Hiya, hoping someone can help me think through this as I keep going back and forth. We are on a 5 year fix at 2.89% which ends in July 2028 and I have about £12k sitting in a savings account earning 4.5% which is decent but I keep wondering if we would be better off overpaying the mortgage instead. Our balance is around £165k. The way I see it we have three options. Keep saving in the ISA and use it as a lump sum when we remortgage. Or start overpaying now up to the 10% limit to reduce the balance before the new rate kicks in. Or split it and do a bit of both?? I know rates are near 6% right now and the base rate might go up again on Thursday so I am a bit nervous about what our remortgage will look like in 2028. Has anyone been in a similar position and what did you end up doing?? Thank you
Your mortgage rate is 2.89% and your savings are earning 4.5%, so right now every pound you overpay is costing you 1.6% in lost interest compared to keeping it in the ISA. That is the simple maths and it points clearly towards saving rather than overpaying while that gap exists. I was in almost exactly this position about four years ago (2.34% fix ending summer 2024, savings at 3.8% in a notice account) and I kept the savings pot intact and used it to make a lump overpayment on the day I remortgaged, which reduced the balance enough to drop me into a lower LTV band and got me a marginally better rate. That is the play if you can be disciplined about not touching the money in the meantime. The risk is that savings rates drop between now and July 2028 and you end up earning less than 2.89%, at which point the maths flips and you would have been better off overpaying. But even then you still have the flexibility of a cash pot you can deploy however you want, whereas overpayments are gone and you cannot get them back without remortgaging. My strong preference would be to keep the ISA, keep adding to it monthly if you can, and treat it as your remortgage war chest. The one thing I would say is make sure you know your exact ERC terms and overpayment limits so you are not caught out if you do decide to make a lump sum payment at the point of remortgage. Some lenders let you overpay 10% in the final month of the fix without penalty, others do not.
Hiya Steve, thanks so much for breaking that down, the 1.6% difference really helped it click for me. Quick follow up though given the rate rise yesterday, does the BoE going to 4% change anything for me?? I am guessing my savings rate might go up slightly but my fixed mortgage rate obviously stays the same until July 2028. So does that mean the gap actually gets bigger and it makes even more sense to keep saving rather than overpaying? Or am I overthinking this and should just stick with the plan you suggested. Thank you
Fizzy, the short answer is probably not much, at least not yet. Your fix is locked at 2.89% so the rate rise does not change your mortgage payments at all until July 2028. What it might change is what your savings earn. If your cash ISA rate tracks the base rate upwards then the gap between your mortgage rate and your savings rate just got wider, which means keeping the money in the ISA looks even better than before. Most of the decent easy access ISAs have been creeping up already, I noticed a few moved to 4.6% this week. So the logic is the same, every pound in the ISA earns more than it would save you by overpaying, and that gap has probably just increased by a quarter of a percent. The only thing that would change the calculation is if savings rates do not follow the base rate up, which sometimes happens, banks are not always quick to pass rises on to savers.