Advice on Long Term Investing Vs Mortgage Overpayments

PEHsaver · 14 January 2018 at 3:07AM

Currently age 28 I purchased my first property 12 months ago. I now have £24,000 equity in this property. For the first 12 months I was overpaying the mortgage by circa £600 PM as I was keen to pay down some more capital and save on Interest.

However, this year even without overpaying the mortgage I will be able to renew with an 80% LTV and hopefully grab an interest rate of around 1.5% (based on today's figures) which I appreciate may increase.

With the potential low interest rate upon mortgage renewal I have lost interest in overpaying as I am confident that I can make higher returns by Investing the £600 PM instead.

I am currently holding £17,000 in cash savings and have an additional £5,000 invested between a S&S ISA and a number of individual shares. I plan to drip feed an additional £7,000 into my S&S ISA over the next 12 months so that I can cost average the buy in price over time.

This will leave me with a £10,000 (6 months expenses) emergency fund in a cash ISA with a measly 0.5% interest rate.

1. Should I leave the emergency fund in a cash ISA for quick liquidation or move it else ware, maybe the S&S ISA? where I can still liquidate funds in 3 days without penalty.
2. Is investing instead of overpaying the mortgage advisable? I have researched the power of compounding and it seems to be amazing. It seems it could grow wealth significantly in the long term and far outweigh mortgage over payments.

Any comments and advice appreciated.

MM10 · 14 January 2018 at 6:57AM

Hi,
I am no expert but can give some layman advice.
I would move emergency fund to Stock and shares ISA. I would use a credit card in an emergency . Most credit cards are interest free for up to 30 days.

Considering your age you have enough time to weather the markets turns and make huge profits, having said that human nature is another thing. Based on your tolerance to risk you may decide to invest for a whole year and then take principal and returns and overpay mortgage or if you are much more risk tolerant you may just keep on investing till you become mortgage neutral. Depending on several factors this could be from 5 to 10 years.

I am not so risk tolerant so I have taken the route to pay off the mortgage as my priority. I keep my emergency funds in S&S ISA have access to huge credit cards amounts which will only be used in emergencies

Alexland · 14 January 2018 at 8:38AM

We keep our emergency fund in 5% regular savers with Nationwide, HSBC and Santander with the account opening dates offset throughout the year so there is always a rolling balance and one maturing soon. Just be aware the HSBC regular saver cannot be accessed early. When the regular savers mature the money gets invested.

With 80% LTV there might still be some advantage to overpaying to get access to better deals. When I last looked the best rates were at 60% LTV. Also it depends on the lender's valuation at the point of remortgage which might fluctuate over time. Suggest you do a spreadsheet to compare your options.

If this is your 'first' property are you likely to need the extra money to upgrade and if so can you really tie the money up for at least 5-10 years to ride the ups and downs of the market?

If you won't need this money until the very distant future would it be more efficient to make extra workplace pension contributions? Or contribute to a Lifetime ISA to invest for retirement?

In my 20s I invested in individual shares and while I didn't lose money (it was during positive market conditions as now) the risk was higher and the return was lower than a good diversified multi asset fund.

Alex

Sarastro · 14 January 2018 at 8:55AM

I would say yes to the first. There's not much point having your entire emergency fund in liquid state if you can earn higher interest in something else that is still relatively easy to access.

I think the second question has too many variables to say for sure, although if the interest rate on the mortgage is that low over-payments could be less effective than saving elsewhere. But, it depends on what's important to you. Do you want to be mortgage free as quickly as possible? If not, then what?
And in what time-frame?

If you want something else short-term, then over paying isn't important and you should divert everything you save to that new goal. If it's more medium to long-term you might think about over-payment to reduce interest paid and use the increasing spare cash to invest into something else (so it's a bit of both).

If your goals is to increase wealth long term you should look at pensions which you haven't mentioned; given the tax advantages, I suggest you look at diverting some of the cash into a pension where the government will credit you lots of tax back as well, so it's very tax efficient (especially if you start now and want to talk about compounding). Long term this will outweigh mortgage over-payment.

If you don't have any particular goals now, I suggest you start paying something into a pension fund and invest the rest in anything that's got a higher interest rate than the mortgage as this would keep your options a bit more open (once it's overpaid on the mortgage, it's gone).

PEHsaver · 14 January 2018 at 3:17PM

Thanks for the replies , very helpful and interesting to get other peoples opinions. I will firstly look to move my emergency fund into something with better returns in the hope that I do not need to access it and it can continue to grow.

I currently do not have any short term savings goals and am just looking to make my money work for me long term.

I did not mention my pension but I currently have a pot sitting at about £2,500. This has come from the workplace pension at its most basic which is me 1% and my employer 1%. I believe this changes in April 2018 to me 3% and employer 2% and then again in April 2019 to me 5% and employer 3%. So by April 2019 (Age 30) I will have a decent monthly contribution going automatically from my wage. Lets say £350 a month. Giving me an est retirement fund of £129,000.

My plan was to keep paying in the minimum increasing pension contributions. However , alongside this do my own personal Investing to grow wealth for retirement in my own way, that I believe can beat a pension.

I was planning to do this in a number of ways such as Investing in Stocks & funds and eventually buying an additional property to rent out. I feel i can make my money work in some way other than just a pension , and ultimately have more control.

I just did some research and If I put £600 a month into my pension now until age 67, over and above my current contributions. It is predicted that my pension value would be £452,000

However, If this £600 a month goes into a fund with an average 6% return (very realistic) , this is estimated to be £1.15 Million! essentially tax free if done through an ISA.

Opinions on this would also be helpful

Linton · 14 January 2018 at 3:29PM

PEHsaver wrote: »

.......

I just did some research and If I put £600 a month into my pension now until age 67, over and above my current contributions. It is predicted that my pension value would be £452,000

However, If this £600 a month goes into a fund with an average 6% return (very realistic) , this is estimated to be £1.15 Million! essentially tax free if done through an ISA.

Opinions on this would also be helpful

Where did you get your pension prediction from? Pension predictions may well be provided in terms of current prices whilst future fund values would normally be done in pure cash terms. In both cases they are purely mathematical calculations based on assumptions. If you make different assumptions you get different results, it may not mean anything.

There should not be any major difference between your return from an S&S ISA and return from a pension other than that due to the tax effects which can be largely balanced out by the tax paid when you withdraw your pension. Almost anything mainstream that can be held in a pension can also be held in an S&S ISA and vice versa. Your pension provider may limit your options but you can move yor pension to a provider with better options.

PEHsaver · 14 January 2018 at 3:54PM

Where did you get your pension prediction from? Pension predictions may well be provided in terms of current prices whilst future fund values would normally be done in pure cash terms. In both cases they are purely mathematical calculations based on assumptions. If you make different assumptions you get different results, it may not mean anything.

Only a quick Hargreaves Lansdown pension calculator vs a compound interest calculator with an assumed return of 6% per year on a fund. I understand these are both based purely on assumption but the difference is staggering?!

With the ISA I also have complete control over my funds, they are not locked down until I am at retirement age and I can draw Tax Free.

Ok on the pension you get taxable benefits upon paying in, but then you get taxed on drawing out any lump sum which essentially cancels this out!

ValiantSon · 14 January 2018 at 4:30PM

PEHsaver wrote: »

I am currently holding £17,000 in cash savings and have an additional £5,000 invested between a S&S ISA and a number of individual shares. I plan to drip feed an additional £7,000 into my S&S ISA over the next 12 months so that I can cost average the buy in price over time.

You are almost certainly better off investing the £7000 as a lump sum. Time in the market is the most important thing, and timing the market is impossible beyond chance.

I'd also sell the individual share (very high risk) and invest in a multi asset tracker.

PEHsaver wrote: »

1. Should I leave the emergency fund in a cash ISA for quick liquidation or move it else ware, maybe the S&S ISA? where I can still liquidate funds in 3 days without penalty.

No, don't leave it in a cash ISA - the rates are rubbish. No, don't put it into a S&S ISA - investments are for the long term. Put it in the highest rate account you can find (which could be a mixture of interest paying current accounts and easy access savings accounts) and drip-feed money into regular savers.

ValiantSon · 14 January 2018 at 4:38PM

MM10 wrote: »

Hi,
I am no expert but can give some layman advice.
I would move emergency fund to Stock and shares ISA. I would use a credit card in an emergency . Most credit cards are interest free for up to 30 days.

I really would not do this. There is nothing wrong with using a credit card to make payments. Indeed, it can actually be a very wise choice for several reasons, but you need to have the cash available to pay for it when the statement is due. If all of your emergency funds are invested then you won't have this and you will have to sell investments to pay your credit card bill. You could end up having to sell at a low point in the market, which will cost you money (not to mention any possible trading costs). This is, in my opinion, dreadful advice.

Oh, and credit cards give you interest fee periods longer than 30 days. Most come with up to 59 days depending on when you made the purchase. It is still a bad idea, however, to do the above

MM10 wrote: »

Considering your age you have enough time to weather the markets turns and make huge profits, having said that human nature is another thing. Based on your tolerance to risk you may decide to invest for a whole year and then take principal and returns and overpay mortgage or if you are much more risk tolerant you may just keep on investing till you become mortgage neutral. Depending on several factors this could be from 5 to 10 years.

If you were only thinking of investing for a year or two then it would be advisable not to invest at all. Look at ten years as a sensible minimum.

How long you are invested for has nothing to do with your attitude to risk. How long you hold investments should be about your aims for those investments.

Thrugelmir · 14 January 2018 at 5:07PM

PEHsaver wrote: »

With the potential low interest rate upon mortgage renewal I have lost interest in overpaying as I am confident that I can make higher returns by Investing the £600 PM instead.

Downfall of many an investor. What do you know that others don't.

jimjames · 14 January 2018 at 5:36PM

PEHsaver wrote: »

Only a quick Hargreaves Lansdown pension calculator vs a compound interest calculator with an assumed return of 6% per year on a fund. I understand these are both based purely on assumption but the difference is staggering?!

It will only be staggering if you put different numbers in. The end result should be near enough identical if you use the same investments in both - in fact the pension should be worth more as it's had tax benefits added in but you'll then pay tax at the end.

Are you using quite different funds/charges?

Advice on Long Term Investing Vs Mortgage Overpayments

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