Over pay mortgage or save

[99Balloons99]

I'll preface this by saying I'm in a relatively good position financially at the moment and I apologise in advance if this is insensitive to anyone struggling. It's not intended.

My mortgage is up for renewal next year. At the point it is renewed I'll be repaying the loan and taking out a buy to let mortgage on it as I'll be moving in with my partner into a house we'll be purchasing.

I'm not very good with interest rates, savings vs debt etc. Would it be more beneficial to save the money to add to our residential property (in which we'll be paying the higher rate stamp duty). Or would it be better to over pay/pay off more of my current mortgage whilst the interest rate is low. I don't want to make the wrong decision if it will actually make a difference to either transaction.

pay off debt first. It’s Martin Lewis’s cardinal rule! But I haven’t entirely understood your post tbh. Will the saved money go towards the next mortgage? Either way, I think debt first. Your mortgage interest rate, even if good, will be higher than the rate you’ll get on savings.

Are you and your partner married and are you putting the same amount into the next home?

Certainly not for certain! My mortgage rate is 1.9% and even my basic savings account is now at 3%, but can get 5-6% for fixed term savings accounts. It makes more sense financially for me to save and pay off as a lump at the end of my fixed term than overpay, as the internet earned saving would be more than the interest saved for that amount of overpayment over the same time

i know I’m not OP and their figure may differ but my mortgage rate is currently <1.5% and I’m getting 5.5% on savings so that’s absolutely not true for everyone

It depends.

what will your mortgage rate be?

What can you get on your savings?

If you save instead of paying off the mortgage will you be tempted to spend the cash?

If your mortgage rate jumps up for whatever reason, how much can you overpay be if you're in a fix rate

So if your savings rate is higher and you're disciplined, I.e. you will not dip into savings, then better to save. But if you think you might be tempted to spend the cash then maybe consider paying into the mortgage.

It depends on interest rates.

If you can save at a higher rate than your current mortgage rate, put the money in savings until next year.

This means that if the new mortgage rate is higher than the interest rate you can get on savings until then (which is likely as mortgage rates are unlikely to fall to pre-2022 levels and also because buy to let mortgage rates are higher generally than residential mortgages), you can use the saved money + the interest you’ve gained this year to pay off a chunk of the new mortgage or pay the stamp duty.

For example, it is currently not hard to find savings accounts with rates of 4%+. So if your mortgage is currently say 2%, it makes sense to save rather than put into mortgage. If your mortgage goes up to 6%, and savings rates remain at 4%, it then makes more sense to pay off some mortgage.

Bear in mind that savings are taxable beyond your personal allowance. How much your personal allowance is depends on your income tax band. So use your ISA allowance first (£20k, untaxed) and put any remainder in a savings account. Bear in mind when you choose each account whether you may need easy access if your boiler breaks or something.

Martin Lewis does good comparisons of the savings accounts and ISAs available.

Depends on the rate you get. I fixed 6 mths ago for a rate that is expiring next month - so for me it makes sense to save. I can get 5-6% interest while I only pay 3.9%. If you’re paying 6% plus it isn’t so clear cut

MSE has a calculator to compare savings va overpayments:

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

Martin Lewis’ rule for mortgage overpayments is to overpay ONLY IF your mortgage rate is higher than the rate you’d earn by saving.

Depends on your interest rates. If you get more interest with savings then save, if you save more from overpaying then overpay.

Look at martin Jewish mortgage overpayment calculator.

One year I overpaid £70,000 towards my buy to let mortgage and my residential mortgage clearing my buy to let mortgage and overpaying the maximum on my residential.

If you are buying a new house then probably best to save all your money for that for now, once you have that then look at overpaying both mortgages if you save more in interest than saving or investing the money.

Interest rates for mortgages have sky rocketed, my friend is paying £800 per month on interest alone every month!!! It's mental!!

I fixed my residential for 10 years so only pay £3 a day in interest so glad I fixed for 10 years in 2016!

Buy to let mortgage rates will be much higher than residential mortgages so prob best to see what rates you get first and comparing savings and investments rates vs overpaying.

Hahaha oops I meant Martin Lewis of course!! Oops

Which savings accounts do you have with 5-6%?

@Isyesterdaytomorrowtoday Isyesterdaytomorrowtodaacc@TidalShore ?

I need to move to a new account as I don't get anything right now

Thanks so much

@FineBerol as an example, NatWest have a 1 or 2 year fixed rate cash ISA paying 5.5% interest.

Thank you for the responses. I did think savings might be the best way forward for the moment. I'll continue to do that I think.

To answer some questions:

Currently my mortgage is 2%

Savings rate ranges on my accounts. Most is currently 6% I think with NatWest but only £150 pcm can be put into it.

New buy to let (if taken now) will be roughly 5.2/6%

New residential mortgage will be higher I think probably about 6% as I'm not sure what the LTV will be etc. But we will have to pay higher rate stamp duty.

Anything I will save will be put towards the new house as a deposit/Stamp Duty payment.

We're not married but will be shortly after the house is bought.

Don't pay the loan off. See if you can get permission to let and use the spare money as deposit for the new house

I was in your position some time ago, I had £400 and was going to overpay the mortgage. I spoke to a fa who recommended I pay this into my pension instead. That way I get tax relief off my pension and the gov contribute a further £100 each month to my pension.

I'm now in a position to be able to pay my mortgage off early, by taking a lump sum from my pension at 55, this is the same year it would have been paid off if I'd over paid. And I get to retire a couple of years earlier than if I'd just over paid my mortgage.

Speak to a fa tho, they will be able to recommend what's best as it might be different with interest rates being what they are

in my early 20's, my best friends DF got ill and couldn't work, He was the breadwinner.
They had enough savings for 12 months, but as they wanted to pay off the mortgage quicker, they had been significantly overpaying the mortgage each month.
They ended up losing the house as the insurance wouldn't cover his illness and the bank wouldn't realise the overpaid monies (not that they should, but it was worth an ask!)
For some reason that always stuck in my brain, never needed to tell anybody until now though!

So for me, i'd probably put it safely away, accessible in an emergency.

release* not realise

Are you sure on the new btl rate? They're usually much more expensive that this? That will make the difference. Past few years I'd gace saud overpay, now you can get decent savings rates, it will depend on tax bands (use isas), its much more complicated. But most btl interest rates are far higher than usual mortgages. So just check...

I think it depends on whether you can actually save the cash and not touch it, and whether you are concerned about being able to service your mortgage at a point in the future.

If you are concerned about being able to service the mortgage and will not touch the cash I think it makes more sense to save it. This isn't the way to get the most money, but is the best way to increase the probability that if you do get to a stage where it is difficult to service the mortgage, you will be able to use savings to pay it and therefore potentially not be forced into a house sale, as the extra contingency offered by the savings plus any other contingency offered by the government would mean you could last out longer until the situation changes.

Please ignore my earlier post. I've just re-checked btl rates and they have indeed decreased! Interesting.

I don't think I can overpay into my pension. I assume you meant your lump sum paid the mortgage off @BanditsOnTheHorizon

The mortgage on my current property will need to be mortgaged onto a BTL in the future so I may as well do it once the rate is up. Permission to lease would be only be temporary measure but BTL rates are competitive to residential ones. I wouldn't be able to fix in with permission to lease... Or at least I don't think I could.

I might speak to a mortgage advisor as my current property is already below 55% LTV I can't get any better rates but if I can reduce our LTV on the new property then that feels more beneficial. But I don't know enough about finances to say that for certain.