Friday, Jul 17, 2009
Save more or pay more into mortgage?
MoneyWeek: Should you build up your savings or repay your mortgage?
A recent survey from the Co-operative Bank suggests that 80% of people overpaying on their mortgage while interest rates are low believe they are better off.
Posted by damien @ 09:56 AM (1492 views) Add Comment
15 Comments
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1. jonb said...
I think they are both wrong. Clearly if the after tax savings rate is higher than the mortgage rate, you should put your overpayments in savings rather than in your mortgage.
The Sunday Times is wrong because they suggest putting it in a 5 year bond. You should only do that if your mortgage is fixed for at least five years, and it tends to be the tracker mortgages that have stupidly low rates at the moment. In the case of tracker mortgages, you should only consider putting your surplus money in instant access accounts, so that when base rates do rise, you can quickly make the decision whether to move the money to your mortgage or leave in the savings account.
Another thing to consider is that a lot of mortgage deals, such as the Barclays tracker mentioned in both the articles, only allow 10% overpayment per year. If you put your surplus money in a savings account, it may be more difficult or more expensive to use it to overpay later.
2. Ndg said...
Hmmmmmmmm. Just the two choices?
3. japanese uncle said...
Either way one thing is certain. People will afford less and less money for general consumption, where green shoot is just a misleading mirage.
4. refusetobuy said...
Put money in an ISA before a savings account (assuming the rates are good enough). Tax free interest.
5. inbreda said...
for most people they are going from zero savings, so they should be after an instant access account. They shouldn't pay extra off the mortgage as this won't help them if they get made redundant, whereas an instant access rainy day fund will.
6. mark wadsworth said...
A bit a rainy-day money aside, of course you should always pay off your mortgage in priority to any form of saving, be that in a cash account, an ISA account (with derisory interest rates - the bank keeps the benefit of the 'tax free' status by paying lower rates, natch) or in "pensions savings" (the value of the tax breaks is usually far outweighed by the inflexibility and management fees and commissions).
Otherwise you are lending the bank money for them to lend back to you.
7. techieman said...
What about an offset?
8. mark wadsworth said...
Techie, the rates on offset mortgages tend to be higher, and psychologically, it's too easy to run up debts again.
9. techieman said...
fair point Mark - just raised it as a fudge between the 2 alternatives.
10. Sold My Soul To The Never Never Never said...
I left a comment on that Times article - better to pay your mortgage off in the current climate. In the event of redundancy as was in our case it took a while for my other half to get another job, the DSS took our savings into account and we got nothing except £59.15 a week for six months.
11. Marktopham said...
It depends what type of mortgage and savings accounts you already have.
eg HBOS mortgage BOE+0.5% Lifetime = 0.98% Its not that hard to keep your Net savings rate above above that especially if you have a non tax paying partner.
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13. Mozzo said...
The man is an idiot. If you can get more interest (after tax) on savings than it costs to service the mortgage, you will always be better off saving than overpaying as long as you follow 1 rule. Do not touch the savings and when the mortgage rate eventually rises to a level which is higher than you can get in a savings account (again, after tax), use all the accumulated cash to pay off the mortgage as a lump sum (providing there are no penalties). You are then guaranteed to be in a better position than you would have been by simply overpaying. To me, it's a no-brainer but if somebody can prove me wrong I'd be interested to hear their argument.
14. Chrisvow said...
Re Sunday Times Money section, check out the photos-without exception they all feature happy smiles week in week out-what receesion?
15. Chriswov said...
Re Sunday Times Money section, Why does every photo week in week out always feature smug smiling types?