Savings or mortgage overpayment

Question

This question might be too simple, but I just want to make sure I am not missing a crucial detail.

I currently have a mortgage which allows free overpayments (up to 10% of the mortgage value each year). Let's say I wanted to put an extra £300 a month into my mortgage as an overpayment, which I can do without penalty. For the next two years I am on a rate of 1.99% interest.

However, I can get a bonus saving account at 6% gross for 12 months and pay in £300 a month into that instead.

On the simple fact that the 6% is a bigger number, am I right in thinking I should put the £300 a month into the savings account instead, and then when that matures, pay off part of my mortgage as a lump?

Answer 1

Yes, you will come out ahead slightly by putting the money in the savings account, then paying off your mortgage later.

However, we don't know what will happen to these interest rates after 1 year. If you put the £300 per month into the savings account for a year, then put the money into you mortgage, you will save about £78 for the year over just putting the money toward your mortgage in the first place.

For me, I'm more concerned about longer term strategy. What happens to your mortgage rate after 2 years? What happens to your savings account rate after 1 year? The mortgage rate likely goes up and the savings account rate likely goes down, making the savings of this strategy even less after the first year. Instead, you may want to put this £300 per month toward retirement investments (assuming you have no other debt), which should, over the long term, earn more than the savings account.