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Original poster

Overpay on mortgage or save for next house

27 replies

greenleaf5 · 11/04/2021 10:14

We are wondering what to do with any left over money each month. It’s rarely a lot but we think we should save it for our next house purchase.

We have a 10% deposit on our current house and we’re looking to upsize in the next 3-5 years.

Does it make more sense financially to overpay on the mortgage each month or to save that money towards a bigger deposit? Interest rate is currently 2.5%.

OP posts:
Lazypuppy · 11/04/2021 10:16

Its essentially the same, as means you will take morw capital out of your current house. However, putting into moetgage means money isn't available if you need it in an emergency

WhoisRebecca · 11/04/2021 10:16

It’s the same thing essentially, because you can use the equity in your house as part of your deposit. I would overpay as the interest rate is higher than anything you’d gain in saving.

Iheartbed · 11/04/2021 10:18

Depends how much you have left over and how much moving costs would be eg stamp duty. If you’re planning to move in, say, 5 years I would overpay mortgage for 3.5 years then spend the last few months saving for moving costs

InpatientGardener · 11/04/2021 10:19

We're looking to move in next two years and are doing what PP suggests, pay down the mortgage then start some savings for moving costs. Its the same thing really.

Slayduggee · 11/04/2021 10:23

I would overpay on your current mortgage. If you are paying 2.5% interest on you mortgage then it would make more sense to overpay your mortgage as a doubt you are getting 2.5% interest if you stick it in a savings account.

google moneysaving expert mortgage overpayment calculator it is very good and illustrates how even a small regular overpayment on your mortgage can save you thousands in interest payments. Obviously check your mortgage to find out how much you can overpay without penalty before doing anything

RandomMess · 11/04/2021 10:24

It's the same the same thing so you pay into the one with the highest interest rate, which for us is definitely over paying the mortgage even though it's only 2%! We do have the advantage that we can draw back down any overpayments within a couple of weeks though.

Trinacham · 11/04/2021 10:43

I would overpay. As others have said, that is then equity in your current home which is the deposit towards your next home anyway, and the interest saved is bigger than interest you can earn at the minute!

xyzandabc · 11/04/2021 10:46

Anything you pay off your mortgage, will be available as equity towards your next house. So they are both the same really.

I'd guess that your mortgage interest rate is currently higher than any rate you would get from a savings account, therefore making mortgage overpayments would be slightly better.

sst1234 · 11/04/2021 11:23

It’s absolutely not the same thing. Not at all. Overpaying your mortgage while interest rates are so low is a bad idea. If your goal is to upsize then the best thing to do is to invest - not save or overpay mortgage. Equities, bonds, funds. Even increase contribution to your pension now and reduce later when you want to upsize. Overpaying your mortgage is one the least effective ways to make your money work hard, second only to savings accounts.

Original poster
greenleaf5 · 11/04/2021 12:08

Thanks everyone. Appreciate your advice.

OP posts:
shivawn · 11/04/2021 14:23

I'm in the same position, we're saving money towards the next deposit rather than overpaying the current mortgage.

shivawn · 11/04/2021 14:25

Just to add, sellers are often not keen on accepting offers which are dependent on your own house sale. Its much better to show you have the deposit in the bank.

NoSquirrels · 11/04/2021 14:26

@sst1234

It’s absolutely not the same thing. Not at all. Overpaying your mortgage while interest rates are so low is a bad idea. If your goal is to upsize then the best thing to do is to invest - not save or overpay mortgage. Equities, bonds, funds. Even increase contribution to your pension now and reduce later when you want to upsize. Overpaying your mortgage is one the least effective ways to make your money work hard, second only to savings accounts.
Not on a 3-5 year timeframe, though? Investments generally need to be held 5+ years.
sst1234 · 11/04/2021 16:47

@NoSquirrels

Not the case. There are so many ways to invest and you don’t have to fix your money. Low interest rates mean that if you are overpaying your mortgage (especially small amounts) you are losing money due to low interest rates and look inflation.
And I’m not talking about high risk investments like crypto either. Simple funds or even trading tech stocks. Let’s say OP’s house is worth £300k with £250k mortgage amount outstanding. If she was to invest in upward trending stock vs overpaying her mortgage, she would make more in 6 months than she would save in 5 years by overpaying her mortgage.

Soontobe60 · 11/04/2021 16:51

@sst1234

It’s absolutely not the same thing. Not at all. Overpaying your mortgage while interest rates are so low is a bad idea. If your goal is to upsize then the best thing to do is to invest - not save or overpay mortgage. Equities, bonds, funds. Even increase contribution to your pension now and reduce later when you want to upsize. Overpaying your mortgage is one the least effective ways to make your money work hard, second only to savings accounts.
This is rubbish! Unless you’re planning to save a few grand for several years, any interest you’d gain on savings would be minuscule. If you’ve got a few hundred to save each month, paying it off the mortgage is much more effective if you only want to use the money to move house.
Soontobe60 · 11/04/2021 16:53

@shivawn

Just to add, sellers are often not keen on accepting offers which are dependent on your own house sale. Its much better to show you have the deposit in the bank.
A financial statement showing how much equity is in the house does this job just as well.
Soontobe60 · 11/04/2021 16:53

[quote sst1234]@NoSquirrels

Not the case. There are so many ways to invest and you don’t have to fix your money. Low interest rates mean that if you are overpaying your mortgage (especially small amounts) you are losing money due to low interest rates and look inflation.
And I’m not talking about high risk investments like crypto either. Simple funds or even trading tech stocks. Let’s say OP’s house is worth £300k with £250k mortgage amount outstanding. If she was to invest in upward trending stock vs overpaying her mortgage, she would make more in 6 months than she would save in 5 years by overpaying her mortgage.[/quote]
Hahaha! In your dreams

sst1234 · 11/04/2021 17:52

@Soontobe60

Your financial illiteracy is your business. The rest of us are giving OP the most genuine advice we can.

Soontobe60 · 11/04/2021 17:55

[quote sst1234]@Soontobe60

Your financial illiteracy is your business. The rest of us are giving OP the most genuine advice we can.[/quote]
Oh dear... your ‘genuine’ advice is to suggest risky strategies that any sane FA would not give to someone who wants to save some money towards her next house.
I am very savvy when it comes to money thank you very much.

sansou · 11/04/2021 18:21

Yes, the stock market has returned much better than 2.5% year on year on average in the last 20 yrs that I have had an ISA. The OP wouldn't be asking this question if she was already actively managing her own investment portfolio.

Educate yourself - I've been reading the financial sections of the broadsheets for years - now online so have cultivated tips of where I fancy investing for our annual ISAs/JISAs. It's not rocket science. I tend to choose fairly popular stock/funds/trusts. If you are in a position to invest your full £20K ISA allowance, select 2/4 funds for diversification. You can also subscribe to resources if you get really into it. DH does more detailed research and uses stockopedia successfully. Good Luck.

Psychologically, I overpaid my offset mortgage because the incentive of seeing the balance go down monthly was satisfying and we chose to spend the increase in our disposable income as opposed to reinvesting it. In theory, I could have invested the amount that I overpaid and made more gains and could have paid it off quicker....I have no regrets and I still made my target by my mid 40's. I see myself as naturally financially cautious btw but it's all relative.

NoSquirrels · 11/04/2021 19:45

[quote sst1234]@NoSquirrels

Not the case. There are so many ways to invest and you don’t have to fix your money. Low interest rates mean that if you are overpaying your mortgage (especially small amounts) you are losing money due to low interest rates and look inflation.
And I’m not talking about high risk investments like crypto either. Simple funds or even trading tech stocks. Let’s say OP’s house is worth £300k with £250k mortgage amount outstanding. If she was to invest in upward trending stock vs overpaying her mortgage, she would make more in 6 months than she would save in 5 years by overpaying her mortgage.[/quote]
This is quite poor advice to give on the internet to someone trying to maximise equity/deposit for their next purchase in 3-5 years time.

You might be right that if you’re prepared to trade tech stocks you might make a lot more than paying it off the mortgage or saving it in the bank. But you also might lose a great deal. Any investment on the stock market - be it simple funds or crypto - is subject to market fluctuations and is not guaranteed. The stock market is best for longer term hold. No IFA would give a different answer.

Obviously if “investing in upward trending stocks” was as simple as all that then we’d all be doing it.

Please don’t give risky advice about stocks in a 3-5 year time frame as if it’s an easy or guaranteed option, because that’s irresponsible advice to be handing out.

Iheartbed · 11/04/2021 19:45

I think the op is not looking to create an investment portfolio, which would involve risk and probably require the use of an IFA unless you’re that way inclined. Paying the mortgage off earlier in an efficient way is an easy and safe way to save money in the long term

Original poster
greenleaf5 · 11/04/2021 19:55

Thanks everyone for your help! Unfortunately I don't have the cash to start an investment portfolio but trust me I wish I did. One can dream....

OP posts:
shivawn · 12/04/2021 09:02

A financial statement showing how much equity is in the house does this job just as well.

Often not the case unfortunately, I'm in this position right now of trying to upsize. The issue isn't proof of equity but rather the hassle and delays of dealing with buyers stuck in a chain.

BarbaraofSeville · 12/04/2021 09:31

You might be right that if you’re prepared to trade tech stocks you might make a lot more than paying it off the mortgage or saving it in the bank. But you also might lose a great deal. Any investment on the stock market - be it simple funds or crypto - is subject to market fluctuations and is not guaranteed. The stock market is best for longer term hold. No IFA would give a different answer

^^ This. Imagine the OP had decided to put all her spare money in stocks and shares sometime in 2018 or 2019 and then had needed it all back in April 2020? She'd be looking at losses of 30 or 40%.