Divert Mortgage Payment to Savings. Good Idea?

I'm in the incredibly fortunate position of having my mortgage rate fixed at 2.79% for another 9 years. With 4%, even 5%, savings rates easily available I'm wondering if diverting the capital element of my mortgage payments to savings make sense. Of course this plan is dependent on my mortgage provider agreeing to switch to interest only without this triggering a new rate, which is another question altogether. The intent would be to keep all savings diverted and accrued interest aside to make a lump sum reduction at the end of the 9 year fix.

IF I can switch to interest only, should I?

And who has experience in having such a conversation with their mortgage lender? I reckon they'd only honour the rate if I pleaded financial hardship, rather than asking to switch to another mortgage product. What impact would pleading hardship have? And subjectively, would this impact outweigh the interest gains?

Appreciate any input from those who may have done similar and or might be in the know with such things.

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Originally Posted by SeanST150

I'm in the incredibly fortunate position of having my mortgage rate fixed at 2.79% for another 9 years. With 4%, even 5%, savings rates easily available I'm wondering if diverting the capital element of my mortgage payments to savings make sense. Of course this plan is dependent on my mortgage provider agreeing to switch to interest only without this triggering a new rate, which is another question altogether. The intent would be to keep all savings diverted and accrued interest aside to make a lump sum reduction at the end of the 9 year fix.

IF I can switch to interest only, should I?

And who has experience in having such a conversation with their mortgage lender? I reckon they'd only honour the rate if I pleaded financial hardship, rather than asking to switch to another mortgage product. What impact would pleading hardship have? And subjectively, would this impact outweigh the interest gains?

Appreciate any input from those who may have done similar and or might be in the know with such things.

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As long as you are disciplined with the money it's a good plan - if not, it will be a disaster.

Just a word of warning - NS&I recently scrapped its 6.2% bond with a max investment of £1M - a week ago they were offering 5.7% on £100K max and the best they offer today is 3.95%

Obviously there are other providers but my point is interest rates are volatile and NS&I are currently reining them in - and although there is a tax free allowance on savings income, over that the savings are taxed at your usual rate. For me, it wouldn't be worth the hassle.

Probably worth asking your lender before spending any more time on it.

I would be asking to draw down additional borrowing at that rate and dump that into a >5% for a few years.

Get yourself some free money if they bite

I would just enjoy what you have. Things pop up and you may take from the savings thinking you can put it back later and it never happens putting you in an awful position later on.

Also check if you could actually put it all back in one go.

The maths will depend on your tax situation, assuming you are not looking at ISAs,

Also check the mortgageT&Cs very carefully , I got caught out on my interest only offset mortgage with Lloyds, I had more in the offset than the mortgage value, they dug out a berried clause saying they could then take payments equal to their current interest rates, so they were taking it out of one of my accounts and effectively putting it in another and forcing me to pay off the mortgage.

Personally i can not see why your mortgage lender would by in to your idea. Given as you have said your fixed for 8 years, i think they may look at this as an opportunity to change the product. Be careful saying that affordability could be an issue as well as they could then pull the product entirely.

Like others have said enjoy the fact that your rate is locked in and low.

Yes, it makes sense. You are effectively borrowing at 2.79% and investing that money at 5%.
They may not let you swap to interest only without re-mortgaging (and therefore moving to a higher rate). And if they let you swap to, they may not let you swap back.
But you should be able to reduce your payments to the minimum if you've been overpaying.

The other thing to check is what the penalties will be in a year or so when you transfer the lump sum from your matured savings account back in to your mortgage. There may be none, or you may get stung.

You need a spreadsheet, you will be paying some capital down currently so you need to adjust for that.

Also remember the £85k protection limit - you might need several accounts with different Institutions to be safe.

Do the numbers but sounds like a goer

Sent from my M2101K6G using Tapatalk

Unwise to claim hardship when that clearly isn’t your motive.

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Originally Posted by Halitosis

Unwise to claim hardship when that clearly isn’t your motive.

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Indeed. I'd imagine it'd leave a footprint.

Forget the hardship claim, silly to go down that road if it's not true.

The simple answer is the mortgage provider isn't going to agree to this. Why would they? You're fixed below market rates.

The basic math does add up, so if you have a low fix and relatively high saving rate (remember, savings interest becomes taxable..!), then yes you'd be better off saving than overpaying against the mortgage. But I think it's wishful thinking to imagine the bank is going to let you keep your capital payments, effectively increasing the loan you have on a fixed product at an unfavourable rate to them. It doesn't hurt to ask, but I would suggest you be open and transparent about the situation.

Cheers gents, after giving it more thought last night the best course of action is to just enjoy the low rate. Any indented overpayments however will be put into savings, of course ensuring the tax paid on interest doesn't wipe out the benefit.

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Originally Posted by SeanST150

Cheers gents, after giving it more thought last night the best course of action is to just enjoy the low rate. Any indented overpayments however will be put into savings, of course ensuring the tax paid on interest doesn't wipe out the benefit.

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I'm sure you know this already but make sure you max out your ISA allowance first (assuming you haven't used it in S&S).

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Originally Posted by SeanST150

Cheers gents, after giving it more thought last night the best course of action is to just enjoy the low rate. Any indented overpayments however will be put into savings, of course ensuring the tax paid on interest doesn't wipe out the benefit.

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Ask your mortgage co. to recalculate your minimum payment. If you've been overpaying this will have dropped since you last looked.

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Originally Posted by Davidh

I would be asking to draw down additional borrowing at that rate and dump that into a >5% for a few years.

Get yourself some free money if they bite

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nice idea but won't happen.

fixed rates are issued in tranches rather than a reserve facility. any top up will be at prevailing rates.

OP, whilst in principle it makes perfect sense most lenders do not permit switches to IO. the current government supported push is just about hardship and for a short term fix.

we have people using higher rate savings instead of 'over paying' but that's more straight forward.