Debate House Prices


In order to help keep the Forum a useful, safe and friendly place for our users, discussions around non MoneySaving matters are no longer permitted. This includes wider debates about general house prices, the economy and politics. As a result, we have taken the decision to keep this board permanently closed, but it remains viewable for users who may find some useful information in it. Thank you for your understanding.
We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
We're aware that dates on the Forum are not currently showing correctly. Please bear with us while we get this fixed, and see Site feedback for updates.

Overpay or save?

Hi, My apologies if there is already a thread for this. I have a flat which I bought in May of last year with a deposit of 5%, on a 5 year fixed rate mortgage over 35 years.
My 'friends' are taking great delight in telling me how much money i'm going to lose due to the impending house price crash.:mad:
I'd like some advice please, serious advice. Should I be overpaying on my mortgage as much as I can, or should I be banking the extra money in a ISA? I wouldn't expect to have to draw this money back as I wouldn't leave myself short. Any suggestions would be greatly appreciated!:D
«1

Comments

  • hotrod21
    hotrod21 Posts: 25 Forumite
    Part of the Furniture Combo Breaker
    Sorry - just found an article on the main site! But Im finding it confusing!
  • WTF?_2
    WTF?_2 Posts: 4,592 Forumite
    Basically:
    Does your mortgage cost you more than the interest you would earn on savings? The answer to that would dictate whether to overpay or save.

    Personally, unless the difference is really big I would always tend to overpay and shorten the term of the mortgage.

    But remember that cashflow is important too so if I were you I'd try to save six month's worth of expenses as a buffer before overpaying the mortgage.
    --
    Every pound less borrowed (to buy a house) is more than two pounds less to repay and more than three pounds less to earn, over the course of a typical mortgage.
  • snarffie
    snarffie Posts: 450 Forumite
    Part of the Furniture 100 Posts Combo Breaker
    I am curently paying into an ISA before overpaying each year. The advantages are:

    My ISA pays out 6.5% interest. My morgage charges 4.65% interest (Soon to be 5.23%). I make almost 2% more from every £1 by putting it into my ISA. Over the course of 25 years, that would mount up!

    If you can get an ISA that has a higher interest rate than your mortgage, you are financially better off with the ISA.

    There is also the benefit of having 35 years worth of your money safely tucked away in the tax free ISAs when the mortgage is payed off.

    The other benefit (or disdvantage, depending on your personality) of saving rather than overpaying is that you will have money available to you for a rainy day. If you overpay into a mortgage, you may not be able to get that money back, although some are more flexible than others. The danger is that you may dip into your savings, which is disastrous!

    For me, the biggest benefit of overpaying is psychological. It really is nice to see the mortgage come down! From a purely financial point of view, whilst savings rates are higher than mortgage rates, it's better to save.
  • m00m00
    m00m00 Posts: 1,755 Forumite
    it's only better if you can keep the money in the isa for the same length of time the overpayments cover.

    ie, overpay 2 years into a 25 year mortgage, you need to keep the equivalent money in a savings account paying more for 23 years to get the same benefit, thanks to the joys of compound interest (obviously if the difference is substantial you don't need to match the times exactly)
    It's a health benefit ...
  • PasturesNew
    PasturesNew Posts: 70,698 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    You would need to read/understand your mortgage terms for overpayment.

    For example:
    - is there only one date per year when making an overpayment actually knocks the money straight off the mortgage? A lot of mortgages will take your money and keep it (interest free) until one day a year when they then deduct it off the mortgage. In these cases, you're best off saving it elsewhere and transferring it as an overpayment just in time.
    - are there any limits on how much you can overpay each year
    - how much your interest rate is -v- what you can earn in a cash ISA. As ISAs are tax free this is a direct comparison. However, if you save separately in a normal savings account take account of the fact you will lose 20-40% of interest earned in tax.
    - is your mortgage interest calculated daily or monthly or other.

    So the answer can be worked out, but only when the figures and details are known.
  • snarffie
    snarffie Posts: 450 Forumite
    Part of the Furniture 100 Posts Combo Breaker
    m00m00 wrote: »
    it's only better if you can keep the money in the isa for the same length of time the overpayments cover.

    ie, overpay 2 years into a 25 year mortgage, you need to keep the equivalent money in a savings account paying more for 23 years to get the same benefit, thanks to the joys of compound interest (obviously if the difference is substantial you don't need to match the times exactly)

    Sort of.

    If the savings paid more for the first two years, they 'could' pay less over the following years before you would be out of pocket against overpaying, but I see your point.

    Also, if the mortgage rate became lower than the savings rate, you could decide to transfer the savings into the mortgage, and 'lock in' the savings made up to that point. Of course, the cumulative ISAs would be lost.

    Saving into an ISA is still the better option whatever happens.
  • m00m00
    m00m00 Posts: 1,755 Forumite
    sorry I wasn't really replying to your points specifically.
    you are doing a very sensible thing by combining both methods

    my points were related to either overpaying or keeping it in the isa without overpaying at all, and then using the lump sum at some future point.

    doing the maths, there's a tipping point where it becomes more sensible to save in the isa than to overpay, but it requires specific variables to work it out. (amount of capital remaining, interest rates etc)

    either way, saving in an Isa, or overpaying the mortgage, are both infinitely better than blowing it all on BMW X5's and plasma screens.
    It's a health benefit ...
  • setmefree2
    setmefree2 Posts: 9,072 Forumite
    Mortgage-free Glee!
    You've been given loads of good advice here but you might want to pop over to the "mortgage free wannabe" board too as there are threads on just this. It does get heated though.:o But if your ISA rate beats your mortgage rate then ISA is best.
  • neas
    neas Posts: 3,801 Forumite
    Overpay your mortgage if its more than the isa interest rate.
  • m00m00
    m00m00 Posts: 1,755 Forumite
    on a 35 year mortgage, I'd definitely be overpaying rather than ISA, to get that capital down as much as possible.

    the interest on each 100k block over 35 years, is considerably more than the interest on the same sum over 25 years, no matter what the interest rate is.

    also remember there's additional benefits that can be derived from lowering the capital value, such as allowing access to more competitive mortgages that require lower LTVs.

    the whole opportunity costs of each specific case must be looked at carefully. No matter how well intentioned a post on this forum is, it's highly unlikely that the OP's situation can be properly advised with access to all variables.
    It's a health benefit ...
This discussion has been closed.
Meet your Ambassadors

🚀 Getting Started

Hi new member!

Our Getting Started Guide will help you get the most out of the Forum

Categories

  • All Categories
  • 348.3K Banking & Borrowing
  • 252.1K Reduce Debt & Boost Income
  • 452.4K Spending & Discounts
  • 240.9K Work, Benefits & Business
  • 617.2K Mortgages, Homes & Bills
  • 175.7K Life & Family
  • 254.1K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16K Discuss & Feedback
  • 15.1K Coronavirus Support Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.