Pay towards mortgage (2.6%) or save (5%)

MoneysavingSophs

Hey guys,

We've got a mortgage of 18 years, but fixed at 2.6% for the next 5 years (we did a 10 year fixed mortgage in 2019! We know how fortunate we are!!). We'd been overpaying every month (£625 to £850) as we hope to pay it off by 2029 with a lump sum... however when the interest rate rose for savings we stopped overpaying and started putting money in various savings accounts at around 5.5% instead.

Now our mortgage company has contacted us and reduced our mortgage payments to £450 (recalculated because of the overpayments)

We have about £50k in various savings accounts (mainly taxed). We're saving 
Our mortgage will be worth about £60k in 2029.

Should we accept the £450 and put £175 in savings somewhere which will get taxed as well, or overpay by £175 to reduce our mortgage even though the interest is only 2.6%?

South_coast

Are you making full use of your ISA allowances? You could put away £20k each tax-free each year that way?

kempiejon

Savings at 5% interest costs at 2.5% looks obvious to save.
We've overpaid our mortgage - fixed 4 years ago at 1.74% until July 25 - to the tune of about £100 pm.  My investment have returned over 8% past decade but I like the idea running in front of my mortgage. Disinterest SO does not use their surplus very efficiently so sticking it in the mortgage is better for them. We also chuck lump sums £1-3k every year or so.

The mortgage does tie up the money for good, savings could be re-directed. Nice to have a new car or kitchen but being mortgage free 5 or more years earlier is worth more than hard cash or things to me.

gill5blue

I was in a similar situation. I decided to put my extra money in premium bonds. The winnings easily paid the interest on the mortgage and also paid for a few holidays. 
I am now mortgage free, and now pay what I was paying to the mortgage into premium bonds.
It worked for me, as I could also withdraw the money reasonably quickly if needed.
gill5blue

Mark_d

MoneysavingSophs said:

Should we accept the £450 and put £175 in savings somewhere which will get taxed as well, or overpay by £175 to reduce our mortgage even though the interest is only 2.6%?

Absolutely don't overpay your mortgage.You can easily beat the 2.6% interest rate using ISAs, Premium bonds...even the interest on my current account/east access savings beat 2.6% (and that's allowing for tax on the interest).

Why aim to pay off your mortgage in 2029?  Investing your £175 per month in S&S ISA or pension, you should get a long term return of between 6% and 10% tax free.

kempiejon

There's more to being mortgage free than just squeezing a few percent on savings. Shame inflation has been falling as that was nicely eating debt.
I suppose it's worth running the numbers if saving at 5% (or so) and adding that in a lump towards the end of your term will it clear the mortgage quicker than monthly overpayments? One might well find the difference is marginal.
Of course in 5 years when you come off the fix the interest rate could be much higher or in the intervening years interest rates could fall so your savings cash earns less.
Alternatively over 5 years the interest rate falls cash earns less and it'll be worth running the numbers to see if paying the penalty for swapping mortgages becomes worth investigating.
There's not much certainty 5 years out what interest rates will have done. 

badmemory

If you are actually paying tax on those savings then you are actually only getting 4.4% not 5.5%.  So as already said you need to take advantage of ISAs.  I think the main question is are you sure you won't touch those savings if you don't pay them off the mortgage.  Some people can leave it untouched & some can't.

Brie

How much interest will you get each year and how much tax will you pay on that?  Balance that against if there is a charge for overpaying on your mortgage above a certain amount - some allow 10% per year but you might have saved more than that in a few more years.  So you might want to save some money at 5.5% for 2 years and then throw that at the mortgage and then repeat the process in another 2 years.