Mortgage overpayments vs savings??

[littlemonkeychops]

Hello

Hoping someone with a financial brain can help me :-)

We have a repayment mortgage with 22 years left to run. I've looked into making overpayments, as our savings are getting less than half what we're paying in interest on our mortgage. We are allowed to pay up to 10% of the balance each year without penalty (though we're not talking that much, just maybe say £1k or two a year). So all the info I can find says provided you have a rainy day fund set aside making overpayments is a good thing.

But....we are likely to move at some point, either short term because of job changes, or longer term if we outgrow our current house, and we might then take on a bigger mortgage to buy a bigger house.

So what I can't work out (sorry if I'm being a bit thick!) is if we were to pay off say £2k now, that would save us £x over the remaining 22 years in interest, but if we remortgage in a few years time when we move and take on a mortgage than is more than £2k bigger won't we have wiped out any potential savings anyway?? So is it better to just stick the £2k in savings and put it towards a house in due course?

Hoping someone cleverer than me has the answer!

If you pay a lump sum off now you start saving interest straight away. You're borrowing less money so immediately the interest added is lower. If, at some point in the future, you need a bigger home-loan then you start paying interest on the new amount when that happens. In the meantime, if you can afford to pay off 10% without penalty and the interest-rate on the mortgage is much higher than you are getting for cash deposits, do take advantage.

What cogito says. You'll see the changes in the end of year statements. You'll have more equity in your house. When you move or remortgage, you will might have a lower LTV and thus getting a better deal.

If you are saving for the next house, then it's worth putting in the mortgage, provided that you

1. have a fund for the rainy day (usually 3-6 months outgoings)
2. have some cash to pay for the survey etc.

I haven't sold yet so I'm not sure what exactly you need to stump up in cash when you sell. But I've been told you don't need the deposit as it'll be handled through the chain.

If you overpay the mortgage you will see MASSIVE benefits in years to come - you will pay less interest overall - by a LOT and you will probably pay it off early... we are paying ours off next month! 6 years early.. through overpayments (between 2 and 4k a year) and savings in a long term account when rates were higher than now...

We have saved £45,000 of interest payments doing this and will be mortgage free and able to save spend from now on too.....

Thanks, so it's unanimous overpayments would be a good idea!!

Have a look at the Money Saving Expert calculator - very revealing!

www.moneysavingexpert.com/mortgages/mortgages-vs-savings

Interesting.

Can I ask a similar question...

Is it still a good idea to overpay even if you might then have to extend your mortgage in the future to fund an extension.

For example say we needed £50k in 2 years time for an extension, is it better to have £10k in savings and borrow an extra £40k, or to have paid off £10k of mortgage and then borrow back the full £50.

I'm guessing the latter will save a small amount of interest in the intervening two years, but after that it will make lite difference.

@SarkyPants... it totally depends on the interest applicable. If your mortgage is costing 5% and your savings earning just 2% then it makes no sense to have very much sitting in a savings account for 2 years because it's costing you money every single month. If the numbers were reversed.. mortgage costing 2% and savings earning 5%... that would support keeping the money on deposit.

Thanks. That was my understanding, but just checking that there weren't any complicating factors with a mortgage extentsion.

Whatever the product is called it's ultimately just 'borrowing money'. When debt is expensive and savings are cheap it's always best to keep your total liabilities as low as possible as often as possible.

How flexible is your mortgage? Ours will let us take out the overpayments if we need to, so for us it's a no-brainer. If the mortgage didn't, then I'd want a decent amount of savings too, in case of the boiler blowing up, or some similar financial disaster.

If you pay £2k off your mortgage, then you'll be remortgaging at £2k less, which is great because, as ToddlerTerror says, not only will you have less interest to pay on the debt, you also have a better chance of getting a good deal because your LTV% will be better.

Totally agree with Cogtio and Bytheway1.

We've paid off and have never looked back. Although our savings are not earning much, due to the financial climate, we have built them up very nicely and we don't have the worry of owing a large amount to the bank Should you choose to move in the future you will have more equity from the house you are selling.