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?

We are in the very fortunate position that my lovely Dad would always help us in an emergency, but I would rather that didnt happen obviously.

We are also pretty frugal, £10 sim only contracts, no TV package and no car finance etc but tween girl and uni student son do inadvertently bleed us dry some months.

One thing I will take away is ensuring my DC are financially literate. DH and I have dicked about enjoying life and living in extorionate rentals for years not paying any attention to this stuff and now I feel like a child not understanding basic principles.

Due to this the two schools of thought on this thread both seem equally plausible. I read one really helpful response nodding thinking "that makes perfect sense", then do the same with the equally as helpful opposing advice directly below! But I do appreciate all responses and we will be getting our shit together one way or the other.

Also it seems £150 a month is such a drop in the ocean that whatever we do is worth but neither option is going to give me a huge savings balance or do much to mortgage. I am also going to try and save £50pm on top regardless.

Luckily we adore our house, and have no plans to move and thank goodness we didn't buy the massive, flashy pad that we could have stretched to.

Money saving supermarket has an overpayment calculator, which you can use to see what that overpayment would do to your mortgage. It will take a certain number of years off. When you come to remortgage, you may end up with a better loan to value ratio, which might mean a lower interest rate remortgage (relatively). You could also consider increasing the number of years back up on your mortgage (when you remortgage), which would clearly increase what you pay overall, but it would reduce the monthly costs.

I paid off my mortgage very early. What I did, and this will not necessarily be what's best for everyone else, was to save lump sums to pay the mortgage company and reduce my monthly payments. This freed up more of my income to put into the next lump sum. Fortunately there was no restriction on how much I could overpay.

I kept an emergency fund of a few months expenses but every other spare penny got thrown into savings for the mortgage.

I chose lump sums rather than a regular monthly overpayment simply for the flexibility. In the early days I maintained some commitment to saving for them monthly by using regular savings accounts. (Not the same as monthly overpayment in terms of flexibility as the money was still available at end of term should I need it.)

Admittedly I didn't give much thought to reducing term versus reducing monthly payments because, after years of just making the regular payments and realising how little was actually being paid off, I set myself a 5 year deadline to clear it completely.

I did beat the deadline, but it was extremely hard work. Glad I did it. Glad I never have to do it again.

@DialsMavis This was published by Money Saving Expert today and may be helpful www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

It seems obvious to me that you would pay off what you can before the interest rates go up drastically. Because whatever is left then, suddenly costs you a lot more.

@GOODCAT Thanks for that, amalgamates all the advice on this thread in a very easy to understand way. (wish my cat was good)

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.

my mortgage is 2.6%, If I put 10k into a 3.9% savings for a yr is that better than overpaying?

fix ends 2027

The link posted above by GOODCAT has a calculator for you to check. You need to be mindful of any tax you would have to pay on savings.

I have just transferred £500 to my savings account as it is pay day, may need to take some back for DD's bday presents, but will aim to leave it all in there

@lannistunut thank you

Save it, £1k in savings is nothing and could easily be wiped out. The next few years are going to be challenging and I would be building a financial buffer.

ISAs are tax free up to £20k, save as much as you can and then you will then be in a position to pay down a chunk when you remortgage.

You keep talking about finishing the house using a credit card. Yet only have £150 spare a month? Save the £150 over the year you will have saved £1800, then decide whether to keep saving or finish the house.

Thanks, we really do need to finish our house, we have no carpet upstairs. The £150 is what I think I can afford to not notice out of my payrise, whilst leaving some left over to cover all of the additional price rises.

But I have spoken to DH about us being much more frugal in general and piling more into savings and mortgage. We spent so long in relatively low paying jobs paying £2k a month rent in London that since moving away and house buying (whilst never being wasteful, or big spenders) have been enjoying being able to enjoy life a bit too much. We are v frugal day to day but have got into the habit of buying expensive presents for parents, more meals out etc, just the things we couldn't afford to do before, but we have had our fun now!

We're in a similar position, our fixed rate is up in November next year and I'm expected to get a significant pay increase in the coming months.

Our plan at the moment is to put the extra funds into a savings account as if we never had it and wait until we know more about what rates are going to be available to us for our remortgage. Once we know more we will either plough those savings into our mortgage to reduce it (currently around £160k owing on £320k house), or we will keep the savings to put towards some home improvements we had planned to do in the next few years, we were originally going to use some of our equity to do these but it seems more sensible to save for them if we can, now.

We're fortunate in that we already have a small savings buffer (currently about 3 months of our total bills), but have long term plans for most of our savings in that they're mainly savings for our DD's future - she's two at the minute so we can use them in the short term - or indeed the long term if we do need it.

I don't know if we're taking the right approach but I always feel more comfortable having access to some funds in case we need it, especially considering that it will be harder to get cheap credit in case of emergency in the near future.

I'm saving rather than overpaying so I have choices when my current rate expires a year today. I can get a better rate that way. However, part of my reasoning is that my remaining term/balance are fairly short and if I pay off too much now I may actually struggle getting a new deal because the numbers are too low, so I'd be stuck on svr for the last year or so. Whereas this way I can see what deals are out there at the time and what the outlook looks like, decide whether to pay some of it down before remortgaging, suck up svr for a while or raid my longer term savings and just get rid of the whole thing.

From personal experience I'd always say over pay the mortgage if you can, doesn't matter how little the amount is.

We started doing this in our 20's, felt like a drop in the ocean at first but 17 years on (which actually went really quickly) and we're now mortgage free in our early 40's.

We're now going to plough as much as we can into our savings. We only ever had a £1k savings pot but we knew we could easily access the overpayment money if needed which we never did. We still put money into pensions and savings for DS.