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Savings:Mortgage (Read 8776 times)

Fultonius

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Savings:Mortgage
February 21, 2020, 03:43:32 pm
Fine minds of UKB, at what point should you stop saving into a rainy day fund (instant access, 1% interest) and start paying off your mortgage.

I've seen 3 months regular outgoings mooted. I'm past that, so considering overpaying the mortgage. I don't think we have penalties, but will check.


Will Hunt

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#1 Re: Savings:Mortgage
February 21, 2020, 03:52:26 pm
I would always put some money into some sort of rainy day/savings fund, but one way to look at it is to look at the interest rate on the mortgage and compare it against what you might get in savings/investments.

So if your mortgage is at 5% interest, you'd be better off putting your money into a savings pot that was giving you 10% interest. If your mortgage was 5% but the best saving rate you could get was 2.5%, you'd be better off overpaying the mortgage.

wasbeen

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#2 Re: Savings:Mortgage
February 21, 2020, 03:53:46 pm
Obviously depends a lot on your risk tolerance.

However, before paying off the mortgage I would be inclined to use a regular saving account (e.g. First Direct 2.75%) after a year you can then decide whether or not to use it to pay off a chunk off the mortgage. If you withdraw the money before a year, you lose the interest but even so it is a lot more accessible than paying off the mortgage.

Where paying off the mortgage really benefits is when you have enough equity to unlock the better interest rate products which require a lower loan-to-value.
« Last Edit: February 21, 2020, 04:02:36 pm by wasbeen »

SA Chris

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#3 Re: Savings:Mortgage
February 21, 2020, 03:57:03 pm
Thanks Will!

Check penalties, but also check if you can take a break from payments if you find yourself jobless, or any other "life issues" crop up.

Also factor in job security for the 2 of you, and how dependent the mortgage payment is on you both earning.

HarryBD

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#4 Re: Savings:Mortgage
February 21, 2020, 03:58:29 pm
Depends on your mortgage rate - if > 5% then pay it down otherwise you can expect ~5% return on index funds so you're probs better off investing. Not sure of your employment/retirement situation but if you aren't taking advantage of all your employer pension contribution matching/allowance and you don't have enough in there then that's a tax-efficient way of not being poor when you can't work anymore.

Nigel

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#5 Re: Savings:Mortgage
February 21, 2020, 04:06:56 pm
Cut-off is a personal choice really, it'll depend on your circumstances. Can you survive 3 months easily on what you've got saved i.e. all outgoings, bills, mortgage, food, fuel etc? If in your judgement you'll be fine getting a new income within 3 months of losing one then all fine. If you think you'd walk into a similar paying job in 5 minutes then its maybe too much? If you would struggle for whatever reason then maybe not enough? Only you can decide that - its not a cast iron rule. Also worth bearing in mind whether your rainy day fund is to cover other one-off expenses e.g. car, boiler going kaput, and how likely this is. If you've got a brand new car and boiler then its less of a worry.

My personal approach to the above is to keep a few months back. Beyond that, realistically parents would come to the rescue until everything was sorted!

You are unlikely to have penalties for overpaying up to 10% of outstanding balance per year, but definitely check this. Probably worth calling up the mortgage company to get it from the horse's mouth, and also discussing overpayment options. I.e. is it something you want to do as a regular fixed amount, a one-off, or on a varying month-by-month basis depending on spare cash? When I had separate bank account and mortgage providers it was easiest just to call them up and do it as a card payment over the phone, which was a hassle. Now with same company for each and I can tweak it all online to my heart's content in a matter of seconds, and see all kinds of info.

Are you early on in a mortgage, or due to remortgage at some point? If so overpaying has large benefits both in reducing future interest and increasing LTV. Moneysavingexpert has a calculator and graphs which can be revealing. As others have said though, despite this better returns can be had via pension / investing. Although there is a balance to be had between locking money up til old age / risk of investing vs guarantee of reduced debt if overpaying mortgage. It is a personal decision.

abarro81

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#6 Re: Savings:Mortgage
February 21, 2020, 05:05:17 pm
At the moment you can sometimes get 2-5 yr fixed savings accounts with higher interest that mortgage rates if you've got good LTV, so like Will said, worth checking what you can get vs mortgage rate. Unlikely to apply if you're on a high LTV though...

shark

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#7 Re: Savings:Mortgage
February 21, 2020, 05:15:36 pm
Fine minds of UKB, at what point should you stop saving into a rainy day fund (instant access, 1% interest) and start paying off your mortgage.

I've seen 3 months regular outgoings mooted. I'm past that, so considering overpaying the mortgage. I don't think we have penalties, but will check.

Depends on your mindset. In a low interest environment where you can borrow at less than inflation I think it is more prudent to re-invest than pay down.

In fact take out a second mortgage and reinvest in the Shark Enterprises Gilt Edge Bond (safer than soloing).

The time to invest is now; it always has been and always will be.

tomtom

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#8 Re: Savings:Mortgage
February 21, 2020, 06:10:27 pm
Not Shark Holdings Investment Territorial Savings?

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#9 Re: Savings:Mortgage
February 21, 2020, 06:50:52 pm
I can't speak to the UK rules on Mortgage, but do you have mortgage insurance?  In the US, most banks require it if you your Loan to Value is over 80%.  If this is the case, then I'd most assuredly pay extra to get the mortgage insurance dropped. Once that is off, then it really becomes a personal call based on risk and return and options available.

Fultonius

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#10 Re: Savings:Mortgage
February 21, 2020, 07:21:20 pm
Awesome folks, lot to think about. I'm maxing my pensions with work, so that's good.

My LTV is quote low, so interest is about 1.85%. I guess in that case some kind of stocks and shares isa might be worth a look?

I'm fairly secure for work. Worst case scenario would be going back offshore contracting, so 3 months pay seems reasonable. I've got very few financial commitments (loans/cards etc.) and my outgoings are fairly low (no kids).

Any other thoughts on where best to invest?  I'm a lefty hippy, so no tobacco or climate change deniers...

James Malloch

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#11 Re: Savings:Mortgage
February 21, 2020, 08:01:10 pm
I would always put some money into some sort of rainy day/savings fund, but one way to look at it is to look at the interest rate on the mortgage and compare it against what you might get in savings/investments.

So if your mortgage is at 5% interest, you'd be better off putting your money into a savings pot that was giving you 10% interest. If your mortgage was 5% but the best saving rate you could get was 2.5%, you'd be better off overpaying the mortgage.

This depends on the amounts though, right? Putting a grand into a 10% savings account won’t be much use if you’ve got £200k in a 5% mortgage

Will Hunt

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#12 Re: Savings:Mortgage
February 21, 2020, 08:24:08 pm
It's about thinking about each individual pound of surplus and how to make it "worth" the most.

In your example, after one year of having your £1000 you would have turned it into £1100 in the 10% savings account (you're up £100).
Your 5% interest on £200k is £10,000. 5% interest on £199K is £9,950.

So you either spend a grand overpaying the mortgage and save £50 or put it in savings and get £100.


Don't you work in the finance industry, James  :P

HarryBD

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#13 Re: Savings:Mortgage
February 21, 2020, 08:39:44 pm
My LTV is quote low, so interest is about 1.85%. I guess in that case some kind of stocks and shares isa might be worth a look?
ISA certainly better than a generic savings or brokerage account - think of it as a wrapper that stops you paying tax on income gained from it. Savings account interest or standard broker account investment gains are treated as income.

Any other thoughts on where best to invest?  I'm a lefty hippy, so no tobacco or climate change deniers...
Don't want to tell you specifics - you should make your own decisions about how you want to invest/save. There are 'Ethical' investment funds that typically avoid defence companies and such.

tomtom

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#14 Re: Savings:Mortgage
February 21, 2020, 08:40:26 pm
Though mortgages are compound interest - so if you have a significant amount outstanding and/or many years to go - you would save on interest payments for all of those years...  non?

tomtom

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#15 Re: Savings:Mortgage
February 21, 2020, 08:47:21 pm
Though mortgages are compound interest - so if you have a significant amount outstanding and/or many years to go - you would save on interest payments for all of those years...  non?

😃 of course savings would be compound interest too. That’s what 12 hours of toddler supervision has done to my brain!

Will Hunt

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#16 Re: Savings:Mortgage
February 21, 2020, 09:06:54 pm
In any case, I'm referring any further questions to Martin Lewis as I'm really just parroting what I read on his website.

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#17 Re: Savings:Mortgage
February 21, 2020, 09:30:34 pm
No one has championed the overpaying option so here goes.

Housing costs are the biggest the expense that most people have.  Paying it off early will give a massive amount of freedom as your monthly outgoings will be drastically reduced.  It provides a huge sense of security knowing that no matter what happens your house is yours.    Once paid off your can invest all surplus without worrying too much about share prices falling etc.

That's said, with rates so low, it's very possible that stocks & shares investments will return more than you save by overpaying,. remember though that 'the value of your investment can go up as well as down'. 

At the end of the day it comes down to a personal choice, what is right for you and what you feel comfortable with. 

Edited to remove one of my reason for overpaying as realised it was twoddle - sorry
« Last Edit: February 21, 2020, 09:37:26 pm by dpb »

moose

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#18 Re: Savings:Mortgage
February 21, 2020, 09:56:48 pm
No one has championed the overpaying option so here goes.
Housing costs are the biggest the expense that most people have.  Paying it off early will give a massive amount of freedom as your monthly outgoings will be drastically reduced.  It provides a huge sense of security knowing that no matter what happens your house is yours.   

I overpayed - I paid off my mortgage around 5 years after taking it out.  With interest rates as low as they were, I know it wasn't the most fiscally profitable option.  But I reckon I gained substantial peace of mind from feeling that even if I lost my job, I would have a roof over my head (and one with a woodie and fingerboards installed to keep me occupied).  I know the same money invested elsewhere could have been withdrawn, if required, and used to pay-off the mortgage in a lump sum - but I wouldn't have had that same comfort in the interim.  [I feel it's that slither of freedom to quit that has helped me cope with pronged bad patches at work - I could convince myself that work was somewhat optional - a tiny exercise of volition made me feel less like a wage slave and kept me going!].   

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#19 Re: Savings:Mortgage
February 21, 2020, 10:24:50 pm
Have to agree with Shark; in the current extreme low interest rate environment, which is likely to continue for the foreseeable future, I wouldn't be overpaying a low interest mortgage.

Awesome folks, lot to think about. I'm maxing my pensions with work, so that's good.

When you say maxing, I take it you mean putting in enough to get your employers maximum contribution? If so, remember you can put more in yourself (I would assume, if it's any normal DC scheme). If you're putting any less than 15% of your gross pay, even with the employer contributions maxed, then I'd seriously consider paying more.

Any other thoughts on where best to invest?  I'm a lefty hippy, so no tobacco or climate change deniers...

You'll find loads of options nowadays for this sort of thing. Take a look at any of the major investment platforms and they'll have lists of funds, but be cautious and educate yourself on what you're buying before doing anything. The adage if you don't understand it don't invest in it is a good one.

Have you considered getting some independent financial advice? Always the first thing to consider if you're not sure yourself, and there's a ton of research showing that advice does add real value for the majority of people.

Other thing to consider is what are you saving/investing for?

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#20 Re: Savings:Mortgage
February 21, 2020, 10:32:39 pm
HarryBD: you don't need an ISA on a normal savings account unless you're above the threshold of interest - £500 for higher rate tax payer or £1000 for normal. Which at current interest rates means 40-50k for most people. Not sure if that threshold interacts with gains on stocks and shares or trackers but I assume not.
Anyway, cash ISA is unlikely to be useful for most people and usually worse interest

Bradders

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#21 Re: Savings:Mortgage
February 21, 2020, 10:42:30 pm
HarryBD: you don't need an ISA on a normal savings account unless you're above the threshold of interest - £500 for higher rate tax payer or £1000 for normal. Which at current interest rates means 40-50k for most people.
Anyway, cash ISA is unlikely to be useful for most people and usually worse interest

True, although lots of providers still offer their best cash rates on ISAs so don't discount them automatically.

Not sure if that threshold interacts with gains on stocks and shares or trackers but I assume not.

It doesn't.

HarryBD

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#22 Re: Savings:Mortgage
February 21, 2020, 11:06:05 pm
HarryBD: you don't need an ISA on a normal savings account unless you're above the threshold of interest - £500 for higher rate tax payer or £1000 for normal. Which at current interest rates means 40-50k for most people. Not sure if that threshold interacts with gains on stocks and shares or trackers but I assume not.
Anyway, cash ISA is unlikely to be useful for most people and usually worse interest

Good point, I was mainly thinking in terms of stocks and shares ISA for retirement - wrong of me to assume goals and risk appetites.

I’d echo what Bradders has said and suggest getting some professional advice/planning. They’ll be able to layout what’s best for your specific circumstances and goals.

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#23 Re: Savings:Mortgage
February 22, 2020, 11:09:12 am
Why save into a 1% return when you can have 5% w Nationwide upto £2500, 1.5% on £1500 w TSB or 2.75% regular saver up to £300/ month  with 1st Direct.

James Malloch

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#24 Re: Savings:Mortgage
February 22, 2020, 12:31:29 pm
It's about thinking about each individual pound of surplus and how to make it "worth" the most.

In your example, after one year of having your £1000 you would have turned it into £1100 in the 10% savings account (you're up £100).
Your 5% interest on £200k is £10,000. 5% interest on £199K is £9,950.

So you either spend a grand overpaying the mortgage and save £50 or put it in savings and get £100.


Don't you work in the finance industry, James  :P

I can tell you how likely you are to default or how much the bank would lose if you did default.

Interest rates though... black magic.  I still have no idea how my credit card works!

 

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