Is now a bad time to overpay?

Phlik

Dithering_Dad wrote: »

... or perhaps a new motorbike or a new....

Now we're talking :T. Springs almost upon us, what model are you looking for? . Got back into my biking last August after an 8 year layoff (have you met my children?).

Oops, bit OT. With possible trouble ahead I'd suggest having a good deal of savings before considering overpaying. Whether that be retrievable overpayments, ISA's, savings accounts or wedged under the mattress.

Phlik

Capricorn_One

Sideways wrote: »

On the bright side, Heather Mills won’t be shopping at Aldi when the muck hits the fan :cool:

She can buy Aldi now.

Dithering_Dad

Phlik wrote: »

Now we're talking :T. Springs almost upon us, what model are you looking for? . Got back into my biking last August after an 8 year layoff (have you met my children?).

Oops, bit OT. With possible trouble ahead I'd suggest having a good deal of savings before considering overpaying. Whether that be retrievable overpayments, ISA's, savings accounts or wedged under the mattress.

Phlik

I bought a ZX9R last month

Phlik

Dithering_Dad wrote: »

I bought a ZX9R last month

Fingers crossed for a good long summer, I think we're overdue one.

Phlik

sheslookinhot

talana wrote: »

It depends very much on your mortgage interest rate compared to any savings rates you're getting (ISAs or otherwise, remembering to compare the NET rates on any other savings).

Also depends on which sort of mortgage deal you have, whether you're able to reborrow overpayments if it became necessary or whether you're effectively locking the money away.

In my situation, I don't think it's now the time for overpayments.
My mortgage rate - 5.95%
My cash ISA - 6.1% for starters.
Makes more sense to save.

save £45 a year or reduce the mortgage by years. I know what I would do.

setmefree2

You can always save and see what the economic climate is like a little later (6 to 12 months) and throw it at the mortgage then. Not sure any of us quite know what we are in for yet...is it all hype or are we heading for hell:eek: Better to be safe than sorry, surely.:o

talana

save £45 a year or reduce the mortgage by years. I know what I would do.

But you're missing the point. It's save £45 a year AND reduce the mortgage by years if I choose to, and I have a pot of savings in the short term in case of emergency.

- You're saying I should make regular overpayments on a mortgage and reduce the term by years.

- I'm saying I'll make regular payments into a cash ISA instead. That pot of cash is growing at the same rate my mortgage would otherwise be reducing (or £45 a year more if you like). When I want to I'll use the whole pot to make a lump sum overpayment and er....... reduce the mortgage term by years!! Where have I lost out?

setmefree2

Hi Talana

Just to add more smoke to a cloudy issue:D

The Mortgage vs ISA dilema is not just a staright comparison of rates as an ISA will deliver tax gains forever. So an ISA pot of say £70k will produce a tax free income of say £3500 in old age, equivalent to £4666 worth of pension (as this is taxable.) So the earlier you start your ISA saving the bigger your tax free stream of income will be in old age.

There are many who argue that attention should be paid to ISA's so you don't find yourself with excess money that you can't protect from future tax.

However, looking at an ISA in this way is effectively saying goodbye to the money, much as you do with a pension. So it does depend on what you are trying to do, I think. If you are trying to pay down your mortgage so you can get another mortgage and move up the property ladder, for example, you may not be interested in ISAs.

Indeed, as DD said many are more motivated to pay off a debt, such as a mortgage and therefore, this should be taken into account too.

I am no expert - just thought I'd give you another angle to think about. Sure others will be along to give you even more to think about.:D

All The Best

SMF2

jamesd

sheslookinhot, the savings money grows just like the saved mortgage interest but at a faster rate because of the higher interest rate. Then you use the savings to pay the mortgage off earlier than if you'd overpaid on the mortgage, if you want to throw away money by doing that.

setmefree2, the savings continue to generate an interest rate above the mortgage rate so you continue to make more money by keeping the savings then paying off the mortgage. Once the savings exceed the mortgage you're in a position where the interest on the savings is more than paying the mortgage interest every month. A little while longer and it'll also cover the capital repayments and you'll no longer be seeing any mortgage cost.

Once the mortgage isn't costing you money each month after interest from savings you have that extra monthly income to do something with and it's natural to wonder about how to save and invest it in a tax efficient way. One way to do that is to keep the ISAs and use the extra income to pay off mortgage capital. It'll take longer to fully clear the mortgage if you delay like this but at the end you're left with all of the extra monthly income you have in nice tax-efficient savings and investments, so it's a good deal even though it'll take a few more years.

The long term tax gain is such a good deal that it's worth having even if the savings don't pay a higher interest rate than the mortgage, so long as they are reasonably close.

If you really want to make money, though, go with a pension mortgage. You get tax relief on the money going in and use the 25% tax free sum to clear the mortgage, and are left with the remaining 75% as pension money. You do have to pay in about twice as much as the difference between interest only and repayment for this to work so it's not for everyone, mostly of interest to those who have a personal pension and particularly if they are higher rate tax payers, who really do well from this.

setmefree2

Thanks Jamesd - plenty to think about there....:money::D

All The Best

SMF2