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...

Thanks again everyone. I've found some cash ISAs that pay around 5% so I've decided to open one of those.

Childcare costs will continue to go down as DD gets older so that £300 will become &
£600 and eventually £1000 when she starts school in 2026. By then we should have quite a big savings pot so interest would be taxed unless in an ISA (we're both higher rate taxpayers and have other savings so this would happen relatively quickly). In total I think we'll be able to save around 30k this way which sadly is less than 10% of our mortgage debt, so we can switch to repaying the mortgage at any time if savings rates drop below our mortgage rate. I think my logic is sound here but please do correct me if I'm wrong.

The challenge as one pp said will be not to spend this money on anything else in the meantime!

And just to be clear I'm talking about saving the money over the next 4 years until we have to remortgage, so that we can reduce the term of the next mortgage we take out. Repaying the mortgage early is the ultimate goal.

I think you are doing the right thing in the current climate. Could you put the money in an account which you can't access easily to stop you from spending it. You might also be able to lock in interest rates for a fixed period.

At 5% interest you can hold around £10k in savings as higher rate tax payers without paying tax. So it’s a good idea to combine ISAs and high paying interest accounts.

Also to decide if an ISA or high interest account is better, you can multiply the ISA rate by 1.66 (this is the higher rate tax payer number to use, it’s different for basic). If the normal account is still higher, it’s worth doing it and pay the tax.

The cash ISAs sound like a good option.
do the MSE calculations though, I did it a while back and for me it was better to save, but it really isn’t a side by side comparison of interest rates as PP have said.
because you’ll start paying off more of the mortgage loan and less of the interest as the debt reduces.

Thank you!

I’m in a similar position OP. Since my mortgage interest is 0.94% until 2027, I’m saving my mortgage overpayments in a savings account with a significantly higher interest rate. When it’s time to refinance in 2027, I will pay a lump sum. May as well have the money earning to my advantage in the meantime! It’s all earmarked as ‘mortgage’, so I’m not going to be using it on holidays, etc. I guess if DH or I lose our jobs, we may reconsider repurposing the savings, but that’s a worst case scenario.

If you are lucky enough to have what is now a low mortgage rate for 10 years fixed, you would be absolutely crazy to over pay it.

The pp is right - put that money in savings, and in 10 years time make an overpayment and the balance left on your mortgage will be better than you overpay the mortgage.

You can get ISA as high as 5% still at the moment. If not using ISA, then you need to watch out for the tax payable on any interest and take that into account in your calculations including the tax free amount you can earn (500 or 1000 depending on your income tax level). If saving less than 20k, an isa may be your best bet unless you think the interest earned woukd be lower than the amounts where you'd pay tax

Really envious of your position tbh, like I say, you'd be mad to waste it by overpaying instead of saving it all at more than double your mortgage rate.