Overpay mortgage or save?

[RapidRob]

I think I know the short term answer to this, but longer term is less clear to me.
Currently on a 5yr fix at 1.04%, with a 35yr mortgage. This deal will end in Dec 2026, and I'm assuming interest rates will be higher than they were when we took the mortgage out. We should be close to a 50% LTV by the end of the 5yr deal.
For now, we are saving what we can in a 4% account- which is obviously the better option for now, but I am assuming it would make sense to overpay what we can not long before the end of the 5yr term? It's not going to massively change the mortgage from what I can see, but we could put £15kish down providing our circumstances don't change too much.

[MitchT]

As long as you've got that fixed rate save the money as you'll get a lot more interest on it than the mortgage is costing you. Once the fix ends, use the saved money to pay off a chunk of the capital so you're minimising your repayments once the rate goes up. That's what I'd do.

[Danpunch]

MitchT said:

As long as you've got that fixed rate save the money as you'll get a lot more interest on it than the mortgage is costing you. Once the fix ends, use the saved money to pay off a chunk of the capital so you're minimising your repayments once the rate goes up. That's what I'd do.

I'm in the process of doing exactly this. Makes sense to hold money right until the point you need your next remortgage deal. You can have years of higher returns on that chunk you have saved.

I even wonder what the bank would say if i wanted to get a £40k loan out on that 1% rate to do some 'home improvements' and then just stick the funds in a 2 year fixed bond!

[RapidRob]

Yeah that makes sense - just need enough discipline to actually move money from current account into savings! Only thing to be aware of with paying just before term ends is the max amount you can pay off per year - I think ours is 15% of the mortgage balance.

[Danpunch]

RapidRob said:

Yeah that makes sense - just need enough discipline to actually move money from current account into savings! Only thing to be aware of with paying just before term ends is the max amount you can pay off per year - I think ours is 15% of the mortgage balance.

The max amount is inconsequential at the point in which you start a new deal. You just pay the money to the new provider and reduce your next mortgage amount.

[wyson]

Might not even be worth paying down the mortgage, depends on what the principle is, and if by paying it down, you are going to be paying a lower interest rate.

Unless it makes a big financial difference, it might not be worth it. I wouldn’t trade 15k of liquidity to save a paltry sum like £30 a month on £800 mortgage payments for instance. I’d put that 15k in an index tracker or something more liquid, that has the potential to do even better than property. Diversify a little.

Edited by wyson on Wednesday 2nd August 06:54