Build savings or chip away at mortgage

[d000hg]

We've just bought a new house after renting previously, and chose to take a bigger loan (85%) in order to keep a sensible warchest intact (about a year).

My wife has a steady job and while I'm in work, we earn far faster than we spend. Obviously different people have different definitions of a 'safe' level of warchest but assuming you achieve this, would you continue to build savings or would you maintain the warchest and pay every spare pound into the mortgage since every pound you overpay early on could save you £2 in interest?

Our mortgage is not an offset but allows overpayments of £20k a year (as well as payment holidays). Locked in for two years.

To me the fact interest is calculated daily means I should try to overpay whenever I can, even every month rather than saving up and making a single end-of-year payment, but what do the rest of you lot reckon is the best approach?

[SarahL2012]

Depends on whether you can get the overpayment back from the mortgage company if you need it, but generally I think if you've got enough cash savings built up then overpayment is best.

A standing order every month works for me - I can do up to £500 per month, which means more when I've got surplus cash and just £5 when feeling a bit poor or don't know when the next job is turning up.

[kal]

We've just bought a new house after renting previously, and chose to take a bigger loan (85%) in order to keep a sensible warchest intact (about a year).

My wife has a steady job and while I'm in work, we earn far faster than we spend. Obviously different people have different definitions of a 'safe' level of warchest but assuming you achieve this, would you continue to build savings or would you maintain the warchest and pay every spare pound into the mortgage since every pound you overpay early on could save you £2 in interest?

Our mortgage is not an offset but allows overpayments of £20k a year (as well as payment holidays). Locked in for two years.

To me the fact interest is calculated daily means I should try to overpay whenever I can, even every month rather than saving up and making a single end-of-year payment, but what do the rest of you lot reckon is the best approach?

Doing something similar, bought the mortgage term down to 10 years, which means I am paying 50% a month more on an ongoing basis. On a 2 yr fixed which allows 10% over-payments a year, I will make this payment as soon as I can (allowing for 3 months outgoings in the war chest at all times). I will then continue to build it up to the next 10% payment next year. Once that is paid the next payment will be as big a chunk as I can once the fixed rate is over. By my calculations it means I should get it all paid off in 3 - 4 years (hopefully!)

[northernladuk]

What is your mortgage rate? Would you be better putting some of it in an ISA at an equal or better rate that you can dip in to in an Emergency while the 2 year locked in runs down?

[Troll]

Always get rid of debt before doing any savings

HTH

[sasguru]

In general pay off mortgage would be my advice.
But get an offset mortgage so essentially you are doing this automatically.
And keep putting an amount away in a warchest.

[kal]

In general pay off mortgage would be my advice.
But get an offset mortgage so essentially you are doing this automatically.
And keep putting an amount away in a warchest.

Thing about offsets is that those nefarious banks always charge you a higher interest rate for the privilege!

[d000hg]

What is your mortgage rate? Would you be better putting some of it in an ISA at an equal or better rate that you can dip in to in an Emergency while the 2 year locked in runs down?

I'd have to run the numbers but my guess is on a mortgage rate of 3.x%, Vs the 2% you can get on an ISA if you need access to the money, paying off would be better, especially since the mortgage payments come down the moment you make the overpayment?

Always get rid of debt before doing any savings

HTH

Surely as a contractor that doesn't make total sense, you have to retain savings - one wouldn't stick their warchest as an overpayment (unless you can DEFINITELY get it back out). Or were you specifically meaning long-term savings i.e. not including the warchest?

[d000hg]

Thing about offsets is that those nefarious banks always charge you a higher interest rate for the privilege!

Yes - only get an offset if you actually have the savings to USE the offset. This time round we'd have had to use all our savings to get the LTV down enough we could get a half-decent offset mortgage, so we're better on a standard mortgage for 2 years with the possibility to save up and get an offset later. Although if we overpay heavily for the next 2 years we might still not have savings, BUT we'll need a much smaller mortgage in two years which is equally good.

[centurian]

I'd have to run the numbers but my guess is on a mortgage rate of 3.x%, Vs the 2% you can get on an ISA if you need access to the money, paying off would be better, especially since the mortgage payments come down the moment you make the overpayment?

Another factor is the compound effect of ISAs - you can't put in this year's allowance next year. If the difference was as little as 1%, I'd be inclined to keep it in the ISA tax-free vehicle. For anything outside an ISA, then yes, better off paying down the mortgage once you have enough warchest.

If I redeemed my cash ISA's, I could completely clear the mortgage at a stroke, but my ISA is paying a higher rate than my fixed rate mortgage (just), so it makes no sense to do so.