Over pay mortgage or pay into an ISA?

[suzym1984]

Hi!

I am hoping for some advice please as I am not very financially minded! DH and I have approx £300 spare at the end of the month which we are hoping to save as we need to move in the next few years (small house, baby on the way!).

Would it be best to over pay the mortgage (we can over pay by £500 penalty free) as our interest is high (5.8%) or pay the money into an ISA (interest rate 2.5%).

I feel better having the money in an ISA as then we would have the money as deposit when we want to move (as no equity in property).

What do you think?

Over-pay mortgage as interest rate is higher. And then you will start to have equity in the property as the amount you have borrowed will be reduced by the amount you've overpaid.

I agree partly with Gipfeli in using the interest rate as your guide. However, because 'rainy days' are all too common, keep yourself a cash buffer of three to six months' outgoings in an easy access ISA. If you need a chunk of money in a hurry and it's all tied up in your house it's not much use.

Good point, which has reminded me to say also check the mortgage terms - the overpayment we make on ours is available for us to withdraw again should we need it, or to take a break from mortgage payments if we needed to.

Thanks for the excellent advice, I will look carefully at the mortgage terms. I will also keep a buffer of money, good idea.

Overpay is way to go if you can afford to lock the money away I'd make the maximum payment you can. Started doing this about 2 years ago and we have saved loads of interest money and will pay off mortgage in fewer years - also saved a one off yearly payment of up to 10% which some let you do.