Increase Mortgage Payments or Save

BigDamo_2

Ok here goes, At the moment I have a 30yr mortgage. If I reduced it to 20yr it would only cost an extra £150 a month.

We want to buy a bigger house but unlikely at the moment to have the appropriate income to do so and we do not have much savings.

Therefore do I save for a larger deposit on the next home or put the money into reducing my mortgage?

Any Advice?

Thanks

Martinslovechild

I would always suggest putting the cash into reducing your mortgage as you'll be increasing the equity in your current property by reducing the amount outstanding. Also, you won't be tempted to deposit the cash into a savings fund and then use it for something else (e.g. new sofa, weekend in barcelona, night out with the lads).

Additionally, if you already have a 'flexible mortgage', then every overpayment will also have the benefit of reducing the interest payable.

Check out the Egg Calculator to determine possible interest savings and duration reduction.

Robert_Sterling

We would need other information.
E.G. What rate of interest are you paying on your current mortgage?
Are you allowed to overpay by £150 per month without penalty.
If you are allowed to overpay are you also allowed to take payment holidays.
That would do for starters.

jamesd

It depends on the return you can get on investments over that term and on your desired investment split between property and other investments as well as on your tax bracket.

A calculator comparing mortgage prepayment to investing can be found at http://www.drcalculator.com/calc/prepay_v_invest.html . Remember to select Loan Interest Deductibility to No, set your tax bracket and choose the correct before (non-pension/ISA) or after tax (ISA, pension) investment type.

For an example I assumed 150,000 loan balance, current payment 650, additional payment 150, mortgage loan interest rate 5%, loan interest not tax deductible, 4.5% investment return rate, tax bracket 0 (ISA gets no tax) and after-tax investment. That gave an 11,815 better benefit for prepaying rather than investing.

Changing the assumption to conservative stocks and 9% investment return rate still in an ISA changed that result to a 71,750 benefit for investing rather than prepaying. The conservative bonds 7% setting was what it took to get a return high enough to make investing better than prepaying.

30 years is easily long enough to qualify as long-term for stock market plays and you may well be able to do substantially better than 9% return.

If you're thinking of moving within five years, you'll have to take lower risks with your investments but it still looks likely that you can do better investing than prepaying.

For myself, I've decided that I'll fully use my ISA equity investment limit of 7,000 and company-matched pension before overpaying the mortgage I expect to have soon. Then the mortgage is the property part of my investment mix and the stocks and shares bit can cover the rest of the mixture.