Mortgage or savings

[nc22124]

Due to a reduction in childcare costs, we now have £300 spare per month. We'd like to put it towards repaying our (huge) mortgage. We currently have a fixed rate of 3.06% until the end of 2027.

Should we increase our monthly payments or put the £300 in a savings account to repay a lump sum when we remortgage?

Savings accounts seem to pay 4-5% at the moment so I'd assume that this is the better option, but there may be something I'm missing...

Moneysavingexpert.com has a calculator where you can compare overpayment to savings based on rate/tax bracket.

You’re absolutely right that the 4-5% savings are a better option. Just make sure that you can access the savings money before your fixed term comes to an end.

Who is your current account with? First direct do a regular saver where it is 7% and it’s up yo £300 per month so perfect for you.

If you are able to pay your mortgage comfortably a month, then I would put it into savings. These savings can be used for unexpected crop ups, etc. If you can, it's always better to have a little bit of savings behind you for anything for that matter, holiday, family day drip, unexpected bills etc.

Sorry, I have completely read your post wrong 😅 just discard my comment.

Savings!

Have you got any savings now? If not then forget about overpaying your mortgage because everyone needs an emergency fund, at least three months worth of expenses.

Thanks all, really helpful responses. @Mazuslongtoenail I don't have an account with First Direct but I'd happily open one to get 7% interest!

We already have savings for rainy days, etc. but I'm keen to start paying down the mortgage so we can hopefully retire before we die! But I guess if we put the £300 a month in savings we could use it for something else if the need arose.

As savings rates are higher than your mortgage rate, it makes sense to save.

But the mortgage is on a large amount so worth trying to bring down.... I've been trying to work out the same thing and if I overpay by £300 a month it reduced the term by 4 years

The idea is to use the money to pay down the mortgage either way, it's just whether I do it month by month or in a lump sum. My assumption - which I think is correct based on this thread - was that it would ultimately cost me less to do it as a lump sum provided I can save at a higher interest rate than I'm paying on the mortgage in the meantime. So I think I will put it in a savings account until either it's time to remortgage or saving rates drop below my mortgage rate, whichever happens first.

@thesleepyhoglet that's not relevant. The point is you have £300 a month which will either earn you x% or save you x%. The total size of the mortgage doesn't matter.

@nc22124 yes agree save for now and overpay later

But for the £300 pm the OP is talking about, it earns more interest in savings than it saves if paid off the mortgage.

If it comes to the point when she can't beat her mortgage rate with savings and then pays down the mortgage, the term will then start to be shortened but by more because the amount of money overpaid is bigger because it's grown more while it was in savings.

I just overpay on the mortgage because I'm in danger of using the savings for something else if I don't. I'm sure if you're more disciplined saving is probably the better option.

@TheOneWithUnagi
But If you pay off the mortgage, the amount that you are paying interest on decreases so you pay less interest overall. I don't think it's as simple as a side by side comparison- someone explained it to me. My mortgage lets me pay up to 10% of the overall balance so in order to benefit from the overpayment, I can't leave it all to the last moment .

I also read somewhere that paying your mortgage weekly rather than monthly also cuts your term.

It really is a straight comparison of interest rates. Whoever explained it to you is wrong.

In the OPs circumstances where she has some spare money to overpay, it's better to save at a higher rate rather than overpay straight away as the interest earned is more than what is saved by overpaying.

Given that there are people still on very cheap fixes, they are at risk of throwing away their good fortune and thousands of pounds if they overpay before they have to.

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

Recommend reading this. It's definitely not a straight interest rate comparison and depends how much you have borrowed and how early you are into the mortgage.

That calculator says it is better to put the money in savings (£300 pm saved at 5% as a basic rate tax payer vs 3% mortgage interest rate for the entire term is nearly £9k better in savings than overpaying).

Even if its shorter term, every month you save rather than overpay puts you ahead while you can get a higher rate on savings. <weeps at how people still continue to willfully misunderstand a very simple point>

Check if there is a ceiling for the savings accounts. Some will give you 7 per cent up to balances of say 5k. If that's the case it may be better to pay off the mortgage with the excess. Or have lots of little pots everywhere!

Your point is around compound interest so by overpaying the mortgage, interest is charged on the smaller amount. The flip is also true on savings though as you earn interest on any interest added into the savings balance so the effect is the same. Higher rate is where to go with the extra cash.

With the overpayment limit, that applies during the course of the mortgage. If the lump sum repayment exceeded the 10%, you don't overpay the mortgage but take out a smaller loan at remortgage point with your lump sum making up the difference.

Interest will be taxed over the de-'minimus limit, unless in an ISA so you should factor this in too.

I think I might do both based on this- £300 in savings and £200 a month mortgage overpayment.

I will look into a first direct savings account/ is that a regular saver or something different? Need tips on the best saving account

My mortgage rate is fixed for 10 years at 2% but still adds up to a lot hence wanting to reduce the term.

Calculators like the MSE one that compares mortgage payments with savings assume you can save the entire amount into savings. For example if we paid £300 a month into a regular saver over the next 25 years we’d be better off than if we overpaid by that amount. However, regular saver products don’t last that long. We’d need a new one at a good enough rate every time and who knows what’s going to happen? You also don’t know what’s going to happen in life, and if you’ll be in a position to use those savings or if they’ll be seen as deprivation of assets. (We have insurance for some situations but not others.)

If we saved our overpayment for 25 years we’d be a bit better off, yes. But if we overpay our mortgage we can clear it years and years earlier, and then be able to save far more every month.