Should we save or make mortgage overpayments?

Q My husband and I have an interest-only mortgage of £114,000 at 0.95% above base rate, so our payments have gone down quite a bit since rates went down. We have extra cash as a result of this – about £500 a month when we tighten our belts – but don’t know whether we should save this in a high interest account or make overpayments on the mortgage.

Interest earned on savings is pretty low at the moment, and we can’t seem to figure out which would be better. Mortgage calculators don’t seem to balance the two, and I have searched everywhere on the net but can’t seem to find the answer. We have no other debt apart from the mortgage. CT

A As you have an interest-only mortgage, none of your monthly repayments are currently going towards repaying the mortgage loan. So, when your mortgage comes to an end you will still owe £114,000. I suggest you ask your lender to change the terms of your mortgage from interest-only to repayment, so that when it comes to the end of its term you will have paid the loan off in full.

If you still find you have extra cash after paying your mortgage, you will usually be better off making overpayments rather than putting it in a savings account, but it depends on your tax position.

If you pay tax at 20% you would need to find a savings account paying more than 1.81% in interest to make saving rather than overpaying a better deal. If you pay tax at 40%, the savings account would have to pay more than 2.42%, while it would have to pay more than 2.9% if your tax rate is 50%.

Virginia Wallis © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds

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