Overpay on the mortgage or add to savings?

[imagrumpalo]

I feel so clueless when it comes to money but not sure what to do...

We now have about £700 left over each month if we stick to our budget which is fairly strict so may not always be achievable. Would you over pay on your mortgage (180k) or add to the savings (8k)?

Or a bit of both?

I do a bit of both. 2/3rds saving, 1/3 mortgage. Makes decent inroads into both, without sacrificing savings for the mortgage, but with the peace of mind of knowing the mortgage will be gone faster.

Depends on interest rates. If the mortgage interest is higher than the savings, pay off the mortgage.

I'd look at your mortgage rate compared with what your money could earn in interest, and also whether you might need to access savings in the future. You can get mortgages which behave to an extent like a bank account ( you can use any extra money to bring down the sum owing, but the overpayments can be accessed if you need them). I looked into these a while ago, but, iirc, the rates were not very competitive.

We have a fixed rate which we signed up to when the market was very much in our favour, so we're not paying the mortgage off, even though we could afford to. If circumstances were different, I can see that, psychologically, it would be great to be mortgage free.

Look at the interest rates of mortgage debt vs savings interest!

So if you are paying 2.5% interest on your mortgage but only get 1.5% on savings then it’s definitely better to pay down the mortgage.

I would keep some aside for raining days and emergencies eg broken boiler and then over pay the mortgage.

Given that you have £8k of savings I would put around £500 into the mortgage and £200 (or what's left) into savings. If for whatever reason the savings drop you could revisit and top up the savings again.

But what I personally would do is increase my pension contributions by a little bit so that my overall take-home pay would be a bit lower. I would tweak the pension percentage I pay that £200 goes into that. Then I would put £400 into the mortgage and £100 into savings. (At my work I can change pension contributions month by month so this would be easy to change back.)

Ideally you'll have sufficient liquid assets to cover a prolonged downturn in your income and any planned expense, so once you have savings enough to cover those things, then start overpaying on your mortgage as well.

I overpay the mortgage as savings rates are rubbish at the moment. My mortgage is fairly flexible, if I ever needed money in an emergency I can get the overspent back out. Why not give your mortgage providers a ring?

I’d do £500 mortgage £200 savings. If you needed extra money for whatever reason the mortgage overpayment could be stopped temporarily whereas if you are putting more into savings there’s the temptation to think you’ve got plenty there so spending some won’t hurt iyswim.

I'd

1. put some slush cash into the budget
2. work out 6 months spending. Save everything till you are over this level.
3. after you have 6 months saved, split the spare cash between mortgage and savings.

The traditional advice would be to build up an emergency fund of 3-6 months expenditure in an accessible savings account before over paying the mortgage.

That way if something unexpected happens, a job is lost or something then you have a cushion, a smaller mortgage wouldn't really be as helpful.

This is a decision I'd consider not every month but every 9 to 12 months or so. I.e. every 9-12 months, look at your savings, think how long they'll last if you lose your job, think of what unexpected expenses you may incur (what if the boiler breaks down, the car breaks down, etc) and decide accordingly.

Thank you all so much for the advice.

I need to have a chat with our mortgage provider and find out some info...

I think I would first make sure to have at least 3-6 months of expenses in an emergency fund so that you have the liquidity to deal with unexpected issues if necessary. Once the emergency fund is fully topped up, I would make sure to max out pension contributions, especially if your employer will match. We aim to put away 15% each month.

Do you have kids? With our extra money we are putting away money in trust for our children so that they will have a lump sum to use for university fees/weddings/house deposit. We’ve got a figure in our mind that we want to give each child when they move out on their own, so that’s where the extra money goes right now. If no kids, then I’d pay down the mortgage.