Pay mortgage or save?

Maddens217

We have paid £10000 capital off our mortgage this year, (following a small inheritance) & are overpaying £200 each month to try to pay it off as soon as possible. There is approx £33000 remaining on the mortgage, over 12 years, and its' current mortgage deal is a capped rate of 5.6%, which is due to expire at the end of this year. It has no penalty on overpayments, and no limit to how much can be paid off at any time.

The confusion is whether to concentrate on overpaying the mortgage, against saving as much as we can into our respective ISAs, bearing in mind the current mortgage situation.

We are managing to save £300 a month into our ISAs, but would we be better off overpaying the mortgage by that amount extra each month?

Bearing in mind we dont have much of a pension plan at the moment, we're seeing our savings as a form of income ultimately, but until the mortgage is paid off we can't save as much as we'd like to. We're both in our mid-forties.

Any advice will be appreciated, thanks.
Simon & Angela

Welshlassie

It is worth having rainy day funds and it is worth considering that you should full your ISA allowance each year as once it is gone, its gone.

By plugging your figures into an overpayment calculator I'm getting the following:
Approx £315pm standard payment with an overpayment over £200 knocks 5 years and 7 months off your mortgage.
If you increased your overpayment to £500 (using the savings amount), it would knock 8 years and 3 months off your mortgage, and for every £25 above this a further month.

If you have no pensions as such do you have investments in mind that you would put your savings into to provide an income? How much would you need to get the income you require?

If you already have a rainy day fund, then in my opinion I would use the extra savings to pay off the mortgage as quickly as possible and then put the £815 (£315 mortgage payment and £500 savings) into ISA's and other savings plans for your pension.

HTH and good luck

ailuro2

But 815 a month is 9750 a year, which is more than two mini cash isas can hold, if you're risk averse and only want Cash ISAs.

You really need to sit down and work out where you're going with your pension. If you're in your forties, then you need to get cracking on a pension now, the longer it's left the more horrendously expensive it will be. Sit down and work out how much in pensions you want/need, and how much it will cost to have that. Then you can get the mortgage overpaid around your pension payments. Normally I'd say put it in an ISA because you'll get a better rate, but because your coming to the end of a capped rate but your mortgage is pretty small, then the arrangement fee on a mortgage with a better interest rate will likely negate any savings you would make, hence the overpaying coming before the ISA. Hope this makes sense!

Maddens217

Thanks for replies .... has helped us to make our minds up.

We're with the Coventry Building Society for our mortgage, & the scheme we currently have (at 5.6% & expires Dec 08) is running at 6.99%. That's where some of the confusion lies as, although the ISA rates are higher than what we currently pay in mortgage rates now, once we have to take out a new mortgage deal, it looks like the mortgage rate will be higher ..... unless they drop dramatically.
We both pay into stakeholder pension schemes, but mine ran at a loss last year, so we dont want to put money into something that may have very little return.

Looking at all the posts on this site & everything else we've read, it seems our best bet is to pay as much off the mortgage as we can, & then save as much either in ISAs or our respective pension schemes.

Any further advice or thoughts welcome.

dimbo61

consider offset mortgage to save money for your retirement funds as
tax free savings and you get the same rate as your mortgage.
you can transfer money to ISA,s and back if paying a better rate.
GOOD LUCK

SKIPPY

Wow, I wish my capped mortgage with the Coventry Building Society allowed me to pay off unlimited lump sums. I am only allowed to pay off up to 5% of the mortgage amount.

StuartGMC

I would definitely look at the offset possibility. I'm 43 and still in a company pension scheme but I would support the comments that you need to plan out how you will manage everything on, say, a 5-10yr investment plan (I've just posted a statement on what we hope to achieve here: http://forums.moneysavingexpert.com/showthread.html?t=944413)

1) I assume you have your ready access cash savings at 3-6X your monthly costs (based on income would be better) already available? This should be a reasonable proportion of your remaining mortgage, and you will be incurring tax on interest (unless these are in ISA form).

If used for offset and was, say, £10k it would mean interest only accruing on the £23k of capital. If the interest rate was 6.2% (like NatWest one I have) you can consider that the effective interest rate you'll pay is 23/33 or 4.32% for your £33k mortgage (sound good vs other offers?)

If you kept the £300 extra per month you have and placed it in savings that offset, in one year you'll have a further £3600 to offset, or 10.9% of your mortgage as it is now. This money is working for you by reducing interest charges (so more of your basic payment is clearing capital) but, you can still access it if required.

If you had done this last year added to the assumed £10k above, you would only be incurring interest on £19.4k mortgage (£33k-(£10k+£3.6k)) or 19.6/33 of 6.2% ie "equivalent" to 3.68% interest rate on the £33k.

Of course, as it is flexible you can overpay and reduce term without any penalties, and the cash you hold as savings is still available...

2) Regarding investments, this is a tricky one as, like us, you're at a stage in life where really you want to see growth in funds and then move to more "safe" investments around 55 or so, assuming retirement from 60 onwards so you don't get hit with a downswing in value just when you need to convert to income generation.

Now, the markets are down and not performing well, but this means you can invest in Funds at a cheap price IF you believe in 5yrs time they'll rebound and out-perform savings. If you are not sure and risk-averse, then the Cash ISA option is a more "sure fire" return. However, if you wait for the markets to improve you may misjudge your timing for purchase.

You could consider the following:
a) Ensure you have 6x monthly spend in immediate cash and offset, and continue your overpayments anyway.
b) Move all expenditure each month to credit card; money remains offsetting in your current account and you simply ensure you pay in full at least 3 working days before payment is due. If you had a monthly bill of £1500, that is 4.5% of your mortgage you are not paying interest on (and it increases as the capital owed decreases)
c) Put your £300 per month into offset savings now to significantly reduce capital incurring interest, then revert to ISA payments (you need to do the maths to be certain on this based on Cash ISA interest rate paid vs saving made offsetting).
d) Look at your investment considerations and decide on Cash ISA (£3600 max each per year) and/or Stocks and Shares ISA (£7200 per year less any Cash ISA payments in same year).

You can invest in both types for small monthly amounts (if you use an online service you will minimise your charges too - I use Interactive Investor but others are available so check the reviews).

HTH and good luck with the planning for both clearing the mortgage and getting the funds built ready for a long and happy retirement.
Stuart