Which is best ?

Peelerfart

Hi all,

We are currently overpaying our mortgage by roughly £100 per month.

In addition to this we are putting money to one side so that roughly every three months we can make a capital repayment of £1,000 to our 93K mortgage. Would we be better lumping the two amounts together ?.

If so would we be better making capital repayments or just overpaying?. When we make capital repayments we get a letter from the BS to say our mortgage payment has been reduced. We don't reduce the payment but it makes us feel better. When we overpay we don't get anything from them at all .It is unlikely we would need access to the overpayment money .

angelavdavis

I guess it depends what interest rate you are earning on your money v the interest rate of your mortgage because you will pay interest for every day you are saving up your capital payment.

Peelerfart

I'm only getting something like 4.2% but as it's only there for a month or two it's not really something I care about. It's very handy because it's linked to my current account so I just transfer the money after I've sent the cheque.

Peelerfart

Anyone ??? .Or am I being thick and it doesn't matter ?

Daft_Pegasus

Since you're getting a lower rate of interest on your savings than you're probably paying on your mortgage (and the savings figure quoted could well be taxed too) you would probably be better off paying the cash straight off the mortgage rather than saving it up for a few months.

However the difference is likely to be small and it's always good to have access to some savings just in case, therefore you have a choice to make between saving a little more on the mortgage and having access to savings in case of a rainy day.

Jonbvn

The MSE way would be to pay off the mortgage ASAP, since that has the higher rate and you are probably taxed on the savings. However, over just 3 months, the difference is likely to be small.

Slightly aside from the above, please remember to use your ISA's before you pay off the mortgage. The reason being that the ISA's are tax-free, and in most cases pay a slightly better rate than some mortgage rates.

Peelerfart

Thanks Jonbvn,
We're pouring money into the ISA to get it to the max for the year end and I'm using OH's allowance for a bit of stoozing so we're full 'til Apr '08,then it's stooz time again .

Jonbvn

Peelerfart wrote: »

Thanks Jonbvn,
We're pouring money into the ISA to get it to the max for the year end and I'm using OH's allowance for a bit of stoozing so we're full 'til Apr '08,then it's stooz time again .

Good!

I think it is important that anyone who is a MFW not consider paying off their mortgage as their sole financial goal. IMHO tax efficient savings for your retirement (ISA's and/or pensions) are equally as important.

belfastgirl23

I think the only reason to divert money in this way is as a 'rainy day fund'. It is always useful to have some money in an easy-to-access account and in some ways you're getting the best of both worlds with this, short term savings and money towards the mortgage. But if you already have a rainy day fund then I'd say put this directly into the mortgage...

fagun

Why are you distinguishing between overpayments and capital repayments? All overpayments are capital repayments, and every little bit counts.

I would (and did) make the maximum affordable overpayment each month - remember you pay tax on savings so the effective rate is lower than 4.2%.

You should be able to instruct your mortggae provider to use the overpayments to reduce mortgage term rather than recalculating a reduced monthly payment.

Most mortgage providers also allow you to take back your overpayments if you need them (i.e. in an emergency).