Should we put £40k into the mortgage?

[inverness123]

We’ve got a large mortgage and are one year into five years fixed at 2.07%, which seemed a lot at the time but is looking pretty great now and I expect when we renew in four years it is likely to be more.

We’ve got £40k to invest and really want to put it into the mortgage as it’s great to see that huge sum going down. But would we be better putting it into a high interest savings account and then using it when we remortgage to mean we need a lower amount?

And if it’s better to put it into savings, where should we be looking for a good deal?

thanks!

You need to do the sums and work out the best option. How much do you have on your mortgage? You can only normally over 10% without a financial penalty.

We have just over £400k, so £40k is within the limit.

Im just not sure how we do our sums or exactly what those sums are. Any advice on websites that would help?

It's easiest working it out on a spreadsheet, put the months in the column over the length of the fixed deal.

On one column, work out your do nothing option where you pay down at your normal rate and apply the fixed interest each month.

Option 2 if you paid the 40,000 off one month, then apply the interest and repayment across the length of the deal, this should show you a substantial saving.

Then option three, see what interest rates are for savings accounts, and see what the yield is. Double check if you need to pay tax on the interest, especially if you have other savings.

Then compare whether option 2 or 3 gives you more yield, vs option 1.

Also, it's a good thing to have 3 to 6 months of essential bills covered in savings, just to give a cushion now the days of easy cheap credit are coming to an end.

@Timeforabiscuit thanks very much - very helpful.

I’d put it in a good savings account until your fixed term is up as you will gain more interest than you save I think. Barclays were doing 4% ISAs recently, may even have gone up since the last interest rise.

What interest rate is your mortgage? Does it have any penalties for overpayment?

Look on a comparison site like Moneysupermarket.

You can get a higher interest rate than 2.07% so just park your money in there until the end of the fixed period and then re-evaluate. Make sure you understand effect of tax and consider cash ISAs or even premium bonds.

No points rushing to overpay when your rate is lower than savings rates.

Have a look at the moneysaving expert overpayment calculator. You would be far better off putting the money into a savings account than paying down with such a low mortgage rate. A 3 year Atom bond would pay 4.65% compared to the 2.07% you would be earning by paying it into the mortgage.

The maths is pretty simple.. if the interest rating on savings is more than the debt, it's best to save.

Looks at a couple of ISAs though, be aware you'll pay tax on interest if above your allowance (which any much!)

Can I just ask as I'm hopeless at this sort of thing. Do you have to take into consideration the differing amounts? So the 2% interest is on 400k vs the 4%+ on 40k? Sorry if it's a silly question but it's something I've never quite got my head around.

No (and there are no silly questions with this sort of thing!)

You are looking at the £40k and working out “what can it do?” in each case:

If the OP paid it off the mortgage, she would save the interest on that £40k - so it would save £828 pa (£40k x 2.07%)

If she put it in the Atom saver, it would make interest at £1860 pa (£40k x 4.65%)

So purely financially, it would be much better to put it in savings and then wait to pay off the mortgage as she will be able to add the interest also. As the PP says though they might end up paying tax on interest so need to look at their overall savings to maximise the gain as much as possible

Savings then pay it off when you remortgage. It's what I'm doing - my deal expires in September and I have £30k waiting to put against it but it's in savings accounts until then.

Thank you @MrDrEvilPorkChopToYou that makes sense.

If you can put it in a savings account with an interest rate better than the mortgage rate and leave it there (you know you won't be tempted to spend it on holiday etc) then I'd do that.

Put it into a high rate interest account for now, pay it off the mortgage when the rate goes up.

We will be getting 3.3% on our Chase savings account from 22 May and that is instant access, so we can get the money out at any time without penalty. I know there are better savings rates out there for people prepared to shop around, particularly if you don't need instant access.

Anything higher than 2.07 you are earning more interest than you would be saving by paying off a chunk of your mortgage.