Saving to pay off mortgage earlier.

Poor_Leno

Hi guys.

So, currently my outstanding mortgage is 118k and it was a 28 year term when I took it out in 2022 (aged 41).  Back then I was paying 375 a month, though that has now increased to 689 since the 2 year fixed ended - the rate was 2% on the first 2 year fix term, while since March the rate is 5.02% when I started another 2 year term.

Given some health concerns I have the future (the last 2 years my dad has a little known dementia type disease called corticobasal degeneration and he also has parkinson's with this) I need to start planning on paying off this debt earlier.  My dad is 74 and in a care home since the autumn of 2022 and of course things like this start to make you think about yourself - only three years ago he was perfectly healthy and enjoying retirement with my mum - sigh

I have several options to consider and I'm really unsure what is best.  What I do know, whatever I do, I prefer to have access to either part or most of what I can put aside (or invest) should I desperately need to.

my options : 

1) overpay the mortgage by £190 per month would see the mortgage end almost 10 years earlier than current.  However, this is the worst option as there is no access to this money if I needed it.  I do already have 6 months of my yearly salary saved in the event I might not work for a period of time but I always seem to prefer to not feel like I can't access my money if I really needed to.

2)  save this money each month into the highest paying regular savings account and use this money to pay part of the mortgage off each year (I am already saving £250 per month into a virgin money regular saver that is paying 10% interest, and in the next 30 days i've two other savings accounts maturing with Nationwide and Skipton that were paying 8% and 7.5% respectively).  The thing I like with this option is I at least gain some money from the interest, rather than just overpaying directly.  I presumed as much that as long as the savings rate is higher, then this ould be more sensible than option 1.

3) I still have an existing lifetime ISA account which I could pay into up to age 50 when they stop accepting payments into it (which would be a savings of 24k + bonus from now until I reach that age).  The draw with this is the bonus you get.  The problem I can't get my head around is ... what happens with the money between age 50 and 60 ?  From what I read you lose MORE than the bonus if you withdraw for any other reason than the earliest age you can withdraw for retirement (age 60).  To me it seems a bit odd that you have this 10 year gap where you are at the mercy of whatever interest rate is being paid by the provider?  The better alternative to the Cash LISA might be a balanced investment from a stocks and shares LISA, which is currently yielding 8.9% average annually on moneybox.  Obviously it has its risks, but its almost twice what their Cash LISA offers.  From what I saw of their S&S LISA it isn't woth having for the lower risk option as it only yields about the same as a Cash LISA.  The thing to like about it (and above paying extra into my company pension scheme) is you can withdraw the lot at the age of 60 without penalty at that point.  The bad point with this product is the fact you lose more than you gain should an unexpected life event occur and need to withdraw the money for any other reason than retirement apart from a few ill health exclusions (cancer being one for example).

4) My company pension matches contributions to 7.5%.  Right now I pay 4% (and so do they).  Obviously I could increase this to the maximum benefit of 7.5%.  The problem is no access to this money if it was needed and not only that, even though you can start to draw from this pot aged 57 (it used to be 55 but it is changing from April next year...not sure why but it is), 25% is the maximum lump sum you can take without being taxed.  To be honest, while the pension contributions offer many positives, its probably my least favoured option since there's no access at all to the money until that point and even then, only 25% of it. I don't anticipate that being much over 25k (in today's money).  So unless my mortgage is down to the last 25-30k by then, its probably pointless for me to make these extra contributions, as lovely as it might be to have almost double the amount of contributions going into it.

Right now, I feel like option 2 is safest... option 3 has some risk but i'm puzzled about this 10 year period of all LISA products not doing very much, and without any ability to switch this product for a different investment product other than another LISA.... which in 5-10 years time will probably be non-existent.  Option 4 is probably the long term wisest, but I don't see that clearing the balance by age 60 with only being able to take 25% of it.

sorry for the lengthy post.

ManyWays

Regular savings accounts only work for small amounts of money because the amount you can put in a month os heavily restricted. so you cant roll forward one years savings into the next year. Also these savings are taxable. They are not a long term way of building up a large pot.

In general the interest rate you will get on your savings may well not average more than your mortgage interest rate.

Have you asked your employer pension scheme what the options are if you have to retire early on health grounds? getting matching contributions from your employer plus tax back is effectively giving you an uplift of over 100% in the first year - massively better than a LISA 25% bonus.

MFWannabe

Personally I’d go with Option 1 as you have six months savings 
You have another 16 years until you could access pension and you could have the mortgage paid off well before then if you go with option 1 
If you change your mind about making overpayments you can always stop them? 

katsu

The pension money is for you to live on when you are older. You'll need an income.

I woulds maximise your employer free money by going to the 7.5% then yes look at the mortgage reduction with your extra cash. 

I'm not sure how much better off you are by saving the money in a regular save then paying it off. You can go to the mortgage board here for advice working out all out.

TheAble

You can't both pay it off early and have access to the money unfortunately. But making monthly overpayments while at the same time building your savings might be a good compromise.

vampirotoothus

Hi also you have the option of Premium Bonds (may get lucky) and what about a stocks and shares ISA (a small amount each month). You could distribute the amount across most of the options you have discussed and these two as well, which allow a small investment each month. V x

Stateofart

I would pay extra off each month.  You can stop if things get tight and it's the same as reducing your term but with the added benefit of stopping.  Premium bonds are almost not worth it unless you've got the maximum in.

Poor_Leno

Thanks to everyone for the comments and advice.

The thing I forgot about with paying extra each month off the mortgage is realising that the lower LTV at the end of the term leading then to reducing both the years to repay and access to better rates, alongside the 'saving' in interest from reducing the term.

I think I will take a compromise.. the £190 a month needed to reduce the mortgage term by 1 yr each calendar year, I'll use the money i'm saving into these couple of savings accounts i'm currently drip feeding into.  At least then I'll get the benefit of the interest earnt as well as saving on the mortgage term and still have access to the money should I need it.  I'm on a fixed rate deal so its not like I'd see an immediate benefit by straight paying off the £190 a month off the mortgage balance, If I do it before the end of each year then that's all that matters.... I think (assuming nationwide resets its 10% overpayment limit each calendar year and not tax year... I didnt check that yet).  Though i'm not going to getting anywhere close to that anyway even if I did two overpayments of 3k next year.