Pay off mortgage or keep savings?

navidson

Looking for a bit of advice about how to make our savings work best for us - Any suggestions as always appreciated!

My partner has recently moved in with me after selling her house.  We decided to deposit the money from the sale (£80,000) into the highest earning savings account we could find (A Cahoot saving accounts with 4.5% interest)

We remortgaged our current home to allow us to make overpayments - so chose a First Direct mortgage that allows for unlimited overpayments. 

The plan was to use the interest from the savings (which works out around £170 a month) to overpay the mortgage and reduce the term as we go.  The first overpayment has been processed today and i've noticed that the interest charge is considerably higher than it was on last months payment (£201 compared to £40 last month)  - I'm not sure why this is the case and it has me wondering if somehow the term won't be reduced at all by doing it this way?

Are we going about things in a sensible way?  Would it be better if we just paid off the total mortgage amount (£57,000) and put our monthly mortgage payment into a long term savings account?

Thanks

Exodi

Sorry it's hard to know exactly what happened without more detail but it's likely if you remortgaged that the first months interest was less because it only accounted for part of the month. The following month may represent the first 'full months' worth of interest.

On £57,000 at 4.25%ish, you'd expect your monthly interest to be around ~£200. £40 per month in interest was never going to be the normal amount (you wish!).

"I'm not sure why this is the case and it has me wondering if somehow the term won't be reduced at all by doing it this way?" - you can choose to either reduce your monthly payment or the term of the mortgage from over-payments, it'll be one or the other.

jifmoose

On the savings side, is the Cahoot account an ISA? Just be aware that if it's not you'll need to pay tax on the interest from a standard savings account after the personal savings allowance. The PSA is £1000 interest a year, or £500 if you're a higher-rate tax payer. The tax rate you pay scales with tax band (usually 20% or 40% of the interest).

The bank doesn't take that tax off - it pays you the total (gross) interest. HMRC will usually contact you the next tax year to say how much you owe and arrange payment (pretty straightforward, they can just adjust tax code etc to collect it with PAYE).

But if you're making £hundreds in interest you might hit the PSA within the year - so something to bear in mind.

Exodi

I can't see that Cahoot offers ISA's.

At 4.46% on their cahoot Simple Saver (using the gross rate, not the 4.55% AER as they are withdrawing the interest), it means on £57k the OP is earning £2,542.20 in interest, well over the PSA.

If they are a basic rate tax payer, they'd pay:
£1000 @ 0% = £0
£1542.20 @ 20% = £308.44

If they are a higher rate tax payer, they'd pay:
£500 @ 0% = £0
£2042.20 @ 40% = £816.88

Bringing the effective interest rate of these accounts down to ~3.92% / ~3.03% respectively, less than the mortgage (or even worse if they're an additional rate tax payer!).

Meaning this method is almost certainly worse than just overpaying the mortgage across the year (though maybe the first few months it might be marginally beneficial, if you have not used your PSA elsewhere). People typically do what the OP is doing when they are still enjoying a ~2% fixed mortgage rate from a few years ago.

navidson

Thanks for the advice everybody

I'm still not totally sure of the best thing to do - Starting to sway towards paying off the mortgage in full (leaving us 23K in savings) and then just adding to the savings monthly

Exodi

navidson said:

Thanks for the advice everybody

I'm still not totally sure of the best thing to do - Starting to sway towards paying off the mortgage in full (leaving us 23K in savings) and then just adding to the savings monthly

If the options are only between saving or overpaying, then that seems like the obvious thing to do.

I would remind that there are more options than just these. What are your pension situations? Are you on track to meet your retirement goals? You seem to already have a lot of cash savings - any reason why? Have you both used your ISA allowances? What is your view towards investing? etc

navidson

Exodi said:

navidson said:

Thanks for the advice everybody

I'm still not totally sure of the best thing to do - Starting to sway towards paying off the mortgage in full (leaving us 23K in savings) and then just adding to the savings monthly

If the options are only between saving or overpaying, then that seems like the obvious thing to do.

I would remind that there are more options than just these. What are your pension situations? Are you on track to meet your retirement goals? You seem to already have a lot of cash savings - any reason why? Have you both used your ISA allowances? What is your view towards investing? etc

The cash savings we have are purely from the money received from my partners house sale.  We both had our own houses for a number of years and she then sold her property to move into our current property together.

jifmoose

Definitely worth considering those other options as Exodi lays out. Some of it is personal preference/situation: we are in a similar position, we put a chunk into the mortgage, have pensions sorted and are happy with some risk so have some (but not all) in investments. In practice that is returning far more than savings - but of course may (and has) gone down as well as up. 

If you are close(-ish) to retirement age it might be worth checking you have no gaps in national insurance years. If so, you can still pay to fill them (I believe) and that gives a worthwhile boost to state pension.

If you're set to do savings, e.g. for the remaining ~20K there are still some nice cash ISAs around, even if rates have comes down. Trading 212 has one paying 4.73%, and that would be tax free. You can only put 20K into the ISA per year, so you would have some left over.

If you're saving monthly it's well worth having a look at "regular savers". These can pay much higher rates of interest, 7% or even higher, but the catch is you can only pay a smallish amount into them each month (£100-500 usually). But this can be a good deal if you are topping up every month. Monmouthshire BS has one paying 6% at the moment which allows paying in £500 a month. You can usually access your cash without notice. Though of course potentially you may have to pay tax on these as they're not ISAs.