Overpay mortgage or Savings
Discussion
A little while back one of my close relatives passed away after a short battle with dementia which lead to other complications. Now that everything has been settled with the solicitor the estate has been divided between my dad, my sister and myself as we are not a big family and we each received roughly £100k. I have never imagined coming into such money and I have absolutely no idea what to do with it. I'm not the type of person who will squander money as I know my late aunt would want the money to be used for our future which I have every intention of doing however I'm still stuck as to where to put it.
As it stands I have maxed out my 123 account (dropping to 1.5% in November, Thanks Santander!) and the rest is split between an ISA and a normal savings account. I have just had confirmation that the rates on both of these accounts will drop to around 0.5% which is disappointing to say the least. I have already paid a one off over-payment (10k) to my mortgage on my flat which has reduced the interest being paid every month which is only a good thing. This reduced my mortgage to about 97k. The mortgage lender only allow for an over-payment of 10% of the outstanding balance per year (without incurring ERC) meaning I have maxed this years allocation.
Now prior to all this happening we had intentions to move onto a bigger detached property in the summer (2017) which would be a joint mortgage application with my GF. The flat is solely in my name as it stands.
Given this is really only 6 months away before we sell the flat does it make sense to max next years overpayments before we sell up in order to reduce the interest on the mortgage or is it worth holding onto? So in January I could potentially pay another 9.7K towards the mortgage or I could keep in my bank account and use this for a deposit on the next property. I suppose it just means I would have more tied into the flat than I previously did.
Any suggestions or advice welcome as I am at a loose end!
As it stands I have maxed out my 123 account (dropping to 1.5% in November, Thanks Santander!) and the rest is split between an ISA and a normal savings account. I have just had confirmation that the rates on both of these accounts will drop to around 0.5% which is disappointing to say the least. I have already paid a one off over-payment (10k) to my mortgage on my flat which has reduced the interest being paid every month which is only a good thing. This reduced my mortgage to about 97k. The mortgage lender only allow for an over-payment of 10% of the outstanding balance per year (without incurring ERC) meaning I have maxed this years allocation.
Now prior to all this happening we had intentions to move onto a bigger detached property in the summer (2017) which would be a joint mortgage application with my GF. The flat is solely in my name as it stands.
Given this is really only 6 months away before we sell the flat does it make sense to max next years overpayments before we sell up in order to reduce the interest on the mortgage or is it worth holding onto? So in January I could potentially pay another 9.7K towards the mortgage or I could keep in my bank account and use this for a deposit on the next property. I suppose it just means I would have more tied into the flat than I previously did.
Any suggestions or advice welcome as I am at a loose end!
This dilemma comes up pretty regularly in the Finance forum and you'll soon find detailed threads if you look through the index.
On balance it comes down to,
On balance it comes down to,
- Borrowing and saving cash at the same time is very unlikely to work with interest rates so low.
- Borrowing and investing at the same time (which is called Gearing) inevitably involves risk.
- The great feeling of living "debt free", and
- Do you want a cash reserve for emergencies, new car etc.
Personally I would hold onto the cash in your savings accounts until you buy a new property, and then I would put a fair chunk of it into that mortgage as a deposit.
The interest you save from having a better LTV and a lower outstanding balance will likely be a lot more than you would gain on any savings, and it will give you a lower mortgage payment.
In turn I would work out how much lower the mortgage payment is, then overpay it up to what it would have been anyway. This way not only do you have a much smaller mortgage at a better rate, but you are overpaying it and will save substantially in the coming years.. all culminating in you being mortgage free a heck of a lot sooner.
See here if you need to do any calculations: http://www.moneysavingexpert.com/mortgages/mortgag...
In effect pretend you never received the money, and keep paying what you would have had to anyway.
The only caveat to this is having some put away as a rainy day fund, I would look for a longer term bond with a bank, as you will get more interest than an ISA and because its not easy access you won't be tempted to spend/dip into it.
The interest you save from having a better LTV and a lower outstanding balance will likely be a lot more than you would gain on any savings, and it will give you a lower mortgage payment.
In turn I would work out how much lower the mortgage payment is, then overpay it up to what it would have been anyway. This way not only do you have a much smaller mortgage at a better rate, but you are overpaying it and will save substantially in the coming years.. all culminating in you being mortgage free a heck of a lot sooner.
See here if you need to do any calculations: http://www.moneysavingexpert.com/mortgages/mortgag...
In effect pretend you never received the money, and keep paying what you would have had to anyway.
The only caveat to this is having some put away as a rainy day fund, I would look for a longer term bond with a bank, as you will get more interest than an ISA and because its not easy access you won't be tempted to spend/dip into it.
I think in very crude terms the issues are this:
If you keep it in cash then paying down your mortgage is likely to be a far more efficient return on that money.
If you have a very long term view for the capital then converting into a quality ISA using your annual allowance while also paying down your mortgage at the current level that does not incur costs is an option.
If you are planning to move soon then just holding the cash and using it to secure a smaller mortgage, or better property or lower interest rate would seem very sensible. However, if you are looking to co own this next property then I would be exceedingly wary as to how you structured that to hedge against the risk of losing it in a relationship default.
The alternate solution and one that I would personally look at very closely is to pay it steadily into a pension wrapper so that I could claim back all of my income tax for the next few years or for the last few years. You can claim back on the first £40k of income each year and back date it a few years depending on what contributions you are currently making.
Ultimately, I'd consider using the bulk to massively boost my pension to help secure a higher quality of life and more freedom in later life. Plus, look at what amount, if any, could be utilised to lower your LTV on your future purchase to achieve a cheaper mortgage rate on the full loan value as tripping down to a better LTV could deliver absolutely massive returns over the lifetime of the mortgage.
If you keep it in cash then paying down your mortgage is likely to be a far more efficient return on that money.
If you have a very long term view for the capital then converting into a quality ISA using your annual allowance while also paying down your mortgage at the current level that does not incur costs is an option.
If you are planning to move soon then just holding the cash and using it to secure a smaller mortgage, or better property or lower interest rate would seem very sensible. However, if you are looking to co own this next property then I would be exceedingly wary as to how you structured that to hedge against the risk of losing it in a relationship default.
The alternate solution and one that I would personally look at very closely is to pay it steadily into a pension wrapper so that I could claim back all of my income tax for the next few years or for the last few years. You can claim back on the first £40k of income each year and back date it a few years depending on what contributions you are currently making.
Ultimately, I'd consider using the bulk to massively boost my pension to help secure a higher quality of life and more freedom in later life. Plus, look at what amount, if any, could be utilised to lower your LTV on your future purchase to achieve a cheaper mortgage rate on the full loan value as tripping down to a better LTV could deliver absolutely massive returns over the lifetime of the mortgage.
I agree with everything Donkey has said.
I was in a slightly similar position last year....although a smaller amount than the OP. At the time we weren't planning on moving and so paid a nice big chunk of mortgage off, as it fell very close to our mortgage anniversary, we were able to do two overpayments in quick succession.
Where it slightly went wrong for us, is when we decided to move house, the rules on mortgages had changed since our last mortgage, and so it was much tougher to borrow money and arguably it would have been better to have more cash, to make us look more attractive to lenders.
As a side note. When my now wife and I bought a house together, we'd only been going out for about a year so we both agreed to draw up a deed of trust. Basically it was an agreement/contract on how had put what into the house and who paid for what and how much we each owned of the house. At the time we bought, I had more free capital to put down as a deposit but my wife was earning more....our agreement lasted 2 years, at which point we agreed we'd own the house 50/50. It's not the most romantic thing we've ever done but we're both quite sensible about money, so was something we were both happy and comfortable doing.....also kept both sets of parents quiet too!
I was in a slightly similar position last year....although a smaller amount than the OP. At the time we weren't planning on moving and so paid a nice big chunk of mortgage off, as it fell very close to our mortgage anniversary, we were able to do two overpayments in quick succession.
Where it slightly went wrong for us, is when we decided to move house, the rules on mortgages had changed since our last mortgage, and so it was much tougher to borrow money and arguably it would have been better to have more cash, to make us look more attractive to lenders.
As a side note. When my now wife and I bought a house together, we'd only been going out for about a year so we both agreed to draw up a deed of trust. Basically it was an agreement/contract on how had put what into the house and who paid for what and how much we each owned of the house. At the time we bought, I had more free capital to put down as a deposit but my wife was earning more....our agreement lasted 2 years, at which point we agreed we'd own the house 50/50. It's not the most romantic thing we've ever done but we're both quite sensible about money, so was something we were both happy and comfortable doing.....also kept both sets of parents quiet too!
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