Should I pay off my mortgage discussion

girlatplay

I have a mortgage for 70% of my property's value. A housing association owns the other 30%. After 2 years, I am allowed to increase my share by buying out part of the housing association's share, e.g. I could purchase a further 10% to take my share up to 80%. My mortgage is an interest only mortgage and I am allowed to overpay this by a certain amount each year with no penalties. I am currently putting money aside into a savings account which pays a higher rate than the mortgage.

My question is: When the time comes that I am allowed to increase my share in the property, should I use my savings to increase my share or should I use them to decrease my existing mortgage and not purchase a further percentage?

jamesd

Are you able to afford a larger mortgage or pay for the higher share via cash? If you can afford it then it's more likely to favor buying more.

Does the price paid for the share depend on a new valuation of the property? Can the cost of a share drio if property prices fall? If the price of a share drops due to property price drops that favors buying a share when you think that prices are as low as they will get.

You also need to ensure that you have some repayment method for the mortgage in place. Investments inside a stocks and shares ISA is most likely to be the best option.

girlatplay

The bank won't give me a higher mortgage, they gave me the most that they would allow. I do have some savings and, as I mentioned, I am putting cash aside each month so I hope to have enough to purchase a further share in cash. Also, I only took the interest only mortgage to get a foot on the ladder. After paying it for a few months I know I am in a position to pay more than I do so I hope to remortgage for the same amount with a capital and interest mortgage after the 2 year initial period is up. The credit crunch is not having much of an effect on me as I am used to being skint!!

Yes, the price of the share depends on a new valuation of the property. There is still a bit of time before I have to consider whether or not to purchase a further share.

I am looking in to stocks and shares ISAs.

Thank you for your advice.

jamesd

First priority for the moment is getting as close as you can to 75% loan to value on the portion you already own, better less. That's so that you'll be able to remortgage even if lenders become more strict.

Don't be in a hurry to switch from interest only to repayment. Interest only gives you the flexibility to pay extra or save when you can. There's no need to give that up provided you're putting the money away somewhere.

The earliest time to consider buying more in your situation is when prices have dropped as far as they are going to. There's no need for you to hurry, just keep saving and waiting for the best moment.

girlatplay

I wonder, in that case, if I would be best to put some money into a plan to cover the repayment on the mortgage ALSO overpay my mortgage to reduce the amount AND put money aside ready for when I am in a position to purchase further. What do you think?

jamesd

For me using the full 7200 ISA allowance would come before thinking about overpaying on a mortgage. The cash and S&S investments give you flexibility to adjust freely between buying a larger share and paying whatever mortgage deposit makes sense.

Dithering_Dad

jamesd wrote: »

For me using the full 7200 ISA allowance would come before thinking about overpaying on a mortgage. The cash and S&S investments give you flexibility to adjust freely between buying a larger share and paying whatever mortgage deposit makes sense.

James,

Post Credit Crunch, does it still hold that ISAs give a better return than Mortgage Overpayments? Especially when you consider that Mortgage rates have gone up, Arrangement Fees have gone up and Redemption fees have gone up. Many people are still doing the direct rate comparison (mortgage = 6%, Isa = 8%, ISA wins) and forgetting to factor in the arrangement costs.

The second argument for ISAs is 'use it or lose it' (which means if you ever cash them in you have lost the tax advantage), so even if your (true) mortgage rate is the same or more than the ISA rate, you should still use an ISA for your savings or you'll lose this excellent tax advantage.

However, unless you intend using your ISAs for retirement purposes and will therefore not cash them in until you are no longer earning, this is no longer an advantage and so you're back to being better off paying down the mortgage.

Have I missed something?

Dithering_Dad

I can't get away from the following observation...

Imagine that when I started my MFi3 challenge a year ago, I had £600pm disposable income to pay off the mortgage or to invest in a S&S ISA.

If I chose Overpayments, after 1 year I would have reduced my mortgage by £7200.

If I had invested in a UK Index tracker (because, like may people I'm not a stockmarket guru), my £7200 investment would now be worth about £6300 due to the FT100 falling so much.

This year I find that my gas bills, electricity bills and food bills have all increased to the tune of £50pm. Lets look how this has affected our test cases....

Mortgage overpayment: last year's overpayments reduced my mortgage by £7200, which at 6% has reducd my monthly mortgage payments by £36 per month. This means that all together my outgoings have increased by £14pm (£50 increase in bills - £36 decrease in mortgage). This year I will be able to pay £586pm onto my mortgage (my disposable £600 - £14 inflation).

ISA Investment: I can afford to invest £550 in my ISA (£600 - £50 inflation). Again due to falling stockmarket returns, I lose money.

As the years pass, my overpayments reduce my Monthly mortgage payments so that I'm at least 'treading water' with inflation. Whereas the amount I can put into an ISA over the time has eroded to the point where I will eventually have no free income to invest, unless I somehow increase my income to compensate.

QED.

Bargain_Rzl

jamesd wrote: »

First priority for the moment is getting as close as you can to 75% loan to value on the portion you already own, better less. That's so that you'll be able to remortgage even if lenders become more strict.

....

The earliest time to consider buying more in your situation is when prices have dropped as far as they are going to. There's no need for you to hurry, just keep saving and waiting for the best moment.

Well said that man! :T

girlatplay, I am in a similar position to you (the difference being that I'm currently at 40% shared ownership and am on a repayment mortgage not interest only). My share worth £58k at time of purchase, mortgage for £51k plus arrangement fee, now hammering away at it and should be getting down towards £40k by the end of this year (with hardly any cash savings left over, as I'm on a Nationwide mortgage which means I can borrow back overpayments if there is a crisis).

I'd like you to think about something very carefully.

At present, at under 50% shared ownership, you and I are both cushioned from the volatility of house prices and interest rates by virtue of having a relatively small mortgage. Eventual 100% ownership would also have advantages as it would remove various lease restrictions like the inability to sublet, and would make it more straightforward to sell in the future.

Now consider this. While you own 30% of it it is saleable as an "affordable home". If you owned 100% of it you'd be able to sell it on the open market.

BUT if you staircased to something in the middle - say you ended up owning 70% - it becomes, IMHO, unsaleable. A potential buyer is likely to find that the outgoings on a 70% owned/30% rented property are no cheaper than the outgoings on an outright purchase - and if that's the case, it's the outright purchase they'll choose. Basically, nobody would buy it - and (assuming your lease forbids subletting, as most SO leases do) you wouldn't be able to let it either. So if you were in a situation where you had to move, it would become a massive burden to you.

What's more, if you paid off your existing mortgage in full without buying any more of your property, you'd then be left just with your rent, and you might find that there were better investment decisions that could be made with your new-found disposable income.

I don't know what figures you're dealing with, so I can't make an accurate judgement on this in your situation. But I can tell you one thing for sure: I will only be buying further into my flat if I can go to 100%, and I'll only be doing that in the event of a crash so significant that I can take on the additional mortgage without disadvantaging myself. And it may be that I pay off my mortgage on the share I own now, and still choose NOT to buy the rest of it out. There's always a chance that other investments will perform better, while I'm sitting on a saleable "affordable home" with a low protected rent. (I am near Central London so am pretty confident that there will always be a need for affordable housing round here.) And if I do then decide to buy the rest, well then I'd be getting a mortgage for 60% LTV, and should be able to get a pretty favourable rate with that.

jamesd

Dithering Dad, it will depend on the mortgage the person actually has at the time that they are doing things and whether they choose savings only or invest. With savings it's more likely that those remortgaging now will find that over the next year or two it'll be more profitable to overpay.

I'd generally suggest that people avoid putting much money into the FTSE100 even in good times because it's not a choice that is likely to do as well as alternative options. Still, if someone had started making regular monthly purchases of 583 Pounds of the Halifax FTSE 100 Tracker D at the start of each month from 1 June 2007 their 13 purchases costing 7579 would today be worth 6888 (-9.1%). Same for BlackRock UK Absolute Alpha and the 7579 would be worth 8253 (+8.9%). It's easy to do calculations like this using the Morningstar portfolio tool because it has a monthly investment option - just give starting date, fund and amount to invest.

I don't know how you managed to get a 12.5% drop in your calculation. Maybe you looked at FTSE index value at the start and end instead of monthly purchases of an accumulation tracker and so lost all of the dividends and purchased all of it at the highest price during the period?

Better to look at the individual investments or mixtures that people who want stability can use. Choices such as BlackRock UK Absolute Alpha are more appropriate for the short term that you're using in your comparison, and also more so for people who don't like ups and downs.

Even with choices like that around, investment options are more suitable for longer periods, for which now is a time to be buying to exploit the longer term growth. But I still wouldn't be buying a FTSE100 tracker.

I do hope that you are able to find a job where your pay doesn't get reduced continuously by inflation over many years. Pay increases are what makes mortgages cheaper over time and what's supposed to pay for higher bills.