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 have had the same discussion re overpaying / savings / children's savings and decided (once we had enough savings to cover e.g. boiler needing replacing) to overpay on our mortgage as we would be saving tens of thousands of pounds versus making a few hundred in savings interest.

Equally, we have decided not to put anything specifically away for dc as we will be much better off financially when they need it if we have paid off our mortgage early than if we had put money into a savings account for them as the interest rates are so low.

Speak to your mortgage provider to find out what you are allowed to do. I'm with nationwide and have over the last 10 years overpayed >£20k into mortgage, but if I need it I can get the overpayments back out while the mortgage is still active.

It saves a fortune in interest payments. I reduced the term time with each payment, so I'll also pay less insurances etc.

I think with the vast majority of mortgages if you overpay you can't get it back (as opposed to an offset mortgage where you can always access it).

There is an overpayment calculator on moneysaving expert which is good to play around with to see how big a difference it can make. We took years off our mortgage.

reddaisy
THe answer to your initial question depends on the detailed terms of your mortgage.
Mine is a flexible Interest Only so I can pay chunks of capital into an "overpayment fund" that sits there.
My monthly interest is calculated on the amount before the overpayment fund - so I effectively get interest on my savings at 3.4% tax free.
THat overpayment fund can be drawn back out at any time - its only if I choose to "reduce the capital balance" that I cannot get it back.
Its been a brilliant system while rates are low - and I've been doing it for over ten years.

Thanks everyone. Childcare costs will remain high until DS starts school in September 2016. We get our free hours in January but we don't get a reduction in our childcare bill from the childminder who will need to take him to and from preschool for us. OneLittleToddleTerror, we live in the South East as well with no parental support and childcare used to be a problem but several more mums in the village have recently started as childminders so I think we would be able to find childcare again if needed. Lots of nurseries in the area where I work too so worst case scenario he could travel in with me.

Haven't RTFT but one thing that might not have been mentioned is that for some mortgages overpayment doesn't always trigger a reduction in interest.

For our mortgage, only repayments of

Kumquat that must be because your interest is calculated annually. I think that's very uncommon nowadays. Most are daily interest.

Kumquat
Change mortgage providers.
There is NO excuse for annual calculation nowadays
my mortgage converted to daily interest in the 1990's

oh, thanks for that. I had no idea that it was not a normal thing!

cheers

My mortgage calculates interest daily, but doesn't change the monthly payment unless we overpay more than £1k in a month. The balance, the term remaining and the interest reduce straight away but the monthly payment stays the same.
Could it be that?

proseccoco
the mortgage spreadsheet in my thread of spreadsheets shows the varying profits banks make on different approaches to repayment ....

TiP could you please bump the spreadsheet thread to get it nearer the top?

We try and overpay the mortage every month - we don't save very well - so we asked the mortgage company just to take out an extra £100 on top of our mortgage and have noticed over the months the drop in the amount left on the mortgage.

We felt that if we put it into a standard savings account then it would be so easy to get at - if it is on the mortgage then we don't notice it and it allows us a buffer zone if the put up the interest rates.

I would overpay the mortgage, as you're both saving and reducing the loan amount that you pay interest on. Savings aren't gathering much interest at the moment, so in effect your best way to make the best of lowish interest rates is to reduce the amount of your debt.