Overpay Vs Savings?

[Deleted User] · 15 April 2018 at 5:04PM

So we are completing on 23rd but with my love of savings etc that is why I am here I want to know the best way to go forward.

1.84% mortgage 2 year fixed 10% overpayments allowed
So do I overpay as quick as possible - Will this mean that I pay less interest overall the quicker I pay or doesn't it matter whether I pay it on Day 1 or Day 600 of the mortgage.

Or do I try and find a savings account paying 2% or more and how much would I need to have in savings for me to be better off saving like this? Would I then overpay as much as I can the day we go on to 3.99% rate as unlimited overpayments are allowed then? And should I stay on that rate and overpay or try lock in another rate with a fix again and hope they have unlimited overpayments? There was no option this time to get a good rate and have unlimited overpayments and be fixed.

Sorry for the questions it is just the first time I have owned property and I want to pay the mortgage off asap or at least that is the aim.

kingstreet · 15 April 2018 at 5:12PM

If you choose the mortgage overpayment option, the sooner you make the overpayment, the quicker you benefit from the reduced interest - next month.

This assumes you have a daily interest calculated mortgage.

Net savings rate higher than 1.84%? Dunno. See what you can find...

kinger101 · 15 April 2018 at 5:53PM

What are you financial goals? It will be difficult to beat the 1.84% in cash savings, for all but relatively modest balances that can be achieved through regular savings accounts.

But you need to look at you long term plans. Would it be better invested in a pension (very likely yes if you pay 40% tax). How long can you leave the money vested?

It's very likely you'd remortgage rather than going onto the SVR.

I'd concentrate on

(a) reasonable cash reserve for rainy day (£10K?)
(b) more going into pension to drop myself back into basic rate if applicable;
(c) regular savings to save wedge of cash to drop me into a lower LTV bracket.
(d) overpayments once I've exhausted all the rest.

[Deleted User] · 15 April 2018 at 6:12PM

Hi Kinger

Financial goals are to be mortgage free in 5 years - We initially took the mortgage over 12 years to suit our finances, however we are able to overpay just didn't want to overstretch ourselves going for highly monthly amounts or shorter term. Hopefully that makes sense.

Regular savers linked to current accounts can offer 2% + interest - Would it be advisable to save in these? Or would I not have enough saved to generate enough interest to be worthwhile? I don't know how to do the maths to see which would be more worthwhile.

Kingstreet - If we save on interest from day 1 of the mortgage then the sooner we overpay the better? Is that correct? Like the H2B ISA we got bonus on that so essentially that will be £2k overpayment straight away off the mortgage which will be good won't it?

Quick other question - Do we need a solicitor to remortgage?

We don't have to worry about 40% tax.
C - We will drop to a lower LTV once we overpay won't we?

112k value (house needs work but liveable)
87k borrowed
so we already have a good LTV
What percentage of LTV do you need to drop to get the best rates?

If we overpay £8,700 per year for 2 years I imagine we would smash off quite a lot of interest wouldn't we?

Thanks in advance

[Deleted User] · 15 April 2018 at 6:13PM

How would I know if I had a daily interest calculated mortgage?

kinger101 · 15 April 2018 at 6:28PM

There may be small amount for legal fees, particularly if you transfer between lenders. But you won't be doing the same due diligence as the initial purchase.

MSE has an overpayment calculator, so you can work out how much you'll save;

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

From an interest perspective, the first £1,000 each of interest is tax-free, so if savings rate>mortgage rate, savings win (and have the advantage of greater flexibility).

I still think you need to work out your life plan. Although capital is at risk, historically, the stock market has returned more then 1.84% when dividends and capital growth are considered. There are tax advantages within a pension (as you can take 25% tax free on retirement, and might get NI savings though salary sacrifice with your employer).

I'd at least consider these a hybrid of the mortgage overpayment/increased pension. Mortgage overpayments alone is low-risk, but unlikely to be the best use of surplus cash.

G_M · 15 April 2018 at 7:14PM

Most lenders these days calculate interest on a daily basis. If in doubt, write and ask.

The only way to beat 1.84% after tax might be
* investing rather than saving (longer term needed + less security)
* a long-term savings bond eg 3 year fixed

Another factor to check: if you overpay the mortgage, can you later easily 'draw-down' that money again (without re-applying)? If yes, that gives ideal flexibility. If no, then what hapens if you need the money again?

[Deleted User] · 15 April 2018 at 8:30PM

Well the overpayment calculator based on current affords means we could be mortgage free in around 5 years.
After 2 years we would have around £60k left to pay so essentially about 51% LTV. Are there better mortgage rates than 1.84% around?

[Deleted User] · 15 April 2018 at 8:32PM

G_M -With regards to the money we live within our means and we would always have an emergency pot just for rainy days / emergencies etc.

Investing is more risky like you said and I don't want to lose money and I don't know enough about investing.

Long term savings - Maybe 3-5 years but by then I could be mortgage free.

Bluebell1000 · 15 April 2018 at 10:09PM

We have a similar situation but probably looking at mortgage free in 10 years, mortgage rate fixed for 5 years. Right now, we are just about at a reasonable level for emergency funds so we can start thinking about where to put the rest. Our plan is:

We are using two 5% regular savers at £300 per month each.
When they mature we'll probably 'store' some of that in a childrens account since they get about 2% interest, and also switch to a current account with a good rate of interest.

We had been thinking of a fixed rate savings account, but that's similar rates to the childrens ones, and with less flexibility about withdrawals. We may reconsider that in a couple of years when we see what our savings levels are like.

Longer term we would like to switch to an offset mortgage account, once the 5 year fixed rate is up, and will probably pay off a lump sum then once there are no penalties (i.e. just before switching to a different mortgage product). We had one with our last house and it worked well for us, but we didn't meet their criteria when we moved. The advantage is all your savings are offset against mortgage interest, but still accessible just in case.

dimbo61 · 15 April 2018 at 10:46PM

If you want to be mortgage free in 5 years you need to overpay and save into regular savers.
If you can overpay by 10% each year and save into regular savers such as Nationwide 5% regular saver you could be mortgage free in 5 years

PLEASE READ BEFORE POSTING

Overpay Vs Savings?

Comments

Categories

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