In current climate - do I overpay my mortgage or put money into savings account?

[TheOpeningActofSpring]

Someone said on another thread (can’t remember which) that it is not wise to overpay mortgage in current climate but rather save the money in an account?

I currently overpay by about £200 most months. My current deal runs out next year in March and my plan was to overpay as much as possible to put me in a better position for when I have to renew next year. Or should I be putting the money away and use it to help with higher payments on new deal (as the poster was suggesting)?

What do people think?

What are the two interest rates? So of mortgage and savings account?

I was going to overpay on mine but an instant access savings is higher than my mortgage so put it in there and then when the current deal is up, pay it off the mortgage. That way you earn more than you pay in interest and have money available for savings.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Try this OP for a better idea.

If you can get a savings account at a higher rate than your mortgage, you save it. If once you renew the mortgage is higher, put saved money into it.

Run your set up through the Money Saving Expert link as posted above.

I've just run our scenario over term of our mortgage and we would be better off overpaying our 3.5% mortgage rather than saving at 5%.

I overpay mine a bit and save a bit as the interest rates increase. The problem with savings is I have access to them so I’d rather overpay and the money is spent, I don’t trust myself if I have access to the money!

That is my consideration is more a behaviour one than financial!

Once you have a buffer zone of savings eg new boiler type amounts I would overpay. compound interest on the mortgage means you're never going to get as much on savings as you'll pay on your mortgage (unless you're lucky enough to have got an amazing deal fixed a good while back). Plus lower debt gives you options in future eg if you lose your job.

That's interesting @Jarstastic and @chocolatecheesecake. How does that work? I assumed if you have £1,000 and earn 4% you'd earn more than you'd save paying interest on that £1,000 of the mortgage balance at 2.5%. I'd rather pay it off and see the balance decrease but it didn't make sense to do it that way.

My overpayments are going in a higher interest account ready for when the fix term ends and we pay a lump sum to reduce the mortgage balance for the next fix. It works for us as we are currently on a really low interest mortgage for the next 4 yrs and the the savings rates are getting better every month.

At current levels of interest rates, it's hard to beat the "return" from reducing your mortgage. Particularly if you're on a high tax rate, because even if you found a risk-free savings account that paid more than your mortgage rate you'd be paying tax on the investment income.

Thank you. Will use the calculator to have a look. I have less than a year left on current mortgage (1.54%) before new deal - new deal would roughly be an increase to equal current overpayment. Would only be able overpay a minimal amount then or non at all. Current savings are just under 20k - that’s after a new heating system last year and new roof this year.

Put in savings account with higher rate than your current mortgage. Do not touch it until 6 months before your mortgage is up - at that point find the cheapest deal you can. Then nearer March look again and switch to cheaper deal if possible- using your cash to pay any shortfall (maybe keep some back for emergancies)

Is this because you have an overpayment penalty?
We do too - but there's no plenty for overpaying during the last few months of the fixed term so we're just going to do a lump sump then. Our figures are similar to yours.

@Whirlwindinacup @Baisksomwms
I only did it at £200pcm. It’s tax I think. Changes if I say we don’t pay tax. DH is additional rate tax payer but still says better to overpay if I change to higher rate.

We do this. Paying tax on interest isn't an issue for us as we're basic rate tax payers and aren't going to hit the £1000 barrier, but if we were then ISA rates are still the better option.

It's very sensible, but I admit there's nothing like the same joy as I got from seeing our mortgage get chipped away! But this is probably just a sign that I am a sad, sad individual.

And this is all done in the knowledge that we've got enough of an emergency fund that we won't be dipping into our overpayment savings account. I keep it in a separate account so we know not to touch it.

Ah I see! Thanks a lot.
We are higher rate taxpayers too.

How did you find the tax rate? I've had a Google and all I can find is the personal savings allowance.

So for a basic rate taxpayer it's £1000 tax free. For a higher rate it's £500.

But there's no Information at the rate on which the remainder of the savings is taxed. Or at least, easy to find.

I think the MSE website is outdated. It states that 'most people' don't pay any tax on savings interest. This may have been true with rates at rock bottom but not anymore.

The 'average' amount in savings is 17K. Anecdotally judging by the amount people save for their DC uni fees, cars house deposits etc it's not unusual on the scale of multimillionaire levels.

At a 5% interest rate that's £1000 of interest on 20K already. At a 1% interest rate you'd need 100K, which is 5 times 20K, to go above the threshold.

I was just doing compare to savings functionality on the money saving expert calculator.

however I’ve just gone onto gov website and see that additional rate tax payers don’t get any personal savings allowance! So no wonder we’d be better off overpaying. That said the calculator was still saying better off overpaying if I changed to higher rate tax payer.

It’s not allowing for £20k allowed into ISAs though which may be a better solution for some.

it is a bit moot in our case as we have part of our mortgage as interest only (couple of peak expenditure crunch years) and I am not comfortable with it so we make overpayments there. I’m sure we could try and beat it with savings or investments, but I have a more than full time job and other stuff going on. I think there’s also risk of dipping into the money. As a PP mentioned, behaviour. dave Ramsey talks about a lot about this.

Ahhhh I've worked it out.
https://blog.moneysavingexpert.com/2016/02/the-new-personal-savings-allowance-means-some-people-will-be-better-off-earning-less-interest/
So what happens is, your savings interest is added to your total income. The savings allowance is subtracted, and the total amount if taxed.

Say you earn 49K. You get interest on savings that take it up to 52K.
This makes you a higher rate taxpayer. So £500 is subtracted , leaving you with 51.5K of income total. Which is then taxed according to the relevant brackets.

Of course you need a LOT of savings for this to be relevant but seeing the amount people spend on Renos etc to me it doesn't seem like figures that only a few people would achieve before hitting the threshold.

As a recent FTB the interest rates of a cash ISA are still too low to benefit me so yes my best option is just overpaying.

@Merrow

@Baisksomwms
Thanks for this, you make a really good point about tax on savings that we hadn't considered at all. We had been saving the overpayments separately but now realise it's not worth it!

You'll have to thank @Jarstastic !
Some good has come of being on MN, telling my DH this the next time he asks me what I do on here

Yes, but it’s not either / or. The idea is to save it at 5% (paying 3.5% on your mortgage) then when the balance of the rates reverse (6% on the mortgage for example), you use all of the savings (including the 5% interest) to pay into the mortgage. That means you have paid off more of the mortgage than if you were only avoiding 3.5% interest.

Providing we aren’t talking about sums large enough to trigger tax, you will always be better off saving at a higher rate.

This very rarely happens as banks are there to make money - their new mortgage rates will always be higher than their savings rates. It is only happening now because people have fixed rate mortgages at a historically low rate.

I forgot to say, in regard to the tax, there are ISAs that pay better than 3.5%. Of course, if you and your DH are paying more than £40,000 overpayment a year (both of your max ISA allowances), you may well be better off overpaying but there will only be a very small number of people in that position.

What about saving in ISAs? They are still tax free and if your mortgage rate is low enough, may still be better than over paying.

@SarahCrewe PP has mentioned interest only bits of their mortgage. Looks like they're more concerned with getting rid of that.

Multiple PP myself included have already mentioned cash ISAs. In my case a 'flexible' rate is still too low to make any difference and I don't want to lock any money away just yet...