Pay off chunk of mortgage (renewal) or keep in savings? Amounts included.

[SpinningTops]

Thinking ahead to our renewal next year.

We’ve had a 10 year fix at 2.5%.

We will have approx £230k left on mortgage. House value probable £700-800k.

We will have about £150k in savings which we can either put into the mortgage or keep.

Whatever we did we’d keep at least £20k back for emergencies.

Any opinions on the best distribution?

How old are you both?

Do you have dc?
If so, how many how old?

What kind of job do you both do?
How much do you earn?

What rate are you getting on your savings and what rate of tax are you paying on your savings interest ?

Look at penalties for overpaying.

It will depend on the mortgage rate versus savings account. Many years ago we earned more from our savings account than paying our mortgage off but we had a rate of 1.5% on our very small mortgage. We had overpaid max without penalty for about 5 years.

What is six months expenditure in your situation including mortgage payments and every single thing?

Both 38, 2DC, aged 9&6. One works in education, one in IT. Both good pensions. Joint income probably £95k. One higher interest tax payer but savings mostly in ISAs and premium bonds.

Averaging about 4%.

This would be renewal so don’t need to worrying about overpayment penalties.

Savings rates seem pretty matched with mortgage rates.

Not sure about our expenditure, we’re don’t do things like have fancy holidays and are fairly frugal. I’d say we save £500-1000k per month depending on the month.

Wait til you know what rate you can remortgage at.

Then look at the rates on the mortgage, and worst savings accounts. Money goes to the product with the higher rate. Minor exoection, if the rates are pretty close, the mortgage probably wins if you'll pay tax on the savings interest.

Definitely don't pay anything off the mortgage while you are on the fixed rate. You will be much better off with that money in savings.

And then tax on that ...

I'd pay the 130k off and leave a new mortgage of 100k and definitely have that over a short period of time. You will still have a chunk of savings and if necessary pay the usual 10% off per year that's allowed on majority of mortgages. Having no mortgage is extremely freeing plus why pay interest when you don't need to.
Then concentrate on investments.

Pay down debt (mortgage) first. Especially if your savings are in cash. If they’re in investments that’s slightly different. It’s misleading to look at the rate, as the compound interest over a number of years will mean you’d end up paying more on the mortgage. At renewal, calculate the monthly amount on the mortgage if you paid it down vs if you didn’t - and consider what you’d do with that difference. Can you increase your pension amount (so it grows tax-free over a number of years)? Can you afford private education for your children (if that’s something you want to do). Look at it that way.

No, it’s in ISAs and premium bonds. Everything in every day savers is under the threshold for us.

The effect on compounding is the same in both savings and their mortgage. It's a simple comparison of rates.

In the OPs shoes, I'd look at investing or topping up pensions instead of overpaying a mortgage as the return will almost certainly be better over time, but also consider savings for large purchases like car replacement, home improvements or DC university and/or house deposits.

OP have a look at https://ukpersonal.finance/flowchart/

I know it might be sensible to keep the mortgage but having a very small mortgage is freeing. If something happens to either of you the other person will have less to worry about.

You can put more in your pension. I but I personally am holding off topping up my pension for a short period until Rachel Reeves gives some clarity on what she is doing with pensions.

Either way, I would get some professional financial advice which takes into estate planning so you really understand the impact of your choices and decisions.

If the money is in cash then I would be tempted to get my mortgage as low as possible .. then start using the extra disposable income to invest (Stocks.. ISA.. low cost global fund etc) ... Use this investment pot to target early retirement.

Good position to be in at your age.

Why on earth do you have so much savings in cash? With that amount it should be invested. Get 90% of it transferred to stock and shares ISAs.
The only time you should use Premium bonds is if you have maxed out both ISA allowances for the year and even then investing the money outwith an ISA is likely to net a better return even for a higher rate tax payer than Premium bonds ever will.

Look at rebel finance school . It will help you look at your priorities, potential investment opportunities etc. it's free. Paying off mortgage is usually the least best option.

If I was undecided I would use half my savings to pay off the mortgage.

Also might be worth looking at an offset mortgage.

Gosh that's a large amount to have sitting like that.

I wouldn't be putting any into pension currently under the present intention of including your pension in your estate for IHT. Keep it invested but available where you could dispose of if you wish in future.

Open an offset mortgage. That way you will lop a huge amount of the interest you’ll pay and in a few years time you’ll be ‘fully offset’ and can use the account to pay down the mortgage. Big benefit is you would still be able to access the cash whenever you needed it in case your circumstances change.

We’re very risk averse. We've dabbled with stocks and shares in the past but things immediately crashed and took ages to return. Once it came back up we took it out as I found it really stressful and that was only with about 10k. I like knowing my money is safe.

But I’m open to safer investments. I think we went medium risk before.

Also we’re not sure what we’re doing with the money. A lot of it has come to us in the last year or so so just keeping it ticking over. We’ve both maxed out cash ISAs since getting the money hence the premium bonds. It’s about keeping level interest wise but realise that’s down to chance.

I didn’t know places still did offset mortgages. I will investigate!

Yeah, I’ve got a Coventry one. Gonna finish 8 years early!

I would aim to pay for the mortgage. I have always grown up with the theory that there is no point in having savings if you have debt.