Should we save for our kids or pay off our mortgage?

QWe have two children, aged two and four, and we're considering setting up a long-term savings plan for them, investing ?30 a month. However, we were also thinking about using that money to make overpayments on our mortgage. Which do you think is a better use of our money? Overpaying on the mortgage has the advantage of being risk-free, and we can get the money we would have got from the savings plan by remortgaging at a later date if necessary.

JS

A I think you've answered your own question there! With interest rates at a 40-year low, it makes much better financial sense to pay off some of your mortgage debt than to establish low-earning savings. This doesn't mean you should abandon the idea of saving altogether - you should still have some liquid savings to tide you over in times of financial emergency.

There is no guarantee that interest rates will remain as low as they currently are, though most financial analysts don't see them going above 4%-4.5% in the next couple of years, so it makes sense to reduce your mortgage capital during that period.

And as your children are so young, you can always review the decision to start savings plans for them every six to 12 months - especially if rates do go up. Bear in mind that you will be liable to pay tax on any interest over ?100 a year earned by your children's accounts if you are the one making payments into the accounts.