Savings and Investments Versus Overpaying Mortgage

hobbesandco

Hello,

As you can see I'm a fairly new money saver. Been learning to budget and control my debt for the last 2 years but I'm always looking for new things to learn. Does anyone have any advice on savings and investments versus overpaying on the mortgage?

My partner & I are currently saving about £1200 pcm and putting into various mini CASH ISAS and stocks and shares ISAS and instant access savings accounts. It's been a good feeling to budget and save but the money worries always loom over my head. Anyways, I would like to contribute a lump sum of £1000 towards my mortgage (interest calculated daily) this year.

I'm asking because we're in our early thirties now and want children at some time or another so worrying about money a lot these days as everyone else is I'm sure. Any potential words of wisdom out there?

NeilW

There is little point saving if you have debt. Returns on savings have tax to pay on them, and even Cash ISAs are unlikely to match the rate paid on a mortgage.

If you overpay your mortgage you are effectively getting an investment return equivalent to your mortgage rate with no tax to pay. You will struggle to get any investment to deliver a consistent net return above the mortgage rate.

These days I would probably not even bother with 'rainy day' money. A 0% credit card can deal with a rainy day and give you the breathing space to either pay it off or extend the mortgage again to cover it.

Once you are free of debt, then you can really start saving.

NeilW

cloud_dog

hobbesandco, it's a balance thing (and not a brief subject to cover).

Firstly. Cash ISA's. I would suggest you use up your full allowance, as once it's gone, it's gone, and you may become (are) a higher rate tax payer - always try and use tax shelters as much as possible.

Secondly. Stocks / Shares ISA's. It's always good to plan for the long term and to invest. If you are not a savy invester then you should pick funds ran by well respected managers (I think Bestinvest highlight favourite managers, but they are not the only ones) and continue with drip feeding your investment (monthly). Investing is something you need to be comfortable with - the level of risk / return. For a less-risky investment there are some good "High Income" funds (with you re-investing the income, or taking the accumulation units) - for example the M&S High Income fund is currently yielding 6.something%, although not guaranteed if this was part of your investment portfolio then that is a sound return (not advising here - just demonstrating).

Thirdly. Mortgage. You can look at this one of two ways; either you are financially better off saving / investing or not, or you feel more comfortable over-paying your mortgage (or not). My situation, Mrs cloud_dog does not work (I won't make another joke about that :-)) so our savings (in her name) are payed gross (ING 5%), out mortgage - Nationwide BRT (4.75%) is less than our savings rate. So black and white, do not over-pay just save, right? Well yes and no, we over pay a small amount each month (£85 - which repays just over £1k pa) but the majority of our pot goes into investments (Me CoFunds, via Bestinvest, her FundsNetwork via Fidelity), and we've also got some direct investments via ComDirect outside of an ISA wrapper (because I'm not interested in paying charges and I will manage any possible capital gains tax implications as and when we look to liquidate investments).

As a basic rule of thumb we have shifted from a period of relatively high interest rates / infaltion to one with relatively low interest rates and inflation. Previously it was not as improtant to reduce debt as inflation would erode the real value of the debt but, in times of low inflation the real value of the debt will remain relatively high and therefore you should give more weight to repaying / reducing debt (within your overall financial plan).

So, there you have it. The long and short of this is that you should have a balanced approach to your finances but it needs to be one you are comfortable with.

cloud_dog

hobbesandco

Thanks for the replies. I am in the process of maxing out our Cash ISAs and stocks and shares ISAs. I'm also going to pay a lump sum and start adding monthly contributions. Thanks for the advice!

lipidicman

On a good mortgage rate your ISA can beat your mortgage - so as clouddog said - use the allowance.

Also a reserve is a good idea as the happy days of 0% cards are starting to look numbered.....it cant go on forever