Am I better off paying….(mortgage content)

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  • Am I better off paying….(mortgage content)
  • julians
    Member

    You’re better off putting it in the first direct savings account, but not by much really (in the grand scheme of mortgage sized debt) , especially once you’ve paid the tax on the interest.

    I think you’ll be about £57 better off over the 12 month period by putting it in the savings account after tax (assuming normal rate tax payer) versus paying off the mortgage with it.

    But make sure you dont withdraw the money before the 12 month fixed period is up or you’ll get their standard savings interest rate, which is probably lower than your mortgage

    edited to correct error in my maths

    jekkyl
    Member

    It’s difficult because the mortgage is over a much longer term (25 years? +) so when you pay off some capital you’re not just paying it off for the interest for that year, you’re paying it off entirely so it won’t ever accrue interest over the 25 years (if it is for eg). So the benefit is greater than just the year of savings you’re proposing at 6%. I’d be more tempted to pay it off the mortgage, the old saying that there’s no point having any savings while you’ve still got debt comes to mind.

    Premier Icon white101
    Subscriber

    Thanks for that, I am standard rate tax and dont plan on taking out before the 12 months are up. £33 isnt alot your right, but my recent financal spring clean has seen me swap utility suppliers for similar amounts!
    Thanks again.

    julians
    Member

    It’s difficult because the mortgage is over a much longer term (25 years? +) so when you pay off some capital you’re not just paying it off for the interest for that year, you’re paying it off entirely so it won’t ever accrue interest over the 25 years (if it is for eg)

    He’s going to pay it off, he’s just going to defer payign it off for 12 months, so the actual cost is £1800 at 1.49% per month for 12 months, which is £2.24 per month interest or £26.88 over the year.

    Whereas the savings account will pay 6% permonth , which is £9, so a total of £108, or ~£84 after (basic rate) tax.

    So he saves £84-£26.88 = £57.36

    julians
    Member

    white101 _ I made an error in my maths in my first post, you’ll be £57 better off.

    jekkyl
    Member

    wahey a new hope headset!

    Tinbred
    Member

    If it takes you 15 minutes to do the transactions, your making £228 an hour after tax.

    Premier Icon white101
    Subscriber

    £150pm overpayment on my mortgage or saving it up per month in the account Firstdirect have just offered me.
    For info mort rate is 1.49% and savings account is paying 6%.
    I currently pay the £150 but wondered if I would be better off saving up and just paying £1800 lump sum off at end of 12 months?, both are calculated daily. I can put upto a max of £300pm into the savings account (but couldnt stretch to this) just want shot of as much debt as I can when the rate is nice and low, otherwise garage would be full of T5 and shiny bike stuff.
    Having a blank on the maths.

    johnners
    Member

    Whereas the savings account will pay 6% permonth , which is £9, so a total of £108, or ~£84 after (basic rate) tax

    Not so, only the first month’s deposit will earn the full 6%, the second month’s deposit will earn 11/12*6%, the third 10/12*6% and so on. Interest earned over the year will be about £47 after tax. That’s the figure that should be compared to the saving on overpayment.

    julians
    Member

    Good point johnners, i stand corrected

    Premier Icon nickdavies
    Subscriber

    Yeah, the 6% isn’t a true interest figure as it’s calculated monthly on the balance.
    If you pay the same amount in each month you can basically say the average amount in the account is 1/2 the final balance, in this case £1800, so it’s actually 3% overall interest. ((£1800/2) x 6%)

    Given that overpaying the mortgage will bring your term down and reduce the overall interest amount to be paid i’d say it’s far better to do that.

    If you look at an overpayment calculator online, a 125K mortgage over 25 years at 4% would be approx £660 a month. If you overpaid £150 a month for the life of the mortgage you’d save 22K in interest, cutting short the repayments by 7 years. Someone show me a savings account as good as that and i’ll bite your arm off!

    Also, a hidden benefit of overpaying is that 3% savings rate is now virtually inflation, so you’re losing money on your savings after tax. If we see interest rate hikes which are very likely then those few years off the end of the mortgage could be a few years at a much higher interest rate, that £150 a month overpayment now could save you a lot of money. I’d overpay.

    hh45
    Member

    I’d be more tempted to pay it off the mortgage, the old saying that there’s no point having any savings while you’ve still got debt comes to mind.

    I would be minded to pay it off as reduces the chance of you be tempted to blow the savings on something that will depreciate / waste money. That said a pot of available cash is pretty handy in case of redundancy, illness etc. A set off mortgage works well for this reason but does require some discipline.

    Aidy
    Member

    A few people seem to have missed the point, it’s not either savings or pay off the mortgage; it’s save first, then pay off a lump sum, or over-pay a little each month.

    If you can achieve better than a 1.49% interest rate in savings after tax, it’s financially better to save then pay off when you can no longer achieve better rates*. You’ll pay off a larger chunk than the interest you’d save by overpaying your mortgage.

    The downside of keeping it in savings is the temptation to spend it.
    The upside is that if you really have to spend it, it’s there.

    * To take this to an extreme, if you have the same amount in savings as is outstanding on your mortgage, you’d be earning more interest than you were paying, and the bank would be paying you.

    Premier Icon white101
    Subscriber

    I’ve been overpaying for about a year, and will continue as long as I can afford it. As my mortgage is part repayment and part interest only finding an accurate calculator is difficult. I have around £65k in total left and only £30k of that is interest only. The majority will be gone before the ISA is due to payout so either way savings account or straight off the mortgage I’ll score.
    Thanks for all the input.

    Premier Icon nickdavies
    Subscriber

    Yeah, I got sidelined a bit as i’m looking at stuff like this at the moment. Missed the point 😉

    Using the savings account and paying one lump off the mortgage at the end would leave you better off to the tune of £16.38 over the year if you paid in £150 a month.

    pdw
    Member

    [ edit – deleted response to nick’s previous post ]

    the old saying that there’s no point having any savings while you’ve still got debt comes to mind.

    Unless of course you can earn more interest elsewhere than the debt is costing you. Tax on interest earned makes this unlikely, but it’s not always impossible.

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