I currently earn about £40k pa. DH is a SAHD. We took out a 30yr mortgage for £200,000 in 2007. Things were tough at first but now managable. I am creative with my cash flow and We have no debts or credit cards. In the last 2yrs I have been paying in each £200 into my savings account & £75 each into DS and DD's saving accounts. We still owe approx £180,000 on our mortgage and I wonder if the money I save would be better used to overpay? Any experience would be appreciated.
What's your mortgage interest rate and what interest would you get on savings? I would ensure you have three months savings available in cash and any big purchases you know you have to make in next couple of years then overpay. Or get a flexible offset mortgage then all overpayments are available to take out again as cash.
'Generally' it's better to pay debt before you accrue savings. But obviously there are a lot of variables in there. If you have a certain amount of savings - say enough to tide you over for 6 months if you lost your job - then personally I think overpaying the mortgage is a good idea.
We both yarn, I'm self employed and have saved lump sums for the last couple of years with a view to starting a pension, but actually on looking at things closely I think we'd be better off paying the money into the mortgage. But we both work (and not in allied industries) so the chances of us both being out of work at the same time are slim (touch wood). We've also insured DH's income, which is another thing worth looking at.
Well, what's the interest rate on your savings accounts compared to that on your mortgage? It's a no brainer for us: mortgage rate way higher than savings rates, so beyond having enough of a ready-access buffer to, eg, buy a replacement (2nd hand) car, we just hammer the mortgage. This also improves our loan-to-value ratio AND gives us the option of taking a repayment break if we were ever to need it.
This is why we have an offset mortgage product. Our savings pot offsets our mortgage amount so we only pay interest on the balance but we still have access to our savings. Fantastic if you need the flexibility of access like we do.
Actually I think 123 is 3% on balance between 3k and 20k but nothing on first 3k meaning rate is better the closer to 20k you have in it. I keep a buffer of cash in mine but we mostly shove spare cash in the mortgage. Both saving and mortgage rates are so low at present it doesn't make much difference! They will go up though.
We have overpaid our mortgage using savings, bonuses for capitol repayments. We had 110k over 15yrs, pay 250over per month. We have reduced loan term by 3 yrs so far. It has about 30 payments left, the interest will be less each month as the balance goes down so maybe less than 30. Its 3% variable repayment. We have about 5k saving besides for emergences.
I'd opt to overpay mortgage as much as you can. Even though your rate is fixed until 2016, interest rates will eventually go up.
Think of it this way: you are actually saving by investing in your property and building equity. Property prices are rising much faster than any savings account could pay, so building equity/lowering debt is wiser/more savvy. IMO.
I would carry on doing what you are at the moment until you have a reasonable amount in the bank account. For me, assuming your 40k, plus child benefit, minus tax/pension etc is about 2.5k/month, I'd probably be thinking 10k - 4 months income. Then think about paying maybe £100/month off the mortgage, and 100/month into savings - rather than the 200 into savings atm.
I've also successfully increased the savings amount by putting half of any payrise straight into the savings direct debit. So, get a payrise that means an extra £50/month in your account? Keep £25, and add £25 to the savings / mortgage overpayment.
Watching the term of the mortgage go down through the overpayments is amazing!
Our mortgage isn't an offset, but anything we save we can take back in a mortgage holiday so if we've over paid say £10,000, and mortgage is £2500 per month, I could ring them up at any time and cancel the next 4 months payments. It isn't instant access but means it isn't fully locked away. Worth checking with mortgage company.