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Simple borrowing/saving question.

Sorry if this is a bit personal and self indulgent in a time of mass financial unease.

I have 10k in a Nationwide savings account and owe 45K on a SVR mortgage. Inflation= devaluation of the pound, so my outstanding mortgage devalues at the same rate that my savings do.

Currently, many people advise paying off debt in preference to saving.

I'm tempted to keep my 10k savings as accessible cash in the perhaps fuzzy belief that 10K savings transferred to pay off mortgage now, has no significantly greater value to me than reducing the mortgage by the same means at a much later date.

Then someone suggested to me that I was missing out some important parts of the calculations.

Can anyone advise me on this and perhaps point me to some relatively simple calculation methods which can help me understand as many of the implications as my fluffy brain can absorb?

Reply to
treenoakio
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Its actually quite simple. You will save the difference in the net savings interest vs the mortgage interest over the remaining term of the mortgage. This will either reduce the mortgage term, or the monthly payment. There are overpayment calculators on the net - example :

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Things to consider:

- How much interest do you pay on the mortgage, and how much do you get on your savings (net) ? If the gap is big, paying off the mortgage is a 'good thing' if you dont need ready access to the cash....

- Do you need the £10k to be available to you ? If you do, you may still be better off paying it to the mortgage, depending on....

- Can you withdraw the overpayments from your mortgage should you need the cash at a later date ?

Reply to
NC

much better online calculator for you - lets you see one off payments and their impact:

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Reply to
NC

No, that's not the case due to compounding. Imagine you were borrowing the

10K chunk at 5%:

Now you have to pay back 10,000 This time next year you have to pay back 10,000+5% = 10,500 In 2 years you have to pay back 10,500+5% = 11,025 In 3 years you have to pay back 11,025+5% = 11576.25 In 4 years 12155.06 In 5 years 12762.82 (the calculation is amount*(1+interestrate/100)^years)

So if you paid the 10K lump sum back in 5 years time you'd have to pay 2762 on top to clear the debt.

Let's imagine instead you received interest on your savings at an average of

4% less 22% tax (aka a net rate of 3.28%): After 1 year you'd have 10327.87 After 5 years you'd have 11750.43

So if you paid that into the mortgage in 5 years time you'd lose out by

1012.39. That's the cost you have to pay for having access to the cash.

It's only a win if you can get a better interest rate in a savings account after tax than you're paying on the mortgage. In general this isn't possible (the banks would go bust if everyone could do it) but you may have a particular situation where you can manage it. Beware of falling interest rates, though. The last few years of ~6% rates on savings have been anomalous as far as the long term goes, so don't count on these continuing (unless you can find a good fixed rate now).

Theo

Reply to
Theo Markettos

Thanks for the explanation and Calculator links NC. More thanks to Theo for welcome lesson.

Reply to
treenoakio

Look at the interest rate on your mortgage. Look at the interest rate on your savings after any tax payable on it.

If the interest rate on your mortgage is higher than what you receive on your savings, you should pay off your mortgage.

If the interest rate on your mortgage is lower than what you receive on your savings, you shouldn't pay off your mortgage. This is very unlikely.

The only other thing to consider is how much of an emergency fund you need. It is easier to withdraw savings to pay for an emergency than it is to borrow additional money for it.

Reply to
Jonathan Bryce

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