Overpay or Save?

craigo_2

Great to see that £7k knocked off 6 years!

Thanks Kaz! Actually, I was really miffed with A&L... I enlcosed a letter with the cheque explaining quite clearly that I wanted the monthly repayments to remain the same, and to reduce the overall repayment period. You guessed it... for the next 3 months the payments were reduced by about 10% or so, and it remained at 35 years. Took a few angry calls to get that sorted.

My whole family has had various problems with A&L current account too... Anyone else?

Thanks to everyone for their advice. I'll put what I can in an ISA for now, I can only make overpayments in Jan (I think), so I should worry about it then.

Things might change in a few months anyway, as I'll be starting a new job that requires a lot of travelling. So I think I'll need a newer car - Probably a diesel rather than the guzzler I'm running now....

keeperbear

Waldir wrote: »

Yes, overpaying and saving at the same rate are the same.

If you overpay £100 at 5%, that'll give you £5 less to pay on your mortgage.
If you save £100 at 5%, that'll give you an extra £5 in your account.

Incorrect. Unless held in an ISA, savings attract a minimum of 20% tax. This reduced the 5% gross rate to 4% net of tax. In such a scenario, it is better to overpay your mortgage. If you are a higher rate taxpayer, the benefit of overpaying is even bigger.

keeperbear

Conor wrote: »

You can invest up to £7,000 per tax year in a maxi ISA, which must contain stocks and shares.

With stock markets at record highs, it is very risky to suggest investing potential mortgage overpayments in a shares based ISA. If my mortgage rate is 5%, I know that overpayments will effectively generate a risk free return of 5% into perpetuity. The same cannot be said of maxi ISAs, so I wouldn't gamble with hard earned overpayments. When comparing returns you always have to adjust for risk, otherwise you have an unfair and distorted basis for comparison. For example, my mortgage rate is 5% but I can invest in a stocks based ISA fund that provides a historic return of 7% per annum over the last 20 years. Which is the best choice? It depends on your attitude towards risk. A major terrorist attack in the UK or USA could result in world stock markets declining 10%-15% overnight, but you know for certain that your overpayments will save you 5% per annum.

Dithering_Dad

keeperbear wrote: »

With stock markets at record highs, it is very risky to suggest investing potential mortgage overpayments in a shares based ISA.

This isn't true, the stockmarkets are nowhere near their "record" highs. The risks investing in the stockmarket depend on the type of investments you make with stockmarket indexes a high risk, property funds a medium risk and government bonds a low risk. The amount of time you are prepared to invest is also a factor - typically you would look to invest for a minimum of 5 years so that any peaks and troughs in the market are ironed out. Also, if you invest on a monthly basis you gain on the peaks because your holdings go up, but you also gain on the troughs because the shares are cheaper to buy.

keeperbear wrote: »

If my mortgage rate is 5%, I know that overpayments will effectively generate a risk free return of 5% into perpetuity. The same cannot be said of maxi ISAs, so I wouldn't gamble with hard earned overpayments. When comparing returns you always have to adjust for risk, otherwise you have an unfair and distorted basis for comparison. For example, my mortgage rate is 5% but I can invest in a stocks based ISA fund that provides a historic return of 7% per annum over the last 20 years.

Absolute drivel. By making overpayments on your mortgage you reduce the mortgage term and therefore make savings on the interest you would have paid over the full 25 year term of your mortgage - or whatever term is left when you decide to start overpaying. If you pay your mortgage off 5 years early you will save 5 years worth of interest, and then that's it - no "perpetuity". Houses that are fully paid off do not make you money, they just save you money in rent.

Keeper bear doesn't have a mortgage, so it's not at a rate of 5%. He also must not have an ISA because if he is only getting a 7% gain then he needs to change funds. My pension was invested in the same L&G funds that I could have invested in with an ISA and they grew 35% over the last 2 years. Keeperbear tends to just pull numbers out of thin air to support his arguments.

keeperbear wrote: »

Which is the best choice? It depends on your attitude towards risk. A major terrorist attack in the UK or USA could result in world stock markets declining 10%-15% overnight, but you know for certain that your overpayments will save you 5% per annum.

This actually made me laugh out loud. I'm not going to base my financial planning on the "What ifs" of a loon like Keeperbear. If there was a major attack, the markets would bounce back in just the same way as they did after Sept 11. As I said at the start, investing in the stockmarket should be a minimum of a 5 year plan. Having 1 day in that 5 years where an atrocity occurs will not adversely affect your investments. If you're that worried, then invest in security or armament companies!!

Sorry if people think I'm being hard on KB, but he's a troll who jumps about from thread to thread posting rubbish like this. He usually hangs out int he mortgage thread and encourages first time buyers to overstretch themselves to get on the property ladder, yet refuses to move up the ladder himself despite his assurances on how safe an investment property is.

Thanks for reading my rant!! :rotfl:

angelavdavis

Surely the decision to overpay does depend on the current mortgage deal you are on?

For example, I am on a fixed two year rate which runs out in December (gulp, nervously watching the interest rates rise!).

My mortgage was taken out prior to my MFW lbm, and the good news is that I can make overpayments, however the bad news is that the interest is set annually. Therefore, I see no short term benefits from overpaying the mortgage - until the December anniversary is up and I can then reduce the capital with my savings (and of course, the interest rates go up so all it will do is probably freeze the payments!!)

My thoughts are that I am better off short term putting the money into a high interest account until December - rather than paying it off the mortgage?

Is this assumption correct? I am a high tax payer.