Right level of rainy day savings when we have mortgage debt

[prepperpig]

I'm trying to work out the best level of savings compared to mortgage debt.

DH and I are both high earners.

We have a mortgage of £278000 at 1.99%. Six years left to run and payment is £4,000 a month.

We have money in ISAs of £65,000 at 1.6%

How do I work out whether we'd be better off paying down the mortgage with the isa money? Clearly the mortgage interest is being paid at a higher rate. My gut says keep the money in the ISAs for a rainy day but then the other side is that once we've paid off the mortgage we are £4,000 a month better off and can build up the savings amount again.

I'm generally quite good with money but this is frying my brain.

Your immediately accessable funds are supposed to be 3 months expenditure. Look at your last 3 bank statements and write down all your essential outgoings and that should be your figure as a starting point. Some people just save 3 months earnings in instant access.

Any other amounts that you want to keep in cash can be tied up for terms of 3 months or more but as you say, rates are so low, it might be worth overpaying on the mortgage unless you get any penalties.

Well we certainly don't spend £65 in three months!

There are no penalties on the overpayments at all.

Do you mean you have 6 years left and then it will be paid off?

Surely then you should use some of that rainy day fund to shorten your mortgage period.

It would also depend on other things, have you got dc who start uni in the next 6 years, or do you educate privately and want to ensure you can pay the fees, etc...
Any big expenses looming, car, etc?

Your mortgage is eye wateringly high. With mortgage rates so low, can you move it to a better rate? Borrowing is so low now and savings are not exactly working very hard!

Can't you put 6 months worth of expenditure in an instant access account then throw the rest at the mortgage and save on mortgage interest payments?

Its is eye wateringly high nochocolate but the house is worth over a million and the mortgage for the first time in ages actually feels quite low (comparatively!). It was a ten year mortgage and when we took it out four years ago it was nearly £500k.

If we carry on with the current rate of payment then yes it will be paid off in six years (bar about £6k). The rate is 1.99. We wouldn't find it particularly easy to move it since DH is a partner (thus technically self employed) and I am a company director with no salary at all just dividends.

We do also have two in private school, year 5 and year 3.

The interest element of the mortgage is low £460. The rest is an overpayment to bring it to the equivalent of a repayment mortgage.

I think we probably should use some of the savings to overpay further but I'm reluctant to take them out of the isa since they can't then go back in.

Should mention we also have crap pensions - hence the money in isas

For a definitive answer I would ask on the MoneySavingExpert site as the question is quite technical tbh.

Yes I have got rather specific

I think the question is really just how much should we have put by in savings if we still have mortgage debt at a higher rate than the savings.

Three months is a good guide but feels quite low.

Martin lewis says pay off debts before saving and that includes not having a rainy day fund. So I would keep three months expenses in the is a and pay the rest off the mortgage

Martin Lewis doesn't count mortgages as debt in the usual sense.

OP, I don't know what you should do! I don't think I'd put the ISA money into the mortgage though. You're already overpaying, and it's a short term. Have you calculated the total amount of mortgage interest you'll have paid after the 10 years? If that's horrific, maybe consider switching your ISA money. But TBH I'd be more inclined to invest the savings in a high-interest stocks saving fund.

I would transfer some of the isa money into a higher rate paying isa. Fixed rate isas pay a better rate than 1.6%.

Also the difference in interest on £65000 at 1.6 and 1.99 percent per annum is about £250. So you would only be £250 pa better off if you paid the whole lot off on the mortgage and you would lose your emergency fund

I guess we save £250ish x 6 years plus we pay the debt off a year and a bit earlier which would be lovely (but then we have to build up the savings again)

Mse have a mortgage over payment calculator, fill in your numbers and see what you'll save over paying etc. It allows lump sum or monthly calculations.
We used it, increased our payments by 25% and will shave 3 years off, we're done in 18months.
I would keep most of your savings as its your fall back plan.

Personally, I'd keep the ISA as an emergancy fund, but not add significantly to it, and use any extra cash that comes your way to make a further overpayment on the mortgage.

Find out what your outstanding mortgage debt currently is then work out if paying off a chunk, say £40k, would bring the payments down. Then work out how much you could afford to overpay.

In very broad terms if we used £40k to pay off some mortgage debt we would basically save £5k. WE would also pay off the mortgage earlier by a year and so would have a year x 4k monthly payments to build up our savings again (but would have lost the tax free benefit of the isa).

Hmm. I'm not sure its really worth dipping into the isas given we've not long to go on the mortgage anyway.

I really desperately want to be mortgage free though!

Personally I would throw at least £50k at the mortgage. Then either reduce the payment down and save most of the £4k you're paying now or continue overpaying to get out of the mortgage in the next few years.

It's a risk because I think you might well need more savings than usual as your incomes don't sound easily replaceable and company directors take a lot of risk financially but having the option the ease the large monthly payment helps too

I think the question is more, are you likely to use the savings? Are both of your jobs/salaries secure - if so, then you're less likely to need the savings and can reduce the savings.

We overpay our mortgage and would like to do more but are a single income family and DH has been made redundant twice in the past five years. So we now know it takes 6ish months for him to find another position at the level.
We therefore have a minimum of 9 months' living expenses tucked away as a minimum, which makes sure we can maintain current outgoings including the mortgage. If I were working too, then we'd have a lower buffer as one job loss wouldn't have such an impact.

I'd look beyond the interest rates if I were you at more practical considerations. We also put quite a bit by into pensions which could go to mortgage - again it's just looking at our own circumstances and getting the balance right.

Hope that helps.

Our mortgage and ISAs are both less than yours, but having come up to mortgage renewal time we had a review with our building society and have now offset our ISAs (they're not ISAs anymore, but we're not paying anything in to them at present anyway). It works out we'll save by paying less mortgage interest than we would earn in interest on the savings, and we can revert it to an ISA/other saving whenever we want. Would this work for you? It helped that my ISA and mortgage were both in the same place anyway

This is so complicated. Maybe we should speak to a financial adviser

I think my main concern is that once the mortgage is gone in 6 years time we will have a lot more money than we currently have (unless circumstances change) but will have lost the tax free benefit of the isas since once you take the money out it can't go back in again. I do also however appreciate that cash savings tend to get significantly eroded by inflation anyway and so are not generally a good idea.

I'm only 40 and DH is 43 so some way off retirement. The savings are there for retirement or emergency.

I think the best plan is probably:

Up the pension contributions
Use any extra cash to overpay further on the mortgage
Keep the isas where they are for now but don't necessarily pay any more in at the moment.
Ignore the fact that the house is falling down around our ears and needs some money spending on it!

It totally depends on whether or not you feel you are likely to need your rainy day fund, with high levels of income you're likely to be able to cope with everyday emergencies such as boilers/ appliances breaking, and with the level of equity you have in the house then for something extremely expensive you could probably extend your mortgage.

So really it comes down to how secure you feel in your jobs.

Don't ignore the fact your house needs repairing! Leaving it is probably a false economy as it may be more expensive as it deteriorates.

I would keep 6 months of expenditure in Isa. So mortgage 4k x6 = £24k, plus average bills, plus odd bit for random expense such as if something big breaks So say £35k in Isa.

Use the spare £30k to pay off mortgage quicker. That should take around 9months off your mortgage.

In the meantime if more savings still possible could you increase monthly payments by say £250? That will reduce length again

I'd leave the ISAs as they are, and stop saving into them. I'd spend every last penny getting mortgage free ASAP. Do this whilst the going is good. Do you have life insurance?