Pay Off Debts With Savings Article Discussion Area

HomeJames_3 · 16 August 2006 at 3:02PM

Im sure I read somewhere that it is good sense to have up to 6 months wages in the bank incase of redundancy sickness etc. Were coming into some money soon and wondered if this was the best option we both have secure jobs (well as secure as you can get today) but worry that if anything happened we would need savings to pay the mortgage etc. We also have huge debts but as previous posters couldnt trust myself with credit cards to pay then off each month.

ciscoda · 16 August 2006 at 4:12PM

I am in a position to pay of my outstanding mortgage, (£30k) is it better to invest the money or pay off the mortgage and be mortgage free........I have no other debts just the mortgage at 5.25% on a flexible mortgage

Cheerss

ciscoda

Gemmzie · 16 August 2006 at 4:22PM

ciscoda wrote:

I am in a position to pay of my outstanding mortgage, (£30k) is it better to invest the money or pay off the mortgage and be mortgage free........I have no other debts just the mortgage at 5.25% on a flexible mortgage

Cheerss

ciscoda

I'd say pay it off - a flexible mortgage rate could go up as the interest rates rose on the 1st Aug

And 5.25% is the highest interest rate out there and you'll get taxed on the interest, so I think you'd be making a loss per month on it.

thebard2406 · 16 August 2006 at 9:08PM

MSE_Martin wrote:

Hi folks

Thanks for the replies. I thought I would add a few comments - as I think there's a little bit of confusion between what's written here and what's actually contained in the article....

1. It's ok to keep a few hundreds in savings if you know what they'll be spent on.

Actually I disagree, you may as well pay off any expensive debts in the meantime and borrow the cash back when you need to pay - saving yourself the interest payment in the interim.... unless that is your debts is as follows

2. The exceptions

In the article there were two key exceptions to the theory. The second is the following

It's this bit that's confusing people I think a few of you scanned past this when you read.

Of course if your debt is at 0% then the need to repay it isn't there. Thankfully most people here have used all the other techniques on the site and now have the discipline to do this. Yet remember most people still pay interest on their debts and do it at high rates. They also grab a 0% card than forget it and let it go back to the go to rate.

However I may go in and tweak this bit to make it a bit more detailed - as it seems to be the bit that's missed.

3. ZTD - banking explanation.

No I think i'll leave the massive complexities of fractional reserve banking for now. And my explanation missed out much more than that - the cost of branch and admin systems - interbank borrowing - etc before we even go there.

That's why I started it, ""Put most simply", its understanding the essence of banking that's important here. The most important bit is that when you save with a bank you are effectively lending it your cash.... that's what people need to get

Hope this is useful

Martin

Great article and very timely with the interest rate rise.

Another angle to this though, save one is a serious saver and with a mortgage of say £200k, on offset mortgage. No other debts esp crdit cards and with emergency funds set aside in offset saving account. Would it not be alot better, for salaried individual to instead of paying off the mortgage but instead put in low charging index link tracker ISA (husband and wife), SIPP and other funds ? This is historically Footsie Allshare and 250 index have made on average 11-14% per annum and with tax wrapper additionally beneficial. (of course one should never save for tax benefit alone).

luap_2 · 16 August 2006 at 11:45PM

I've got debt in the form of a mortgage but also savings in ISAS. At the moment the ISA is paying slightly more than the mortgage costs but even if it was the other way round I think I'd still keep the ISA due to the annual limits. In other words if I paid off the mortgage now there's no way I could build up the same level of tax free income due to ISA limits afterwards even with increased income available.
Does that make sense ? or am I missing something ?

Just realised I'm probably saying something to thebard2406, my ISA is effectively performing the role of DIY offset mortgage turning into long term tax free savings once the mortgage is paid off.

stphnstevey · 17 August 2006 at 11:54AM

I think this is all about the cost of debt vs income from savings.

If you treat your money like your OWN BUSINESS, then you need to make a profit to survive. Or in simple terms its what ever puts more money in your pocket.

If you can make more money on your savings, then you would save by overpayments on your mortgage, then do this. However, current interest rates mean it's a very fine line between which would be more benificial. (eg. mortgages under 5% are a rarity and also ISA's are pushing the 5% barrier as well).

Particularly when your a higher rate tax payer. Overpayments work almost as an extension to an ISA and often has higher limits. You always have to compare the NET RATE (after tax) you get on your savings (this will be lower for higher rate tax payers than basic rate tax payers which could alter your decision) to overpayments, as overpayments are not technically taxed.

However, I don't think this applies to Property Investment though and this should be looked at seperately from what Martin is trying to show. If you have a tenant paying rent which more than covers your interest on the mortgage (I know this is more difficult to achieve now), then this in simple terms is like a 0% credit card loan. In this analogue, the capital increase is like the interest stoozers recieve on their savings pot.

However, Property Investments differ in that you CAN pay off the debt, reducing your interest payments and STILL recieve the same rent. So again, if it suits your situation, overpayments potentially could work to your advantage.

The main point though is you need to the math and work out whether overpayments on your debt would be more benificial for YOU than putting the money in savings. Everyone's situation is different and it won't always benefit everyone. However Martin is just trying to point out an idea and a different way of thinking, that evades alot of people. Try it, if it's better do it, if not, don't worry!:cool:

OnePound · 17 August 2006 at 4:39PM

A point about property investment, following on from previous poster.

I have a BTL mortgage at a higher rate (5.5%) that my savings (about 4% in an ISA) so have considered making overpayments. However the interest on my mortgage can be offset against the rental income and therefore reduce my tax liability(Lower rate payer). I have not done any detailed calculations on this, but I''m thinking it makes sense to keep my savings??

waslostbutseenthelight · 17 August 2006 at 5:46PM

Hi - this is my first posting so please be kind!

I have debts (too scared to tot up yet!), got savings (£700ish), pay extra £40 a month on mortgage (know this is wrong - with debts with higher interest rates). Have been an avid outsider looking in and have acted some info - moved debts to lower rate cards ect.

Anyway, what I wanted to add was that I feel secure knowing I have a little savings put by (if I can make it a grand I will be over the moon), also I budget for my Christmas shopping with my weekly shopping (and 2 more presents to get and Christmas for my 3 and 5 year old is done!). With that under my belt I now feel ready to confront my debts head on and with thanks to everyone who participates on this site, I feel great (in debt) but great!

Thank you all....hope I am not too dull!!!

Loxy1 · 17 August 2006 at 10:30PM

Hi,

I think that while Martins advice is generally good with respect to paying off your debts the one time when you may not need to is if you have an offset mortgage, I owev £58 k on my mortgage and have approx £75-80k savings, some of thi sis used as working capital for little money spinners that I do but there is also £58k of cash in the savings part of my ofset, hence paying no interest while also being available to pull out if I need. Therefore all my mortgage payments are being used to pay off the £58k (which will drop quite quickly at which point I am planning to move money out into Isa's for my partner and my self) Hence I think if you have an offset mortgage and savings then it is worth not paying all of your mortgage off.

Jude123 · 18 August 2006 at 10:42AM

Hi, we have a mortage of approx 85K but have approx 25K in Share ISA's (and are still paying into them) that are doing really well (although I do realise taht shares can go up as well as down). We have about 15 yaers to go an our mortgage and wondered whether we should take our money out of the ISA's to reduce the term or keep them going as over this sort of period they should increaee in value more.

Any advice would be appreciated.

Pay Off Debts With Savings Article Discussion Area

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free