A Little Advice or your opinion Please

[dave12]

Hi,

I would appreciate any advice you can offer on this one. Basically I have £8000, in savings at the moment. My plan it to raise £60,000 in 5 years, based on my current saving rate (£1k pm) I should reach my target by the end of 2011. This will then pay off my mortgage. My question though is this,
what should I be doing with the money during this time? Currently it is in a Online savings account where I get taxed on the interest each year.

My thoughts are putting it into ISAs but am not sure which ones are best (there seems that many of them).

Please could you help?

Thanks in advance

Dave

If the sole purpose of the savings is to pay down the mortgage.... why not just start paying down the mortgage now?

The other thing that came to mind was a money market fund in a Roth IRA, but I see you're not in the U.S. so obviously that won't work.

[Fern]

If you gradually pay off the mortgage rather than wait to save the full amount, then 1. you will still benefit from the tax write-off of interest and 2. you will have less opportunity to spend the money as it grows into a bigger piece of pie.

[jIM_Ohio]

If you gradually pay off the mortgage rather than wait to save the full amount, then 1. you will still benefit from the tax write-off of interest and 2. you will have less opportunity to spend the money as it grows into a bigger piece of pie.

the poster did not use the $$ symbol... maybe there is no mortgage deductioon.

The savings on a mortgage deduction is not a dollar for dollar savings. it is something like

"effective interest rate"=interest rate *(1-tax bracket).

So if interest rate was 6% in 25% tax bracket the numbers are

.06*(1-.25)=4.5%

so the effective interest rate on loan is 4.5%. The mortgage deduction is NOT a reason to keep a mortgage. You pay the bank $100 in mortgage interest and the government sends you a check back for $25. You still paid $75 more than if you did not have to pay interest at all.

[jIM_Ohio]

Hi,

I would appreciate any advice you can offer on this one. Basically I have £8000, in savings at the moment. My plan it to raise £60,000 in 5 years, based on my current saving rate (£1k pm) I should reach my target by the end of 2011. This will then pay off my mortgage. My question though is this,
what should I be doing with the money during this time? Currently it is in a Online savings account where I get taxed on the interest each year.

My thoughts are putting it into ISAs but am not sure which ones are best (there seems that many of them).

Please could you help?

Thanks in advance

Dave

what is the interest rate on the loan?
what is the expected return on the savings?

this may answer the question as to whether it makes sense to pay off lump sum, or pay off as you go.

[dave12]

Hi, Thanks for the replies.

My mortgage is in the UK.

jIM, my current interest rate is at 6.5%. And I am expecting around £1000 return on the savings.

This is probably not the best way in terms of saving money, as my mortgage payments are £430 a month. So I guess the best way would be to throw in £1430 a month in to the Mortgage.

However this would leave me with no Savings and hence no security (Except the equity in the house). So what do you think is the best way of doing it? I need the right balance, I suppose.

Thanks Again

[jIM_Ohio]

what is the % return needed to get 1000 return on the savings?

[skydivingchic]

I'll apologize in advance - I don't know how to do the pound symbol, so I will be substituting the dollar sign.

You said you have $8000 in savings already. How many months of living expenses is that? If it is near 6 months worth, then you (probablly) already have an adequate emergency fund to fall back on. If not, I would suggest splitting your extra $1000/month between your savings and your mortgage. Once you reach 6 months worth of living expenses in savings, then take all the $1000 and put it toward your mortgage. This way you have a solid EF to fall back on, plus you pay your mortgage off sooner. Whether that split is 50/50 or some other combination is up to you.

Unless your savings is getting greater than 6.5% interest, this method will actually end up costing you more in the long run. However, only you can decide if the peace of mind of having a fully funded EF is worth the $ trade off.

I agree with skydivingchic. Don't put everything into your mortgage... hold back some cash to protect yourself from financial road bumps. If down the road you're doing well, you can pay off the rest of the mortgage in one fell swoop.

One thing you haven't mentioned is retirement savings. Hopefully you are building up a nest egg, separate from your house.