Another Mortgage one, over pay (a bit) or save as a buffer

[DialsMavis]

We have a fixed rate deal until Jan 2024, we pay £1100 pm and currently owe £300,000. I have just had a pay rise and was planning on overpaying by £150pm. Is this sensible or is it such a small overpayment on a massive mortgage that we would be better to build up savings?

You can use overpayment calculators online to see how much you can save on interest, even small overpayments can make big savings. Depends on how your current savings are too though.

Current savings practically non existant, will be about £1k when have finished doing up house, which we remortgaged for. But we have no other debt whatsoever, we used some of the remortgage money to clear all credit cards and loans.

I looked on an overpayment calculator and it seems the big benefits over

Of overpaying come further down the line. But it would feel good to chip away at whatever we can. But then again our savings are woeful

Overpaying is a great idea i would overpay while you can its very concerning, by the end of your fixed term your payments could sky rocket use the time you have left to get it down as much as poss x

Following as we’re in a similar position.

I would try to build a decent emergency fund of perhaps 2/3k in case you need it. Then plough what you can into the mortgage.

If you have no savings you'd be far better off building savings before your fix is up. £150 is not going to make a major difference to your monthly repayments by the time your fix ends, and if you suddenly find your new monthly repayments are more than you can afford and you have no savings buffer then you could lose your house. If you build up savings at least that gives you a bit of breathing room to be able to continue paying inflated repayments until either interest rates come down, or you manage to increase your earnings etc.

I'm fixed for another three years, but I finish paying off my car in November, and then a phone contract and unexpected funeral payment finish in June, so although the next few months will be tight, I'll eventually have £350 more than I currently have. I plan to squirrel away £200pm (the other £150 will go on cost of living price increases I expect). I'm a solo home owner and don't have any safety net which worries me, so I'm going to make sure my emergency fund is stable first, and then start paying off at £150 a month I think. My employers are switching us from a final salary pension scheme (I have three years worth) to a career average, but also pushing back the date we can start claiming and cutting back the lump sum payment in favour of draw down, so I'm hoping that it'll eventually mean that I can pay my mortgage off a couple of years early.

Unless a savings account pays a much higher rate than your mortgage then it makes more sense to overpay. Most mortgages keep a log of any overpayments in case you need to access this money at a later date.

Is it best to use the overpayment to reduce the term or to reduce the monthly payments?

16 months of overpaying £150 on a 300k mortgage isn't going to touch the sides. Use it to build up savings that you can put your hands on for now.

I would personally feel much more at ease to save it first until having a couple of £k as an emergency fund, then start to look at overpaying thereafter.

If you had an adequate level of savings I'd say overpay but £1k is only a couple of emergencies potentially so I'd suggest building savings to at least 3 months earnings first then overpay.

Thanks all, I think I will get our savings back up to 4k (not enough I know, but we used to have 0) I have just remembered that DS owes me £700 which he is paying back in December. Then over pay the mortgage by £200 and feel the pinch a bit more day to day. I will also look into hosting language students next summer and plough that £ into mortgage and savings.

I do have the option of keeping our current savings and bunging much needed new carpets on a 0% card, but also feel very free not having any cards etc at the moment.

I have just done a Zoopla instant valuation and it looks like even not taking our renovation into account we would now be looking at 70% ltv rather than 80% which pleases me, although I know house prices might tumble.

we were supposed to have savings left over from renovation bit found lots of issues with house once work was underway

Build a small cushion then 100% overpay.

Its all about the compound interest... You will be better off in the long run. Understand compound interest and you will understand.

You are also reducing your LTV so when you come to remortgage you are more likely to get a better rate going forward.

DH and I have looked at this a lot and we have an emergency contingency fund then extra goes into mortgage.

Keep in mind that if house prices stall or dip, the LTV will be even more important

@properdoughnut i also have the same question 🤔

It's usually better to reduce the term, I think. There will be websites with information about it though- it might not be best for everyone.

What's your interest rate? If it's under 2%, you can beat that with savings so will be better off saving the money instead of overpaying the mortgage and it means you'll have a buffer for emergencies, should you need it. If you don't you can send chunks of money to the mortgage at any time, eg if you want to reduce the balance when you remortgage.

www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

It's mentioned quite far down this page

Save, now. If you're on a decent fix you can always put it on an overpay down the line. Savings % is likely to go up soon and as long as you don't overpay over 10% in a year you should be alright to do a lump sum of things changes. We overpay £200pm but switching to savings for a year

You keep talking about understanding the compound interest, yet don't seem to understand it yourself as you don't think it works the same way for savings, when it does.

If you can beat your mortgage interest rate with savings, which many can if they fixed in the last 2/3 years before rates started rising, the same amount of money put into savings will earn more in interest than it would save by being put into the mortgage, because the rate is higher and the effect of compound interest is the same in both cases.

No way would I overpay. Once it's gone on the mortgage you can't use it to help you if rates have rocketed when you need to remortgage (even if that's in five years). Better to have cash reserves you can use to make the monthly payment if it becomes unaffordable IMO. Most mortgages allow 10% overpayment so you can always overpay lumps at a time when savings have hit a certain level.

Just been having this conversation with DH.

We are on a 1.34% mortgage till 2026.... good knows where rates will be then! So thinking we should over pay now while rates are low especially as we borrowed extra to do house renovations.

But reading previous posts we should save in cash if we can find a savings account with a high savings rate then our mortgage? Is that right?