Overpay mortgage or save

ktjb

Hi, I am a bit stuck on what to do and thought I’d ask your opinion. I have a mortgage of £150,000 left over a term of 29yrs, but with a low interest rate on a repayment mortgage of 1.6% fixed for 2yrs. I want to repay £1500 per month on top of my mortgage of £500pm. This should bring my years of mortgage down considerably, but it may be better to save the money in a high interest account. What is the best way to do this? I’m hoping to bring the mortgage down as much as possible over the next couple of years in particular, so that if the interest rate is still high when I come off the fixed rate, that my mortgage monthly payment won’t be too steep. Hopefully this makes sense and I really appreciate any advice. Thank you.

Mark_d

If you put that £1500 per month in a savings account rather than into the mortgage, you'd be earning more interest than you're paying on the mortgage.You can do this with completely security using a cash ISA.

If you can afford to be shelling out a total of £2000 per month now...would it really be a problem if your mortgage payment jumped from £500 to £1000 in two years time?

Having a mortgage isn't constraining your life now so why sacrifice luxuries to pay off the mortgage early?

Lumiona

A quick calculation:

1. Putting £1500pm in a high paying cash ISA (T212's is 5.16%) would earn £1684.04 in interest and you would have £37837.62 to knock off the balance of your mortgage after 24m. Your Mortgage would be around £142688 at this point so it would bring it down to £104851. The mortgage interest paid would be £4688.58. Net interest paid £2850.96
2. Overpaying £1500 pm would give the balance of £106131 at the end of 24m. Net interest paid £4131.14

Doing 1 is a gain of £1280.18. However it depends on the savings interest remaining at 5.16% for 2yrs which is unlikely.

We are doing 1 ourselves as we have a low rate mortgage for 2yrs, I did the maths and the interest gains are worth it for us. DH really wanted to do B and see the mortgage balance reduces for piece of mind but I couldn't see it was worth it.

ladysummerisle

Financially, yes the savings account with higher interest rate would be the better option. 

I find it motivating to still chip money off the mortgage but I’m sure it’s equally motivating seeing savings increase. Paying off early saves on both stress and interest in the long term!

Sistergold

Save at high interest for now and then pay lump sum at the end of the fix? 🤷‍♀️ 

powerspowers

I’m doing similar- paying a chunk into a fixed saver and then paying off when the fix ends. Watch out for your overpayment limit, you might need to make sure you pay some off before the limit resets (if you have one, your lender should advise).
I have a separate savings account so it stays separate from our other savings. 

Also think whether you have enough of an emergency fund and are paying an adequate amount into a pension. 29 years is a long time to be paying interest so definitely worth getting that down if you can. 

Good luck! 

LadyWithAPlan

Also be aware of hitting the interest income tax limits as that also applies - £1k pay as BR tax payer and £500 as HR- if you have room in ISAs etc great but otherwise being taxed on interest would narrow the diff between A & B 

premium bond winnings are also tax free but not guaranteed of course