Saving account or paying off the mortgage

Artica

Hello,

I am getting £25000 from an inheritance. 

I have 2 mortgages running along side each others. One is at around £75000 with a 3.05% interest fixed for another 7 years, the second is larger but fixed at a lower rate for another 7 years.

There is a large fee if I pay more than 10% of the mortgage but I can make monthly payment as long as it does not amount to more than 3 times my monthly compulsory payment and this would reduce the terms (and not the amount I pay every month which is not what I am after).

What do you think make more sense:

Pay £800 extra a month in the small mortgage with a 3.05% rate (interest calculated daily) for 2.5 years

OR put the money in a saving account (I want easy access to at least part of it (just in case) so perhaps 2 savings account at a rate over 4% and hold it for the next 7 years (adding a bit into it as I go along) and pay a lump sum in the mortgage at the end of its fixed term?

I am not too much of a gambler so I have not considered more risky investment options.

Thank you

Sg28

The way I would look at this is can you beat your mortgage rate with savings rates? If yes then save. If no then overpay. 

Currently its yes, this may change at some point over the next 7 years though. 

Catplan

Have you used this years ISA allowance, if not 20k into the highest paying Flexible Easy Access ISA, the other 5k can be put into easy access saving account and drip feed into some higher paying regular savers. Keep an eye on interest rates, it might be better to pay off some over the next few years if interest rates on savings drop and/or you need to pay tax on interest earned.

jimjames

I wouldn't pay either mortgage off when you can get 5% on savings

Janie2008

Savings rates are on the way down but you can still beat the mortgage rate. If you are a tax payer I would put some in a fixed rate isa. Put the rest in an instant access until the savings rate fall below the mortgage rate. 

El_Torro

For now I would stick to savings (assuming you don't want to invest). If interest rates on savings go below 3.05% in the next 7 years then you can make a mortgage overpayment. 

You can put some (or all?) of the money in long term fixed interest savings. 5 year rates are currently giving better interest rates than what you're paying on your mortgage. 

If you are going to pay 20% or 40% tax on this interest then it becomes less worth it. If tax is an issue you can stick the whole lot in Premium Bonds which currently should (emphasis on "should", depends on how lucky you are) give a better return than 3.05%.

Albermarle

Whatever you do you should always keep some cash aside as an emergency fund.

I am not too much of a gambler so I have not considered more risky investment options.
In this specific situation, your instincts are probably right. However in the longer term, when for retirement for example, being too cautious can be a risk to your long term finances.
Sensible long term ( >10 years say ) investing is not gambling, as you are much more likely to win than lose.
Or you could say it is gambling but with the odds heavily stacked in your favour.

Artica

Thank you everyone, my ISA rate is awful so I think I will shop around, put some in an isa and some in a 1 or 2 year "blocked" saving account where I can see I can get between 4.5 and 5% at the moment