Is it better to have savings or overpay the mortgage?

[reddaisy]

We could afford to save approx £150 a month - at the moment we have no savings but we are only two years into a 30 year mortgage so would it make more sense to overpay the mortgage instead? Is it also better to overpay the mortgage than have a small amount of savings in the children's accounts? What do you all do?

We're in the same position, have just dd used to overpay mortgage by £200 a month. I'm as far from a financial expert as you could get(!) but to me, the money is relatively safe invested in property (where I am, south east). No temptation to dip into it then either. Watching with interest...

Can you use overpayments for a payment holiday in the future? If so, it's better to overpay. Otherwise, start by saving a buffer of at least 3 months' income, then overpay the mortgage with most of the £150 (perhaps £120) and add the rest to savings until you've built up 6 months' income.

I'd build up some savings first, then start overpaying the mortgage. I'd prefer to have something to fall back on in case of an emergency. If your circumstances change you may not be able to borrow money or free up equity in your house.

It depends on the interest rate on your mortgage compared to the interest that would be available on a savings account.

That's the great thing about an offset mortgage. Your savings are reducing the interest payable with no tax lost and instant access if needed!

Build up some savings first then overpay the mortgage. You want some savings incase you need money for repairs etc.

Thanks all. It just seems to me that the mortgage is the biggest debt we will ever have so it seems to make sense to prioritise that first. We would save up separately for holidays etc, we would not be covered for change in circumstances but if one of us lost our job, for example, we could run the house on one salary as one salary is currently wiped out by childcare costs. Also, this may be a silly question, but I thought we be able to get to the equity if we really needed it. We are also in the South East in an area where demand for property outstrips supply. What about the savings accounts for the children?

Save an amount you agree on with your OH (three months of living costs in case of redundancy is a good marker, six months if you can).

Then start overpaying the mortgage. It will save you huge amounts in interest payments over the years if you overpay. Check with your mortgage lender whether you can, and by how much you can, before you get too excited though.

Good idea Bowlers, I know we can but I am not sure by how much at the moment.

Children's saving wouldn't be a priority for me. Great if you have excess money to save, but not at the expense of savings for yourself, or paying down the mortgage.

Get some savings incase of big car repair, boilers, redundancy, etc

Find out whether you can get access to any overpayments you make. Our mortgage allows us to overpay, but then we are allowed to re-borrow that money (subject to our circumstances not changing).

Realistically, we would only want to re-borrow the money if our circumstances did change. So we've got a few months savings buffer.

In your circumstances prioritise the mortgage.

Long term savings will be eroded by inflation.

Over pay the mortgage, the interest on the mortgage will be greater than the interest you can earn on your savings at the moment. Check the policy as ours had a policy that if you had overpaid you could take that amount out at a later date, that would give you the buffer for emergencies if you needed it later, but in the meantime you save some interest.

I agree with the others

3-6 month's worth of living expenses saved for emergencies (ideally in an isa).

Then, depending on your interest rate overpay your mortgage. It makes an enormous difference to the total amount of interest you pay and your savings will only be eroded by inflation (plus you get taxed on the interest income).

To encourage you, we have overpaid on our (interest only) mortgage right from the outset and will be mortgage in four more years!! We have literally saved hundreds of thousands of pounds in interest by doing this.

Atticus - that is inspiring! That is kind of my point really, that I would rather we pushed to pay it down as quickly as possible as no level of interest on savings could ever equal what we are paying in interest on the mortgage.

I know savings are important, but we have always managed before without them. We can manage on one income if really necessary (if we dropped the childcare costs), our house is a new build so we have the 10 year cover on that, and we can manage without cars if we had to. I know you never know what is around the corner but it would take us years to save up three months of earnings at the moment.

The other point to keep in mind is that interest rates are going up. Pay off the capital whilst you can so that when they do go up you're paying the higher interest rate on a smaller capital debt.

Agree with a PP, an offset mortgage is what you need here. Your savings pot would offset your mortgage amount yet you still have access to it should you need it. Win Win! Overpaying the capital usually means that you lose access to the money.

reddaisy if you can survive on one income, then aim for 3 months of living expenses as you savings, and then start overpaying? We have 6 months and it's useful when you lose the job. You don't want to drop childcare when it happens. You might find another job within that period. (I did within the garden leave period during redundancy. But it's very handy to have savings to fall back on if it takes you a bit longer. It costs £1k to keep DD in nursery).

An offset mortgage is worth considering but you might find it costs you more to switch than is worth your while.

OneLittle - we could only survive on one income if one of us was looking after the children instead. We can only afford £150 a month savings/mortgage overpayment at the moment so three months of living expenses would take so long to save!

How long will your childcare cost so much? I assume your 3 year-old funding or school will kick in at some point, then your monthly surplus will be much larger. In your circumstances I'd put it into savings because you might need emergency money (for a broken appliance or car etc.) and ready funds are better than trying to find quick finance.
Once your childcare costs fall, start overpaying the mortgage and building up a 3-6 month savings cushion.

Get it off your mortgage! Reduce the capital of the loan so that when interest rates go up you will pay less.

If you are worried about savings, put 100 against your mortgage and 50 into savings, to hedge a little.

reddaisy I assume you are in a part of the country where childcare is easy to arrange? Or you have family to fall back on? I'm worried about re-arrange childcare after you find a new job following redundancy. However if this is not an issue, then my comments won't apply.

We have a year's waiting list here for nurseries. Childminders for schools are also full up around the summer before reception. Places are like gold dust! (The waiting list afterschool club for our second choice primary opens up 2 years before the year a child starts. I've already got DD's name down and she won't start until 2015). A friend has that problem with redundancy as she was working 4 days but have to find a new job for 5 days. Couldn't find a nursery that would take her DD for Friday, which is the quietest day supposedly. She's lucky to have her mum taking her daughter.

I mean the summer before you apply for reception. ie I was told to put my name down this summer for my daughter starting in 2015, ie before you apply for the school.