Overpayments on Tracker - a mistake?

DMcL1971 said:

I might be wrong about this but surely the question of whether it is better to overpay on a tracker or put your money in a savings account is dependent on time.

If we assume that you have a tracker mortgage costing 1.5% and a savings account that pays 2.5%. And that you have 1000 euro and you are trying to decide what to do with it. If you put it in the savings account you will make 2.5% a year on it. If you pay it off you mortgage you will save yourself 1.5% a year. So on the face of it, it seems like putting your money in the savings account seems best.

However, surely you will only make the 2.5% on your savings for the time that the money is in the savings account, whereas you would make the 1.5% saving on the mortgage for the rest of the term of your mortgage. On the assumption that the remaining term of your mortgage is probably a lot longer than the amount of time you will keep the money in your savings account, then the option to pay it off the mortgage will save you more money in the long term.

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Yes, you are right about this, and if you can afford to do this, it is an excellent idea, but the money is locked away then and hard to liquidate. The OP, and others, are worried about being able to pay their mortgage in a years time if interest rates go up and take home pay goes down, so saving to have the money to do this is a more immediate concern.

DMcL1971 said:

I might be wrong about this but surely the question of whether it is better to overpay on a tracker or put your money in a savings account is dependent on time.

If we assume that you have a tracker mortgage costing 1.5% and a savings account that pays 2.5%. And that you have 1000 euro and you are trying to decide what to do with it. If you put it in the savings account you will make 2.5% a year on it. If you pay it off you mortgage you will save yourself 1.5% a year. So on the face of it, it seems like putting your money in the savings account seems best.

However, surely you will only make the 2.5% on your savings for the time that the money is in the savings account, whereas you would make the 1.5% saving on the mortgage for the rest of the term of your mortgage. On the assumption that the remaining term of your mortgage is probably a lot longer than the amount of time you will keep the money in your savings account, then the option to pay it off the mortgage will save you more money in the long term.

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Not really - you're assuming that the saved deposit disappears after a period of time.

You're comparing the one year benefit of saving versus the mortgage life benefit of paying down the capital.

To compare like with like you should compare
a) overpaying your mortgage which reduces your interest cost from now until the end of the mortgage term

versus

b) saving the money (at a higher rate than mortgage interest) for a period of time and then using the savings to make a lump sum reduction in the mortgage at some point i the future. The interest earned on the deposit will outweigh the interest saving foregone by not paying down the mortgage during the saving period and when you use your saved lump sum to pay down the mortgage you then get the benefit for the rest of the mortgage term.

As long as deposit rates exceed your mortgage rate option b will always be better financially.



In fact if deposit rates remain higher than mortgage rates for the entire mortgage term you would be better off (in strictly financial terms) never using your savings to reduce your mortgage.

If you do save rather than pay down the best time to use your saved lump sum to pay down the mortgage is the point in time when mortgage rates exceed deposit rates.

Option b also has the advantage of giving you the flexibility of having a large lump sum available. I would say it's a no brainer to save rather than pay down.

That makes a lot of sense tvman. So it would be best to keep saving money into a savings account as long as it's interest rate is higher than you mortgage rate. When that changes then pay it off the mortgage. Also as you point out there is a lot to be said for having the sense of security knowing you have some savings in case things go wrong.

That's what I'd do. The only possible reason I can see for doing the opposite would be that you might be tempted to fritter away your savings - but if you're reasonble disciplined save rather than pay down until the rate differential flips.

DMcL1971 said:

So it would be best to keep saving money into a savings account as long as it's interest rate is higher than you mortgage rate..

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Don’t forget when doing the sums, whatever rate you get on your savings will be reduced by 25% through DIRT.

twofor1 said:

Don’t forget when doing the sums, whatever rate you get on your savings will be reduced by 25% through DIRT.

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forgot about dirt - thanks for correcting

Wow thanks for the input!

Edited to remove the calculations as I'm sure they're completely wrong!!

twofor1 said:

Don’t forget when doing the sums, whatever rate you get on your savings will be reduced by 25% through DIRT.

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I think DIRT was increased to 27% in the last Budget.