Dumb savings/mortgage question

[minimoog]

Want to chip away at the mortgage a bit. Rate is 5.69% (in year 6 of a 10 year fix*). Do I

1. Pay a regular monthly overpayment straight to the lender, or

2. Pay same amount monthly into (say) a 6.6%AER savings account e.g. with A&L then withdraw it and pay it off the mortgage as a lump sum up to the allowed limit?

Option 2 seems logically better value but also too easy. Am I missing something?

• yeah I know but we opted to pay more to have certainty for a good while. We can afford it so we're relaxed about it.

[Shaw Tarse]

It's something I've been thinking about.

[Omertron]

Option 1: The sooner you remove money from the capital, the less interest on that capital you'll accrue.

Although it seems that you are earning more interest with the savings account, you are actually paying more interest on the mortgage.

This is a good article: http://www.moneysavingexpert.com/mortgages/mortgag...
Summary: If your mortgage rate’s higher than the after-tax savings interest, don’t save, overpay the mortgage.

Edited by Omertron on Thursday 9th October 16:16

[BoRED S2upid]

Option 1. Interest is usually calculate on your mortgage daily (I think) and whats the point in saving up thousands and paying off every year?. I would be far too tempted with a few grand sitting in the savings account to do anything but pay the mortgage off with it.

[walm]

Depending on what tax bracket you are in paying the mortgage is almost always better.

You have to pay tax on any interest at your marginal (highest) rate.

[7 Sevens]

Do you both make use of your ISA allowance? you may be able to use that to bump up your saving rate in option 2. Or if the sums don't work on that go for Option 1.

[minimoog]

Okay so the AER savings rate is before tax. That's what I was missing.

I told you I was dumb

Thanks