Spend or save?

[hereiamagainn]

Just wondering what others would do in my situation.
Bought a starter home last year, just pre Liz Truss, 90% LTV, it’s a 5 year fixed rate mortgage on 2.5% which obviously I am feeling lucky about right now, but generally sharing everyone’s concern about where the economy is going.

I’m getting a promotion in Sept that will amount to an extra £5k a year.

What I WANT to do with this money is to go on a lovely holiday, because I sort of get the feeling that travel is only going to become harder and more expensive from here on, and I spend so long saving for the house, I would like a treat.

On the other hand I’m wondering if I should be putting that extra money into overpaying the mortgage, as is no doubt sensible.

I have an emergency fund, and no children.

What would you do?

Have a holiday year 1 of the new salary, then overpay year 2 onwards.

You can put any extra money in a savings account now that earns 4-5%. That's higher than the interest rate on your mortgage. Then you can use that money to pay off a chunk of the mortgage further down the line, and also go on a holiday too? Do a bit of both?

I wouldn't overpay your mortgage at that interest rate. Either save it elsewhere with a better return, or spend it (depending on large upcoming purchases, your ability to fund your lifestyle with cost of living increases, and your future ability to save). Personally I would probably go on holiday, but it would have to be a fantastic one.

With pay rises generally, I try to do a mix of:

• increase my pension contributions as that gets you an extra 20% tax contribution at least which is a better return than virtually anything - this gets much more interesting when you get older and start wanting to retire before state retirement age

• save or overpay the mortgage depending on interest rates

• try not to allow much lifestyle inflation, but in your case I would put some of it aside for a holiday, but I wouldn't blow the lot on it

Thanks!
The idea about saving rather than overpaying is interesting.

Save

Split it (and any other extra/spare money) into thirds.

A third on debt repayment (but in this case save it for now, as you'll get more interest than your mortgage charges).
A third on saving for the future, just to top up your savings, you can always overpay your mortgage, add to your pension or invest.
Then allow yourself to spend a third of it on a holiday or other improvements to your lifestyle.

When you come to remortgage, hopefully you'll have a good chunk of savings to pay off the mortgage, which should bring down your LTV and hopefully entitle you to a better rate.

In your position I would be tempted with the holiday

of course the very sensible thing to do is save .

and there’s got to be a bit of give and take . But if you have been saving for so long for a home, just jumping to the next saving goal it might seem never ending.

also life is short, and there are no pockets in shrouds.

do the amazing holiday, then get back to the saving hard .

lifes got to have some upside?

Find a high interest account and shove it in there.

This is the way I think most of the time too! What is for if not for living after all?!
I just worry from time to time about being ‘irresponsible’, that’s what my mum used to call my spontaneous attitude as a teen and it’s stuck with me as a cardinal sin. I will probably compromise by saving some and spending some, as suggested here.

What is life for, if not for living, I mean!

Don't overpay on a mortgage with a 2.5% interest rate when you can now get savings accounts which pay a higher rate. Put whatever you would overpay into the best savings account you can find, and when you come to remortgage you would have earnt more interest in savings than you would have saved via overpaying.

At that point you can dump all that money into your mortgage to bring the term down by a good chunk, or continue to save if you can still get better rates saving than overpaying.

But aside from that, if you are managing your bills and have an emergency fund/ are paying into a pension and all of that, absolutely go on holiday.

How's your pension?

Good I think, I’m in local government pension scheme which I understand is a good one?

Thanks, yes I think I will do this with at least some of it!

I'd do both. You can have a holiday in the sun, or a fascinating city, and save the rest.

Agree with most - it doesn't have to be a choice.
Put it into a savings account, then use some of it to go on holiday.
When you come to the end of your fix, use what you have saved to pay your mortgage down a bit.