£1K month: overpay mortgage/save for kids?

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Hello all, never posted about money before on here. Interested in people's views or if you think I need a financial advisor.

I'm in a very lucky position to have a secure government job, and to be in a position to save £800-£1000 per month. Also, I want to lock it away each more to ensure it doesn't get frittered away. What would you do with it?

We have a very large (London) mortgage of £487K, over 30 years, 1.81% fixed for five years (with about £500K equity, so a buffer if prices plunge). Presuming we could keep overpaying 1K/month, we'd save £64K and shave off 12 years from the term. I am 34, DH 35.

I think I have ruled out making extra payments into my (defined benefit, nuvos) civil service pension, on the basis that I might not be able to access it until I'm 70 or perhaps even later, as it is linked to the state pension (I'm 34) and therefore don't want all of my savings tied up until that scarily late sounding time. However, DH has a very poor pension, having been overseas with me for quite a few years and not worked, so we would rely heavily on my pension in retirement.

We have two kids, age 1 and 3. I am sorely tempted to just keep the mortgage repayments as they are, and put £500 for each child in their JISAs, which are with AJ Bell in the Balanced Fund, with a view to funding University/house purchases when they hit 18. I like the idea of it being locked away, and of course given compound interest etc it makes sense to do this sooner rather than later if we can.

Or could obviously do 50/50%.

What would you do?

Defo over pay mortgage 👍🏻

I'd seek independent financial advice, I certainly wouldn't take any advice from people who had no knowledge of finances. You're in a good position and it's probably worth seeing someone after covi.

We are in a similar situation and we are overpaying the mortgage

Mortgage definitely !

Definitely overpay the mortgage, we did and will be paying it off this year, we are 43 and 45. Once paid off, we’ll probably do a mix of putting money away for kids Uni (rather than giving to them directly we’ll keep the money in our names) extra pension payments and investments.
Although we’ve taken a hammering with our pensions and investments in the last month, all the extra money we paid into our mortgage has been a very safe investment,

I would prioritise overpaying the mortgage, definitely. But you could also put some into savings for the kids. Not sure if 50/50 would be the right split.

Does your mortgage have a limit on the amount you can overpay?

Do you have savings goals for the children? Ie £x to fund driving lessons / uni / etc?

I'd do a bit more thinking and then see if you can do a phone consultation with an IFA.

I would overpay the mortgage. I think being mortgage free feels great though.

Depending on your salary paying £1000 into your pension may actually only cost you £600 (if you are a 40% tax payer) so you could consider both - £600 into pension and £400 off mortgage. Actual benefit would equates to £1400. I think.... Perhaps its the time to take professional financial advice. They will charge but do have a legal responsibility whilst I... well I'm just sat here watching telly.

I would prioritise the following...

1. Have 3-6 months salary in savings
2. Over pay mortgage by however much you're allowed without incurring penalties.
3. Invest some into JISA's for kids.

I’m a Dave Ramsey follower. So he has 7 “baby steps” for money management. If you have no debt then he would say get an emergency fund of 3-6 months of expenses. Then baby steps 4-6 are: 15 per cent in retirement, children’s college fund (so uni in this case) and then mortgage.

We do mortgage overpayments of 10% of the balance each year. Our payments have gone down significantly each year as a result, and I put the difference into a savings account so it doesn't get frittered away with our usual spending. You could do similar but use the difference to save for the kids.

Why not throw money at paying off the mortgage early and once those 18 years are up you will have not only the substantial mortgage payments but also £1,000 per month which you can save for the children? Presumably in the next 18 years your salaries will rise, childcare costs will reduce, and you can start a child-fund then if you like. Otherwise I think adults should save for themselves before saving for their children. There's no point in you having funds saved for the children if for example one of the adults became ill or was redundant.

Do you pay childcare?
If so, I'd overpay the mortgage now, and when the free hours (and eventually no childcare needed) kick in, put the difference into accounts for the kids. Then your outgoings would remain the same but you'd be funding savings instead.

Over pay mortgage.

Wow that was a fast bunch of reponses! Ha, not really posted on MN since the TTC boards.

Thanks everyone. The consensus on overpaying mortgage is striking; it is also my sensible financial instinct, and of course it will indirectly benefit the kiddos too.

Interested that nobody has said I'm being silly not considering making additional pension payments- probably because of the giant mortgage (on a small house!!).

Thanks all- back to the telly! But more thoughts also welcome :-)

Think about that saying that you should secure your own oxygen mask before trying to help anyone else. I don't think you should be saving for your children while you have a huge mortgage to pay off. As you say it will help them anyway in the long run.

100% agree with @HollowTalk . Not having to worry about their parents financial position is a real gift you can give your kids. Your DH would be able to take his defined contribution pension at 55 currently so it think i makes sense to save into a sipp for him, especially if he's a higher rate tax payer.

I wouldn’t have overpay mortgage. In simple terms, your return is 1.81%. You can do better than that elsewhere, though you might need to speak to an IFA to find where.

I've had some good tips from the Facebook group Financial Independence UK in the past. I suspect they would lean towards investing the money. Personally I'm prioritising mortgage overpayments over saving for the time being, as the balance is more than I'm comfortable with and so we are focused on reducing it during our current fixed term. When that ends we'll weigh things up again. Due to the coronavirus situation we have reduced overpayments by a half (so that we are now covering the added interest every month but not eating into the capital) and saving the rest. We'll take a view later this year as to whether to pay off a chunk in one go or save it for ourselves/DC.

I wouldn't put it into a pension

I am.ina similar position in that I got a promotion and can now put the same amount of money aside except I have no children and whilst I dont have as big a mortgage as yours my rate is 1.65% so this is what I'm doing

1. build up 6 months emergency fund with aim to have 12 months by next year. So half of my money is going towards this.

2. I always aimed to have mortgage paid by 55 but I want to being this down further to be when I'm 50 so I used an overpayment calculator and I'll be putting 1/4 of remaining money for overpayments

3. the final quarter I'm just keeping as general saving for future holidays, new bathroom etc.

I'm also 37 if thatsbhelps but I always read that you should aim to pay mortgage off by 55 latest cos you need those additional 10 to 17 yes after to really build your retirement pot or obv uf you have kids..

Its gear you started JISA for your kids maybe even a token 10 a month is good it all builds up, my sil puts all birthday money etc. In their too.

At a rate of 1.81% your mortgage 'cost' is negligible. Without knowing your full circumstances, then it is hard to suggest any options.

However, as mentioned above, 50/50 into your pension and mortgage could be an idea.

Many people are fixed solely on paying off the mortgage, when in reality the current cost of money is minimal. If you paid into a pension, plus had the tax relief and achieved an average annual growth rate of 3-5% over 10 years, then its a better option.

@cyclingmad - Why not pay into a pension?

£1,000 would result in £1,250 being credit for a basic rate tax payer. Your mortgage rate of return is 1.65%, this can easily be achieved over a medium term investment return on a pension.

Or is it the idea of being mortgage free that drives you to repay it?

Genuine questions, not a dig.

It is difficult to say without knowing what your individual earnings are. I assume you are over £50k in which case there may be some sense in making pension payments, especially if it brought your a sensible income under the higher rate tax charge for child benefit.

I made substantial pension payments for a period to do this and meant an effective tax saving if 60%