have £97,000 left on our mortgage and a term of 13 years. With an interest rate of 1.54% which is locked in for another 3 years.

We also have approx. £25,000 sat in Premium Bonds.

Would anyone have any words of wisdom for the following?

• Do we keep topping up the Premium Bonds (£250 is a month at the moment).

or 

• Draw down a lump from the Premium Bonds (10% of our mortgage balance) and make an overpayment.

Any advice would be greatly appreciated.

(If it matters, we're both mid/late 30s)

What about other longer term investments, like pensions. Maybe you could top those up as well. ?