Mortgage or save? Is rate king!

[spitty71]

This has been hurting my head for the last hour so thought i'd ask here...

Is it better to put 300 a month into a 5% regular saver which has this rate for 12 months or up my repayments on a 2.19% mortgage? (i'm only 1 year into a 25yr term).Theory would suggest save as the rate is the key factor?

Additional info.. I have been overpaying a small amount already (20% of the monthly mortgage amount) but have a spare 4k I could use to overpay with as a lump sum.

I may have answered my own question but would it make most financial sense in the long run to overpay the mortgage with the 4k lump now and then save 300 a month in the savings account for the year as the rate is 5%? Rather than for arguments sake overpay 300 on the mortgage a month as well as the lump sum?

Thanks in advance!

[American iv]

I'm no expert, but for my own interest (I've a similar quandary) I threw together a quick-and-dirty Excel spreadsheet.

Assuming a $500,000 mortgage, daily compound interest on the mortgage, monthly on savings which starts at zero:

1. With no other repayments or lump-sum, your mortgage would increase to $511,070.4 with daily interest at 2.19%
2. With a $300 repayment on the 1st of the month, your mortgage would increase to $507,427.2 ($3,643.2 less)
3. The saving account would end at $3683.66

Thus, if you put $300 into the 5% savings account you'd earn $40 more interest over the course of a year compared to if you overpaid your mortgage.


Looking at a $4,300 lump sum + additional $300 per month

1. With no other repayments or lump-sum, your mortgage would increase to $511,070.4 with daily interest at 2.19%
2. With a $4,300 initial deposit & $300 additional payments on the 1st of the month, your mortgage would increase to $503,338.7.2 ($7731.77 less)
3. The saving account would be $7870.86

Thus, if you put the $4k into the saving account and then topped up $300 a month, you'd be $139 better off.

Would you be taxed on the earnings from the savings account? If so, you'd need to drop the interest benefit by 20/40/45%.
It should also be said that with normal repayments, the compound interest on the mortgage will decrease as well bringing the gap closer.

I think that's right, though like I say, I'm no expert.


p.s. I'm in Melbourne, Australia where the lowest interest rate is around 3.7% and $500k (280GBP) would buy you a 2 bed apartment 50km from the CBD where most jobs are (assuming you don't want to be in the city).

Edited by American iv on Wednesday 14th February 23:24

[spitty71]

Thanks for the reply. If I understand the situation in the Uk now we don’t pay tax on savings until you’ve surpassed £1,000 a year in interest on savings so that shouldn’t be a worry.

From what you have said, utilising the regular saver makes financial sense but I will have to move it or use the savings as in 12 months the 5% rate will vanish.

The 4K I have In my current account doing nothing may as well go on the mortgage as I don’t think there are ‘normal’ saving accounts with a better rate than 2.19%

It would seem rate is king? - all this being equal..

[Welshbeef]

Don’t ever overlook a cash buffer if it’s in a mortgage overpayment you might have difficulty in getting Iit back.

Do you have debt outside mortgage what are the terms?

[supersport]

With the regular saver you only get 5% on the first month, so in reality you really only getting about 2.x% over the year ( I haven't done the calculations to work out the .x) so there is very little in it.

So unless you can get your overpayments back, the saver may be better. Depends on personal circumstances.

[emicen]

supersport said:

With the regular saver you only get 5% on the first month, so in reality you really only getting about 2.x% over the year ( I haven't done the calculations to work out the .x) so there is very little in it.

So unless you can get your overpayments back, the saver may be better. Depends on personal circumstances.

This. The monthly saver will still save/earn you more, but as it’s only month 1 that gets compounded to 5% the reality rate (invented term but I quite like it) is more like 2.69%

Reality rate = [balance @ end of year] / [total paid in over the year]

[megaphone]

emicen said:

supersport said:

With the regular saver you only get 5% on the first month, so in reality you really only getting about 2.x% over the year ( I haven't done the calculations to work out the .x) so there is very little in it.

So unless you can get your overpayments back, the saver may be better. Depends on personal circumstances.

This. The monthly saver will still save/earn you more, but as it’s only month 1 that gets compounded to 5% the reality rate (invented term but I quite like it) is more like 2.69%

Reality rate = [balance @ end of year] / [total paid in over the year]

This. These regular saver accounts are a bit of a con.

I'd always pay off a mortgage early, get it down as soon as you can, you never know how interest rates will go in years to come. You could take years of the mortgage. You should however keep a buffer of ready savings incase you need them.

[Ranger 6]

megaphone said:

....You should however keep a buffer of ready savings incase you need them.

This.

Is the £4k in addition to other savings? There is a suggestion that having 3 months salary is a sensible buffer to keep handy.

Also, have you taken the maximum ISA allowance for the year? etc, etc.

I would find a good IFA and talk to them. Whilst I'm an advocate of paying down a mortgage ahead of the term, from personal experience, I also keep some 'cash' close to hand.

[NickCQ]

spitty71 said:

If I understand the situation in the Uk now we don’t pay tax on savings until you’ve surpassed £1,000 a year in interest on savings so that shouldn’t be a worry.

This is true but I think you lose that allowance once you are a 40%/45% taxpayer, so worth bearing in mind.

[supersport]

NickCQ said:

spitty71 said:

If I understand the situation in the Uk now we don’t pay tax on savings until you’ve surpassed £1,000 a year in interest on savings so that shouldn’t be a worry.

This is true but I think you lose that allowance once you are a 40%/45% taxpayer, so worth bearing in mind.

40% tax payer gets £500 tax free. Don't know about higher rates.

[Yipper]

Always, always pay off mortgage debt first.

Mortgage rates will not be 2% for the next 25 years. They will rise. Clear the debt now, as fast as poss, while rates are low and the debt can be cleared cheaper and faster.

Ignore the powerful PH directors who juggle money between savings and big investments to get 1% extra return. In the real world, doing such things are a pain and the after-tax gains are marginal.

Pay off the mortgage first.

[sidicks]

emicen said:

This. The monthly saver will still save/earn you more, but as it’s only month 1 that gets compounded to 5% the reality rate (invented term but I quite like it) is more like 2.69%

Reality rate = [balance @ end of year] / [total paid in over the year]

Not sure that’s really helpful - it doesn’t take the timing of cash-flows into account, so it isn’t an accurate measure of the true interest rate achieved on your money and hence can’t be used to compare against the cost of borrowing e.g. on a mortgage.

[spitty71]

Thanks for the replies, I don’t have a buffer at the moment so I should keep a little bit back.

To keep it simple I am in a position for most of this year where I can either overpay 300 a month or use the regular saver. If the 5% saver is only really 2. Odd then that is a bit of a game changer and for what it is perhaps I should just focus on mortgage reduction!

It seems the real interest rate is the main factor on where to save or pay off but rarely do savings out weigh mortgage rates.

Edited by spitty71 on Thursday 15th February 15:14

[NickCQ]

spitty71 said:

rarely do savings out weigh mortgage rates.

Exactly. Obvious point but it would be hard for banks to make money if this were not the case.

[Welshbeef]

NickCQ said:

spitty71 said:

rarely do savings out weigh mortgage rates.

Exactly. Obvious point but it would be hard for banks to make money if this were not the case.

Other debt is more expensive than mortgage and more costly than the savings rate you can make.

So OP do you have any loans or debt on credit cards?
That is first and foremost. Sort out short term borrowing
Build a 6 month buffer and dump into an ISA to stay there - ideal world a full years gross salary in savings gives a lot of comfort, though very difficult for most people to achieve.

[rossub]

A full years GROSS salary in savings? This Finance forum really is a ridiculous place a lot of the time

[spitty71]

Evening,

The only debt I have is a couple of K on a credit card which I know will need shifting but it does have another year of 0% left yet. I also thought if I still have some left on it come then I would balance transfer to another 0% at no cost?

Obviously I am thinking about what is best to do for my own circumstances but part of my interest in this was also just the theory of when is it best to save or pay off. Clearly this is never a black and white matter, the regular saver not being all it’s cracked up to be is an eye opener.

I’ve decided I’m going to pay a couple of K off the mortgage. In terms of regular paying it seems neither here nor there whether I save it or just pay it. Any savings would only then either go towards a car or the mortgage anyway.

[LeadFarmer]

I would throw the money at the mortgage, get as much of it paid off before rates start to return to what they were 10 yrs ago.

I was fortunate enough to get a 0.23% above BoE Tracker mortgage in 2007, when the BoE rate was around 5%. Thanks to the recession BoE interest rates plummeted to 0.25% meaning my mortgage rate dropped from around 5.5% to 0.48%.

I decided to keep my payments at the original 5.5% level so as the BoE rates dropped, my overpayments increased. Its taken about 8 yrs off the 25yr term mortgage.

I could have invested the overpayment money elsewhere, and got a better return to them pay into the mortgage in lump sums, but that would give me the temptation to spend it elsewhere. My priority was to pay the mortgage off ASAP so I could retire early.

So, whilst financially speaking you might be better investing your money elsewhere, I would pay it into the mortgage to get it reduced in size before rates rise.

Edited by LeadFarmer on Thursday 15th February 18:57

[Welshbeef]

rossub said:

A full years GROSS salary in savings? This Finance forum really is a ridiculous place a lot of the time

Maybe excessive yes but a very nice place to be.

[spitty71]

LeadFarmer said:

I would throw the money at the mortgage, get as much of it paid off before rates start to return to what they were 10 yrs ago.

I was fortunate enough to get a 0.23% above BoE Tracker mortgage in 2007, when the BoE rate was around 5%. Thanks to the recession BoE interest rates plummeted to 0.25% meaning my mortgage rate dropped from around 5.5% to 0.48%.

I decided to keep my payments at the original 5.5% level so as the BoE rates dropped, my overpayments increased. Its taken about 8 yrs off the 25yr term mortgage.

I could have invested the overpayment money elsewhere, and got a better return to them pay into the mortgage in lump sums, but that would give me the temptation to spend it elsewhere. My priority was to pay the mortgage off ASAP so I could retire early.

So, whilst financially speaking you might be better investing your money elsewhere, I would pay it into the mortgage to get it reduced in size before rates rise.

Edited by LeadFarmer on Thursday 15th February 18:57

Agreed and while no one can be sure of the future my guess would be that interest rates will only go one way for a while now. My 2 year fix finishes in Dec of this year but that’s another topic!

Mortgage overpay will feel a bit more worthwhile too.

Edited by spitty71 on Thursday 15th February 19:42