Overpayment

Eddie2023

Hi, please can someone help me to understand ?

I know I can get better savings rates for this money,  however I would like to overpay £250 per month somewhere (I am also saving)

I have a personal loan at 2.9 % and a mortgage at 2.79 % with an ERC of 4% for overpayments over 10%. The £250 would be no ERC penalty

Just for curiosity which would give me the bigger cost saving in a year ? I appreciate it's minimal either way
I'm trying to factor in the impact on the ERC by reducing the overall mortgage balance to see this as a saving along with interest 🤔

Thank you 

penners324

Clear the loan first. It'll save on interest and be good for affordability when it comes time to remortgage 

Eddie2023

Hi, thank you, that makes sense 

Newbie_John

Create a separate saving account, save there and get 5%.
When you come close to end of your existing fix - use that money (and acquired interests) for whatever has the highest interest then.

Exodi

If there's no ERC payable, it's as simple as 2.9>2.79.

However, as @Newbie_John correctly identifies, the best idea would be earn nearly double the interest by putting it into a competitive savings account (or depending on your risk appetite and time horizon, consider investing).

People always misinterpret the advice 'put it into a higher interest savings account instead' as 'don't bother paying off your mortgage', but there's nothing stopping you after earning much more interest in the savings accounts simply making a lump sum payment towards the mortgage later (e.g. when the mortgage interest rate becomes higher than the savings interest rate).

The most financially disciplined will hold on to big mortgages while holding even bigger investment portfolios because (typically) investment returns > mortgage rates. But many like the emotional aspect of having no mortgage.

saajan_12

Eddie2023 said:

Hi, please can someone help me to understand ?

I know I can get better savings rates for this money,  however I would like to overpay £250 per month somewhere (I am also saving)

I have a personal loan at 2.9 % and a mortgage at 2.79 % with an ERC of 4% for overpayments over 10%. The £250 would be no ERC penalty

Just for curiosity which would give me the bigger cost saving in a year ? I appreciate it's minimal either way
I'm trying to factor in the impact on the ERC by reducing the overall mortgage balance to see this as a saving along with interest 🤔

Thank you 

Over a year either saving or overpaying 250 at the start of each month, you would profit by
* £45.34 on the mortgage @2.79%
* £47.13 on the loan @ 2.9%
* £81.25 in savings @ 5%

Note the savings interest should really be thought of as net of tax, if you're exceeding your allowance, but its likely 0%. You can always pay a lump sum of £3045 at the end of the year from the savings account and you'd still be left with a free £35.91 (81-45) more than you'd otherwise have. 

Re loan v mortgage, as you can see it's very little in it for that amount and similar rates. Not sure what you mean by the ERC impact - I guess if you'll have loads more to overpay in the coming years, that will exceed both the loan balance and 10% allowance then perhaps you want to use up this year's allowance but such a small difference it's not worth thinking about.

Eddie2023

Hello all, thank you for your replies. Really useful to read and excellent advice

Thank you again