Monthly Income or Overpay Mortgage?

SilverSix

Hi,

In a nutshell from a combination of borrowing more than I needed and a trust that will be released to me when I'm 25 (which I can get at sooner) I will have around £15,000-£17,000.

I have a small mortgage but don't earn massive money (23k) though I do have a part time job (5.5k) to supplement my income and make life a little more comfortable. Having a bike & car and living alone, until I can rent out a room (house completes in October) eats up quite a lot of my main income hence the second job.

I'm considering either taking advantage of the unlimited overpayment facility of my mortgage and clearing off what would be almost 30% and would drop my repayment by around £75 per month OR investing it to give a monthly return.

However I have a feeling that it won't give as good a return/saving by clearing some of the mortgage and would just be erroded by inflation as it wouldn't be growing. I'd need 6% roughly to match what it would reduce the mortgage by if I overpaid.

I guess it's a bit of a no brainer but wanted to hear your thoughts and if there were any other options?

Thanks

Ben

calypso_rhapsody

I'm pretty risk averse so i'd go for paying off the mortgage, keeping an emergency fund for those little crises that can arise.

The only other thing i would give serious thought to is whether i could use the money to increase my earning potential - a qualification of some sort. That could give a better than 6% return .....

If you have a higher appetite for risk then i am sure you will get lots of suggestions!

SilverSix

calypso_rhapsody wrote: »

I'm pretty risk averse so i'd go for paying off the mortgage, keeping an emergency fund for those little crises that can arise.

The only other thing i would give serious thought to is whether i could use the money to increase my earning potential - a qualification of some sort. That could give a better than 6% return .....

If you have a higher appetite for risk then i am sure you will get lots of suggestions!

I will have a £2-3k 'float' for any emergencies/unexpected bills plus whatever I save during the year which should be another £2k or so. So I should be able to pop several hundred in to over pay every year depending on what's due on the car & bike.

My work is contract based at the moment so I should be relocated in the middle of next year or hopefully we can get the next contract which should see me for another few years. I'm only 22 so am quite early in my career. I have my fingers in a few pies so to speak, I'm a qualified personal trainer but don't currently have anywhere where I could make a living off of it so I work as a fitness instructor instead (my part time income). I have a degree in bespoke furniture design & manufacture so there's always a foot in the door in the design industry. I currently work in civil engineering as admin though would like to climb higher so will keep my eyes peeled for internal vacancies.

kidmugsy

Your emergency fund is a wee bit thin. You might like to increase that to, say, 6 months outgoings when the chance arises.

dtsazza

Have you considered tax in that calculation? If your mortgage interest is actually 6%, don't forget that you won't pay any tax on those "earnings" (since from an accounting perspective they're just a reduction of expenses), so you'd need a greater return (probably 7-8% depending on the details) from investments outside of an ISA to match it.

And of course there's the guarantee, both of return and of capital, in the mortgage case which you won't get from investments - personally I'd want an extra 1-2% expected return to account for this, though that's down to your own risk appetite.

One thing to bear in mind as well is that inflation is somewhat of a red herring. If you're just comparing the returns between two (non-index-linked) alternatives, the one with the higher return will do better. It doesn't matter whether inflation is 1%, 5% or 20% - you don't get to opt out of it in any case. (For example, while higher inflation might make your debts "interest free", it would also reduce the returns you'd get on investments by exactly the same amount.) For that reason, just look at the nominal gains you can get to simplify the comparison.


Apart from these pointers, I'd say that 6% is more or less a break-even point; it shouldn't be too difficult to get that sort of return from investments (as it is, you can get 5% in a 5-year ISA) so it mainly comes down to how you feel about the uncertainty of potentially higher returns vs. the surety of paying off a debt at 6%.

Jegersmart

BennyC wrote: »

I will have a £2-3k 'float' for any emergencies/unexpected bills plus whatever I save during the year which should be another £2k or so. So I should be able to pop several hundred in to over pay every year depending on what's due on the car & bike.
.

I think when someone mentioned "risk" - its not whether you had a couple of K when your boiler fails or your car needs a new gearbox - I think it is more a case of if you lost your job, interest rates doubled or your home fell 25% in value would you be in trouble? If all 3 happened would you be royally screwed? It might be unlikely but if even 2 of these 3 are true you could be better off paying your mortgage to ensure you have a less exposure to the aforementioned......especially if you are the only breadwinner or single.

Good luck!

fairleads

Paying more off now, with property prices stagnant or declining, could be money wasted if say in a year or two's time you decide to - or worse, have to - sell. We could also say every option/choice has a cost. To pay off now is to increase your equity but run the risk that price declines reduce the value of the equity portion - the bit you own - of your property. The cost of the alternative, to save the cash, is to pay a little more tax, but even that is tempered by the increase in financial security. And that is priceless.