Use savings for deposit or overpayment

redundantmortgage

When we bought our property we decided what we could comfortably afford to pay each month and took out a mortgage for the term which carried that monthly payment which was 13 years. Our overpayment limit was 10% of the original loan.

We overpaid every month until I was made redundant. This came at a time when we could take out a new deal and our prior overpayments meant our monthly payments reduced considerably which was helpful given the circumstances. The lesson learned here for future mortgages is to take out the full 25 years to minimise how much we have to pay each month, but to pay what we can each month via overpayments.

We ended up paying the mortgage off in 5.5 years but were in a position to pay it off after 4.5 years but didn't due to overpayment penalties

Our plan is to move somewhere bigger which is likely to cost in the region of £300k more than our current property is worth. We currently have just over £100k in savings.

The question is do we borrow £300k and use savings for overpayments/emergencies or do we pay the £100k savings and borrow £200k?

My primary concern is job security having been made redundant before and struggled to find a new job. We also want to minimise the interest we pay overall, obviously £300k would mean more interest in the beginning but later on we may find ourselves in the situation where we can pay it off but can't due to overpayment penalties and interest is much higher now than it was when we had a mortgage.

I see £30k as a limit we won't be able to reach in overpayments but £20k as a limit that would be too low, particularly in later years once the overpayments get the monthly payments down.

Hoenir

redundantmortgage said:

 The lesson learned here for future mortgages is to take out the full 25 years to minimise how much we have to pay each month, but to pay what we can each month via overpayments.

Mortgage terms can always be extended. The discipline of repaying the money quicker and not allowing it to be frittered away is no bad thing. 

Bigphil1474

Can you borrow the higher amount and what interest rate will you pay against the lower?
What interest are you getting on your savings?
Would you earn more in savings than pay in mortgage?
Having cash reserves might be a good idea as you can use it to pay the mortgage if anything unexpected happens. However, you'll have bigger payments to find anyway. I'd guess a £300k mortgage is gonna cost roughly £2400 a month, where as a £200k mortgage will be roughly £1,600 (at around 4.2% rate. ). 
Consider LTV = if the loan is a lower % to the value of the property you might get a better rate making it worthwhile. 

Just some ramblings there, but basically, it'll depend on your circumstances, don't think there's a right or wrong answer. You definitely need a spreadsheet.

Albermarle

You should always have an emergency savings fund, to cover unexpected expenses/temporary loss of income.
Does not have to be £100K but should be a significant amount.

saajan_12

Keep a small emergency fund aside and then put the rest towards the deposit. Not only will it save interest each month, but starting at a lower LTV may get you a better rate on the whole thing.

If you're anticipating having excess income to overpay, then you'll soon build up cash that you can use for whatever other needs. Comments in line..

redundantmortgage said:

The lesson learned here for future mortgages is to take out the full 25 years to minimise how much we have to pay each month, but to pay what we can each month via overpayments. 

We ended up paying the mortgage off in 5.5 years but were in a position to pay it off after 4.5 years but didn't due to overpayment penalties

Well as you've seen, there's limits on overpayments so you may not be able to overpay as much, and end up spending more on interest / penalties than you needed to. It may be better to go for a realistic payment, albeit with some buffer. 

redundantmortgage said:

My primary concern is job security having been made redundant before and struggled to find a new job. We also want to minimise the interest we pay overall, obviously £300k would mean more interest in the beginning but later on we may find ourselves in the situation where we can pay it off but can't due to overpayment penalties and interest is much higher now than it was when we had a mortgage.

That's fair, and it makes sense to hold back an emergency fund, to cover your essential costs only for a couple of months. beyond that, remember with lower monthly payments, you'll have more excess cash which can build that cash balance up again. The emergency fund should be fairly easy access, though still in a high interest account, so the difference between that (after tax) and your mortgage interest shouldn't be huge.  

redundantmortgage said:

I see £30k as a limit we won't be able to reach in overpayments but £20k as a limit that would be too low, particularly in later years once the overpayments get the monthly payments down.

You're thinking of it backwards re the overpayment limits.. the point of overpaying is to lower the balance, and with 300k you start so much further behind, that even with the higher overpayment allowance, it'll take 10+ years to catch up to the balance compared to if you had started at 200k. 

redundantmortgage

Thank you.

LTV will be 60% whichever option I choose and anything below that won't get better rates. Borrowing also shouldn't be an issue because a rough calculation from my previous mortgage provider said we could borrow over £500k.

If we choose the borrow £300k option then the first thing we would do once the mortgage starts is overpay by £30k.

I think the answer here is somewhere in the middle.

Our savings are spread around so hard to put an exact interest on it but it won't be as beneficial as getting a mortgage balance down. 

stormCat99

Have you considered an offset mortgage? We love having our savings being able to reduce the mortgage interest payable, whilst still having the money available to withdraw in case of an emergency.  Best of both worlds.

redundantmortgage

I don't know much about offset mortgages so need to research but my initial impression is they sound too good to be true.

Let's say we want to keep £25k for emergencies and use £50k as a deposit which leaves us with £25k left. Would it be better to take out a £250k mortgage then overpay by £25k with the aim of overpaying by £25k each year thereafter or to put that £25k to the deposit and aim for £22.5k overpayment each year in the knowledge we may end up with £2.5k each year that we can't use for overpayment because it will exceed the limit?

BonaDea

I had an offset mortgage, before eventually paying it off.   No downside as far as I could see.  

BarelySentientAI

redundantmortgage said:

I don't know much about offset mortgages so need to research but my initial impression is they sound too good to be true.

They're great - if you use them right.

The lender runs on the fact that if you see the savings bit as 'available money', then you might spend it on something and suddenly you're paying (the slightly higher than usual rate of) interest on the capital balance.

redundantmortgage said:

Let's say we want to keep £25k for emergencies and use £50k as a deposit which leaves us with £25k left. Would it be better to take out a £250k mortgage then overpay by £25k with the aim of overpaying by £25k each year thereafter or to put that £25k to the deposit and aim for £22.5k overpayment each year in the knowledge we may end up with £2.5k each year that we can't use for overpayment because it will exceed the limit?

Well, many lenders work out how much your allowance is based on the balance at the start of the year, so that logic is not always true.

In general - smaller balance means less interest.  However you get there doesn't matter, but earlier is better from that perspective.

redundantmortgage

OK I see the down side is the interest rate tends to be higher and you get not interest on your savings. Also a limited number of lenders do them and those who do could have that recalculated overpayment limit described.

I think I need to do a few calculations as I'm getting a bit lost with what I'm trying to do and whether there's any logic in it.