maths help please!

dllive

Hi there. I have a mortgage and would like to work out whether I should sell my stocks and shares fund in order to bring the mortgage down. However, I cant do the maths! (Maths was never my strong point).

Im going to use fictional figures here, mainly to keep the maths simple.

25 year Mortgage currently at 2% variable interest: £50,000

Stocks & Shares CF Ruffer Total Return fund: £10,000. In the past year this has gone up 12.29%.

This may be an impossible question to answer, because the investment fund could skyrocket this year, or it could tank. But - would I be better of selling the fund and putting that money into paying some of the mortgage off? Surely that would take years off the mortgage and I would feel the compound gain because Ild be paying off the capital and the interest.

ryan86uk

Hi,

Well you're right about one thing. It is an impossible question to answer!

I can't really think of the best thing to do in this situation. How do you see your share price going in the next year?

Interest rates are at a record low at the minute so mortgage costs are stupidly low! Now is a good time to pay off your mortgage/part of it. If you have spare cash to pay it!

It pretty much depends how you see shares going in the future!

dllive

Hi ryan86uk. OK, I thought that would be an impossible question to answer - without a crystal ball! Say I thought the fund was going to grow 5% this year - which I think is realistic. Does that help to answer?
Ive got some spare cash too which I was going to max out my 10/11 cash ISA. The best ISA I can find is 3% fixed. Would I be better off using that towards the mortgage instead?
You say that because interest rates are low its a good time to pay off the mortgage. But isnt it the other way round - the best time to overpay is when interest rates are high? maybe not, because yould just be paying off more interest I guess.

ryan86uk

Hi,

It would be better to max your isa out as the interest rate on that is 1% higher than the rate you are paying on your mortgage (at present). So you will just end up losing money if you use your isa money on your mortgage. If your mortgage interest rate goes up to say... 3.1% then you would be better off using your isa money to pay part of your mortgage. Realistically speaking though, i wouldn't rush into your bank and cash your isa in if your mortgage interest rate went to 3.1% lol. If it hit the 5%+ mark then it is something you should seriously consider. Just make sure you have enough available cash in your bank to pay any mortgage/bills for 6months (as a rough rule). Any excess you can use to either pay your mortgage off or save in your ISA.

In response to your initial question it doesn't really matter if it goes up by 5% in the next year... then you will have 10500 in shares and you will be asking the same question. Shall i wait another year? See if goes up? Unfortunately this is how stocks and shares works!

All i can suggest is that you monitor your share price and if you feel that the price is a good one then sell. It's just luck of the draw i guess! If share holders of BP knew there was going to be a oil leak in a few months that would cost the company millions.... most of them would have sold! You just never know!

I hope i have managed to answer your question!

rgds

Ryan!

Jonbvn

Generally speaking, I would say the benefits of keeping your ISA outweigh OPing the mortgage. The reason being is that the amount you can contribute to ISA's is limited and cannot be recovered after you finish your mortgage.

ryan86uk

True but the amount he would knock off his mortgage and save in mortgage interest will out weight the savings on the ISA.

lincoln-potter

Hard question indeed. My personal preference (although haven't seen any figures on it) is that I would choose OP over an ISA.

Maybe somebody tomorrow has some figures to show which is the correct choice.

Whilst a hard choice it is still a nice choice to have

Jonbvn

ryan86uk wrote: »

True but the amount he would knock off his mortgage and save in mortgage interest will out weight the savings on the ISA.

Generally that is just not true, assuming the mortgage and cash ISA rates move in unison. Furthermore, most decent funds (or a spread of several funds) have historically offered a much better return than most mortgage rates.

OP, the other thing about you paying off interest and capital is wrong. Your regular payments cover all interest plus some capital. Any additional payments above this reduce the capital only.

dllive

Hi guys,
Im going to think out aloud here - Im prepared to be shot down in flames!...

If I overpay on my mortgage (especially when interest rates are low), then Ill be paying off the money Ive borrowed (the capital?), which will reduce the interest, and the number of years that I pay it back. Its almost like the opposite of accruing compound interest. Otherwise, all the other people on this forum that are putting all/most of their spare money into over paying their mortgage - wouldnt they just put their money into higher rate interest accounts instead?

Am I making sense!!? Ive got myself in a muddle.

lincoln-potter

dllive wrote: »

Hi guys,
Im going to think out aloud here - Im prepared to be shot down in flames!...

If I overpay on my mortgage (especially when interest rates are low), then Ill be paying off the money Ive borrowed (the capital?), which will reduce the interest, and the number of years that I pay it back. Its almost like the opposite of accruing compound interest. Otherwise, all the other people on this forum that are putting all/most of their spare money into over paying their mortgage - wouldnt they just put their money into higher rate interest accounts instead?

Am I making sense!!? Ive got myself in a muddle.

thats the exact way I look at things, but maybe i've been wrong too :rotfl:

Stochasticity

ryan86uk wrote: »

True but the amount he would knock off his mortgage and save in mortgage interest will out weight the savings on the ISA.

Only if the rate on the mortgage is higher than the rate within the ISA.

At 2% on the mortgage, it is definitely possible to beat that return within an easy-access cash ISA or even some normal taxable savings accounts. You can even beat it within some current accounts.

Therefore, it is definitely more profitable not to overpay the mortgage while the rate is at 2% as long as the money instead remains saved within an account paying more than 2% (after tax).

For instance, over one year, £10k of borrowed capital will incur mortgage interest of £200. Put it into ISAs paying 3%, say, and that same £10k will pay you £300 in interest. If only then you then decided to pay back the £10k of borrowed capital and the year's mortgage interest of £200, you'd be £100 better off than if you simply had overpaid the mortgage in the first place.

You would also still be in a position to profit further if cash rates were still higher than your mortgage rates. Borrowing money at 2% and making a guaranteed return of 3% is never going to make you poorer.

However, you have to anticipate that, at some point, mortgage rates will go up and will again outstrip cash rates and that it will no longer be profitable to hold money that could repay the mortgage within savings. When that point comes, when your mortgage is at 3.25% and cash is only returning 3%, then you'll have a decision to make.

As regards a S&S ISA, the answer is a bit more difficult. Generally, the kind of investments typically held within S&S ISAs (including your CF Ruffer Total Return fund) ought to yield a good return over the long term, but whether or not, over the long term, they'll beat mortgage interest rates is another matter - consider all the shortfalls related to endowment mortgages. Investing within the S&S ISA for the long haul is one option, but it does very much depend on your financial circumstances as a whole and your attitude to risk. How you would feel if the return on your investments within the S&S ISA failed to keep up with mortgage interest rates and you ended up in a worse situation relative to having overpaid the mortgage today? And would you have sufficient resources to fall back on and keep up to date with mortgage payments as well as all of your other financial commitments? But with the risks comes the reward - investment performance could very plausibly outstrip mortgage interest rates and leave you much better off too to the tune of several hundred pounds a year.

In the short term, the kind of investments typically held within S&S ISAs are volatile and you could easily end up with less than £10k and still owing all of the capital plus the interest, leaving you significantly worse off that had you decided just to overpay today. If investing in equities, you're generally investing for the long term (5 years and upwards) so as to be able to ride out the peaks and throughs. It is much riskier to invest in a S&S ISA for the short term only and, unfortunately, today's low mortgage interest rates are probably not going to last 5 years. So if you're not willing to risk mortgage interest rates exceeding your investment returns over the long-term, I wouldn't even consider it over the short term. Instead, move into cash and then overpay the mortgage when mortgage rates rise to the point that you're no longer making money on the borrowed capital.