[Fultonius]

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]

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]

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.

[SA Chris]

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]

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]

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]

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]

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]

Not Shark Holdings Investment Territorial Savings?

[Sasquatch]

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]

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]

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]

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 

[HarryBD]

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]

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]

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]

In any case, I'm referring any further questions to Martin Lewis as I'm really just parroting what I read on his website.

[dpb]

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

[moose]

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!].   

[Bradders]

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?

[abarro81]

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]

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]

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.

[mrjonathanr]

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]

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 

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!

[Oldmanmatt]

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!].

Both of these.

Being mortgage free has enabled us to live reasonably well and have the versatility to recover from various traumas ect without also worrying about losing the roof over out heads too. This wasn’t always  the case for either of us and we both went from comfortably middle class to almost homeless overnight due to the death of a partner. Make sure your insurance is tight and will pay out.

We have recently taken some equity release though. Got rid of car loans and we’re both retraining/re-qualifying with a view to increasing earnings, now the kids are older and more independent.
I know this isn’t a direct response to the OP, however I can’t emphasise enough how important this can become, quite unexpectedly. Those with kids, managing traumatised children is more difficult than you expect, take longer and will severely impact career and earning potential.

[Sasquatch]

Does the UK have mortgage insurance? 

[shark]

Does the UK have mortgage insurance? 

Yes - there are various policies available to cover repayments due to illness/redundancy etc but it’s not mandatory

[Bradders]

Does the UK have mortgage insurance?

Not by that name, no.

There has been a huge scandal in the UK over the last decade or so in relation to Payment Protection Insurance, which is similar to US mortgage insurance

PPI was systemically mis-sold by UK banks and building societies, often without people being aware they'd been sold it. Unfortunately that's essentially stopped that sort of product being sold anymore, even where it would actually be beneficial for certain individuals.

Otherwise we have life insurance and critical illness / personal accident based insurance schemes but none of them are mandatory in order to take out a mortgage.

[tomtom]

RE: the OP.

Martin Lewis was on the Radio yesterday talking about this - and his advice was keep enough in an account you can access easily in case there is an unexpected need to spend something - otherwise pay off your debts before starting saving.

[tommytwotone]

Good thread this - all I can add is that the 3 x salary contingency fund is one of those seemingly age-old figures that's been around for as long as I can recall, so may well be out of date given rises in living costs etc.


Savings accounts at the moment are a case of diminishing returns unless you're willing to be very careful about following the rules to get that elusive good rate, and even then you're unlikely to "make" more than a couple of hundred quid.


If you're happy looking mid-to-long term then some kind of unit trust / fund would be an option and (I think, my knowledge is well out of date on this though) be eligible to be ISA-ed.


Failing that (and this is what we do), stick it all in Premium Bonds and cross your fingers. Still waiting for ERNIE to come up with the goods though.

[dunnyg]

Allez ERNIE

[SA Chris]

Good thread this - all I can add is that the 3 x salary contingency fund is one of those seemingly age-old figures that's been around for as long as I can recall, so may well be out of date given rises in living costs etc.

Monthly salary? I hope....

[tommytwotone]

Ha ha - yes - 3 x monthly take-home isn't it?

That's certainly been the received wisdom since I did my FPC (HALAM etc) back in 2004, I'd argue it's probably worth revisiting.

The flipside to this is that in terms of emergency fund / situations - and I discovered this when I got made redundant years ago, is that you quickly find out that actually going to work is pretty costly, so your day-to-day expenditure goes down a fair bit when you're not forking out for travel to work / parking / lunchtime sarnie / coffee etc.

And yes - ERNIE hasn't been totally unkind to us, we've had a couple of 10 fuckall payouts. Always quite exciting / bittersweet when the National Savings envelope turns up, only to find out it's only a low value prize!

[SA Chris]

Yeah, i was between jobs for 7 weeks last week. No commute, plus getting the stove top coffee pot out every morning after dropping the kids at school vs a Costa soon adds up.

We're looking at doing a minor extension / conversion this year, so have redundancy in savings vs paying off mortgage, as I know it will always overrun budget..

[tomtom]

Hasnt the return on premium bonds just gone down the shitter?

[Fultonius]

Crystal ball time....

Rates on the the rise. 2yr fixed deal ending soon. Nationwide offering 2,3 or 5yr fixed at 2.59%, or 10yr at 2.29% (plus £1k fee) - most likely won't go for that one!

Seem like the balance of probability is that rates are more likely to go up than down. Upside gain is max 1%, downside risk could be a few %. Not likely to move / remortgage in next 2-3 and probably 5 years....

I've talked myself into the 5yr fixed haven't I! 

[petejh]

In higher rates environment, if you're able to pay any extra money off your mortgage to get yourself on the next level up the LTV % then it could be worthwhile to secure a better rate to lock in. More so now we're in a market environment that suggests low returns for a typical investment PF. Always going to be a trade-off though between putting money to work elsewhere, versus paying down mortgage, versus renting even for some people. And everyone's circumstances are unique.

[Fultonius]

Cheers Pete. We're already on the lowest LTV (should probably borrow more and throw it all on Alphamin!)....

[petejh]

Market's throwing up some good value currently. Likely to be plenty more bargains ahead to be had for those with cash on the side-lines.

[shark]

Crystal ball time....

Rates on the the rise. 2yr fixed deal ending soon. Nationwide offering 2,3 or 5yr fixed at 2.59%, or 10yr at 2.29% (plus £1k fee) - most likely won't go for that one!

Seem like the balance of probability is that rates are more likely to go up than down. Upside gain is max 1%, downside risk could be a few %. Not likely to move / remortgage in next 2-3 and probably 5 years....

I've talked myself into the 5yr fixed haven't I!

What an opportunity. 2.29% over 10 years is likely to be Nationwide paying you to borrow their money in real terms given (RPI) inflation % likely to be above that. Borrow as much you can and invest the surplus. Less risky than soloing.

[spidermonkey09]

Reading this again, hopefully you went for the 5 or 10 year fix Fultonius...

We're on a 2Y fix ending next December, so basically not a great spot. I'm planning on looking at sucking up an early repayment charge and remortgaging asap next year in an effort to head off the worst of the rate rises for a few years. To do so any earlier than January '23 would incur double the repayment fee, but it might be worth it anyway. We have some additional cash which we may be able to sink into the mortgage so the LTV won't be as high.

I imagine there are a lot of people in a similar situation, so am I missing anything here that it might be worth looking at?

[galpinos]

I imagine there are a lot of people in a similar situation, so am I missing anything here that it might be worth looking at?

Over 2 million mortgages up for renewal in 2023.....

[petejh]

Crystal ball time....

Rates on the the rise. 2yr fixed deal ending soon. Nationwide offering 2,3 or 5yr fixed at 2.59%, or 10yr at 2.29% (plus £1k fee) - most likely won't go for that one!

Seem like the balance of probability is that rates are more likely to go up than down. Upside gain is max 1%, downside risk could be a few %. Not likely to move / remortgage in next 2-3 and probably 5 years....

I've talked myself into the 5yr fixed haven't I!

What an opportunity. 2.29% over 10 years is likely to be Nationwide paying you to borrow their money in real terms given (RPI) inflation % likely to be above that. Borrow as much you can and invest the surplus. Less risky than soloing.

Just goes to show how short-term our thinking can be.

Also, anyone who took out a 5 year interest-only offset mortgage late last year at below 3%, and who's able to offset it with savings is today able to arbitrage potentially £100s of thousands against their house at 2 - 3% cost and make a near zero risk return of 4 - 5%.

I'm not in that boat unfortunately, got an offset interest only mortgage this summer as rates were rising (literally missed a lower rate by one day) and got 4.2% fixed for 5 years, offset by savings. If savings rates or fixed interest continues rising I may start considering the above.

[Fultonius]

Reading this again, hopefully you went for the 5 or 10 year fix Fultonius...

Yeah, just went for 5yr fixed and feel fortunate with timing. Didn't take out any extra as I'm currently in the process of starting up a solo consultancy and didn't want the extra burden of higher monthly repayments, despite the fact I probably could have made a few % on it somehow. If my current track record with investments is anything to go by, I could also have lost ten times as much*....

Really should get round to writing a summary of my first forays into that world over on Pete's other thread, cautionary tales or whatever it's called 

[AJM]

We're on a 2Y fix ending next December, so basically not a great spot. I'm planning on looking at sucking up an early repayment charge and remortgaging asap next year in an effort to head off the worst of the rate rises for a few years. To do so any earlier than January '23 would incur double the repayment fee, but it might be worth it anyway. We have some additional cash which we may be able to sink into the mortgage so the LTV won't be as high.

I imagine there are a lot of people in a similar situation, so am I missing anything here that it might be worth looking at?

At a guess (no expert etc etc, and ignoring the point around LTV), this depends how fast you can move.

There's  presumably some sort of lag before mortgage fix rates catch up with what banks are now expecting to happen to base rate, but once it does then you'll just end up on something that reflects the expected average rate over the fix period - which means you're protected if it worsens further from the point your deal was priced obviously but you'll also lose out if things fall back.

[spidermonkey09]

At a guess (no expert etc etc, and ignoring the point around LTV), this depends how fast you can move.

There's  presumably some sort of lag before mortgage fix rates catch up with what banks are now expecting to happen to base rate, but once it does then you'll just end up on something that reflects the expected average rate over the fix period - which means you're protected if it worsens further from the point your deal was priced obviously but you'll also lose out if things fall back.

Yeah, I guess this is the crystal ball territory really isn't it. Am I better just taking the next year at 2.19% then fixing again for another 2 years at whatever the fuck the rate will be then...definitely possible things stabilise at least a bit, perhaps even probable.

I can move reasonably quick but I'm reluctant to do anything in the next few months I think as the repayment is a lot bigger; its much more reasonable from Jan '23 onwards. 

[csl]

I think you can lock in a rate 6 months in advance, so you could agree a rate now for early next year and then decide if you’ll take it up or not later down the line.

Whether or not it’s worth paying the ERC is another matter though.

[Dexter]

For the early repayment charge it's worth looking at what the rate would be if you fixed it for a longer term (7 or 10 years) and put the money into savings. Does the offset of the interest rates outweigh the charge cost.

[AJM]

There's  presumably some sort of lag before mortgage fix rates catch up with what banks are now expecting to happen to base rate.....

Or perhaps not. Judging by what I've seen on the BBC just now there's a few people closing off new deals already until things stabilise and they have some idea what to price at.

[moose]

Not sure how relevant this is to the above but here's an interesting twitter thread on how financial markets are expecting UK interest rate to hit 5.75-6% by next Spring.  It contends that this would be worse than the far higher interest rates of the late 70s-early 80s, as in those days house prices / mortgage repayments were a much lower proportion of wages - i.e. affordability versus the pure numerical interest rate (14.2% in 1980 equivalent in affordability to 3% now).

https://twitter.com/EdConwaySky/status/1574315522048626688

[James Malloch]

It makes me so glad we went for a 5 year fix (2 year would be due soon) and also a house that we could live in longer term if needed (would prefer to move somewhere with a garden and garage but I guess these are nice to haves…).

Hope things calm down soon, and the government back down on this crazy package they are putting together!

[petejh]

The chart below should be helpful for visualising where mortgage rates may be heading and for what duration. In the top left quadrant you have a comparison of central bank rate hike forecasts as of last Friday (solid lines) versus same forecasts 3 months prior (dotted lines).

This should be helpful for someone trying to decide on duration between a 2 / 5 / 7 / 10 year or longer fix. Obviously forecasts aren't reality and forecasts could change as circumstances change.

You can see that the updated forecast has UK bank rates to rise by another 3 - 3.5% (goes off top of box) within the next 12 months, and to remain elevated around 3% higher than today for 24 months. Then a slow decline, starting around 2 years from now, to a level around 1.5% above the current rate 5 years from now. Note these changes are in addition to current central bank rates (2.25% today in the UK). In other words the forecast is for the UK bank rate to be around 3.75% 5 years from now. Mortgage rates obviously charge a premium in addition to bank rate. 

The EU looks high for longer but they're starting from a lower rate (of 1.25% today). So the net effect after 5 years is that both UK and EU end up at around the same interest rate (of 3.5 - 3.75%). UK drops more and sooner but from a higher base.

Something that could alter the forecast upwards further would be further and deeper global commodity supply shocks than we already have but not at a rate of change that shocked the system beyond coping. Something that could alter the forecast downwards would be a massive rapid shock to the western financial system that resulted in QE stimulus in the form of bond-buying by the western central banks to prevent total meltdown of the economy.
Note the EU's 'TPI tool' as first defence against 'disorderly market dynamics. And the UK's recent bond-buying action...