Where to put our money?!!

jetfighter

After our monthly outgoings, in an average month we tend to have about 50% of our income "to spare". In our household, "to spare" means "to save" rather than "to spend"!

We have three places to put this money:

1. Into the mortgage, on a 6.59% flexible deal. We can overpay as much as we like, as often as we like, and withdraw as much as we like, as often as we like. Obviously by doing this, we reduce the balance of our mortgage, which is currently at about £45,000. We can (and do) effectively use the mortgage as a 6.59% savings account. We save interest by overpaying. We can withdraw it whenever we like.

2. Into our tax-free cash mini ISAs, at 6.1%. We currently have £7,200 allowance between us to use up this year. We don't ever withdraw from our ISAs (we are allowed to, but make it a rule that we don't). Once it's in, it's in for the long term and adds to our tax-free savings for the future. We have £12,000 savings in our ISAs at present.

3. Into our new Halifax 10% savings accounts (we have one each), basic rate tax. We can put up to £1,000 into these accounts per month between us. We can't make withdrawals and the rate is fixed until June 2009. According to Martin's calculator, we would need ISAs at 7.6% to match this rate. We have nothing in these accounts - yet.

But I am trying to weigh up the pros and cons of the three options and struggling a bit.

1. MORTGAGE
Pros: Pays off mortgage faster. Will be debt-free.
Cons: Ultimately is for repaying a debt, not for putting money away for later life, and will inflation cancel out any benefits?

2. CASH MINI ISAs
Pros: Takes advantage of tax-free allowances. Puts money away for later life.
Cons: Not accessible without losing tax-free status of money.

3. 10% SAVINGS
Pros: Higher interest rate.
Cons: Fixed rate, no withdrawals allowed.

I am wondering whether it is best to just throw every bit of spare cash at the mortgage and forget about 10% savings, or tax-free allowances, until the mortgage is 100% repaid.

Then I have people saying that re-paying your mortgage has a negative effect in the long-term because your money is worth more to you now than it will be at the end of the mortgage term, due to inflation.

So I really don't know what to do. :rolleyes:

Any tips/advice?

whu

hi - i that you say you can put £1000 between you a month into the Halifax - is that the total amount of your spare money?if it is i would personally use your ISA allowance and then use the rest to pay off the mortgage more quickly - that way you would be reducing your debt and also saving for the future

Lokolo

Yes thats a good idea. If an ISA pops up which has greater interest rate than your mortgage then go for that, but otherwise stick to paying the mortgage. Plus if you can overpay without penalties then the £40k will soon be £0 if you go budget crazy.

jetfighter

Yes whu, we can save about £1,000 a month in an average month. I would love to be able to increase that amount though - some months it's a bit more.

Though I'm curious to know why overpaying the mortgage and filling up our ISAs is preferable to saving in the 10% account? (At a higher rate?)

And what is this thing people keep telling me about overpaying the mortgage being a bad idea due to inflation?