Overpaying mortgage Vs investing?

VoucherMan

For some time now, my plan has been to pay off the mortgage ASAP. I hopefully have enough in savings to cover any unforeseen emergencies so was going to start using all my spare money there.

I've avoided S&S ISAs as I've no desire to go down the DIY route and the costs of an IFA looked like they would overshadow my relatively small investment.

Having had another look at some figures, I'm now reconsidering. I'm willing to take a slightly riskier level of investment so may get a better return (or loss :eek:)

I’d prefer not to waste his (the IFA's) time, or my money, if I'm being unrealistic so wondering if anyone could offer an opinion or see if my sums are correct. I've worked it out over 7 years as that's when I hope to finish repaying the mortgage as it stands now.

I'm considering investing £250 a month (may be slightly more) Even with the initial fee (just under £500) & a small annual charge I’d hope to outperform any current savings options.

But if I add the extra interest I’d pay on the mortgage by reducing overpayments the potential investment looks less attractive.



I estimate that I’d save about £3300 in mortgage interest payments over the next 7 years if I paid an extra £3000 a year for the next 3 years. That’s based on my current rate of 3.99%.

If I were to invest the same amount instead, I reckon I’d need an average return of at least 6% per annum to benefit over the same period (i.e. exceed £3300 interest after 7 years). This is taking into account the initial charge & assuming an annual fee of 1% (no idea what it would be but just wanted to put a number in for an estimate).

I'm happy with the mortgage figures as they’re from a calculator I've been using for a couple of years, which seems reasonably accurate. I think the savings interest figure is correct but if anyone has a better calculator or can see anything I've overlooked any comments would be welcomed.

It would also be nice to know, if anyone has their crystal ball close to hand and assuming my figures are close, if I could realistically expect to achieve such a return, or if I'm better off concentrating on clearing the mortgage first.

Trentenders

The cost of an IFA (and an ongoing charge) is disproportionately high in relation to the amounts you are proposing to invest. I would suggest either reading up on investing and DIY, or else just concentrate on overpaying the mortgage.

Gromitt

At £250/month to invest I wouldn't even bother with an IFA.

If your mortgage is <= 3% then it may be worth DIY investing or high interest accounts such as Nationwide's 5%, and then reconsider in a years time or so (or withdraw it all then a make an overpayment, depends on your mortgage T&Cs). If its 4% or more, I'd just concentrate on paying it off earlier.

cynicalgit_2

I think everyone myself included always look to stock markets when they seem to be inexorably climbing.
Essentially it's a gamble, over a long-term drip feeding funds into stocks and shares can make sense.
However I agree with previous post, exercise caution whilst markets are frothy.

mf78

We decided to hedge our bets, and split our extra cash each month between overpaying the mortgage and drip feeding into a S&S ISA. But our mortgage is only small and we're not relying on the S&S investment to pay off the remainder in x years time. Though it may get used for that, depending on how things work out.

My wife and I both have a S&S ISA with Charles Stanley Direct. They don't charge dealing commission if you're investing in funds, and the only charges are (if I remember correctly) 0.25% of the value per year. We're drip feeding each month into a Vanguard Lifestrategy, which itself has very low charges too. So theres no need to stump up a large upfront payment and pay too much in annual fees, but it is worthwhile reading up a bit first. Tim Hales "Smarter Investing" is well worth a read.

brcl1519

Always over paying for mortgage is not a good idea, but if it’s worth investing then it is always better, Always try to invest where you know that ROI is guaranteed .But try to seek a very less percent on mortgaging an Investments.

FatherAbraham

VoucherMan wrote: »

I've avoided S&S ISAs as I've no desire to go down the DIY route and the costs of an IFA looked like they would overshadow my relatively small investment.

Having had another look at some figures, I'm now reconsidering. I'm willing to take a slightly riskier level of investment so may get a better return (or loss :eek:).

I think you're right to consider adding a moderate amount of riskiness to the asset mix.

Just need to check -- your mortgage product is repayment, right? Not interest-only? So you're already repaying the borrowed capital and "saving".

VoucherMan wrote: »

It would also be nice to know, if anyone has their crystal ball close to hand and assuming my figures are close, if I could realistically expect to achieve such a return, or if I'm better off concentrating on clearing the mortgage first.

I agree with mf78 -- hedge. Get a mix. A crude rule-of-thumb might be that 20% of your savings should be long-term, and should therefore be invested in riskier assets than bank deposits.

If you hedge, and diversify, there will always be an alternative asset mix which would have done better in retrospect, but you will also avoid the worst outcomes.

I agree with Grommitt -- you don't need an IFA at this stage. Look for a broad, cheap diversified fund. Many like index-trackers; me being perverse, I like large generalist investment trusts (Foreign and Colonial, Scottish Investment Trust, Alliance Trust etc etc) which have their own ISA wrappers and low monthly savings minima.

Warmest regards,
FA

atush

I too like investment trusts (and invest in several monthly) but in your case i'd look at something cheap like the Vanguard series. Maybe an 80:20, maybe 60:40.

But i'd also look at your mtg deal as 4% is a bit high these days, there are some better ones out there?

Doshwaster

I'm a great believer in not putting all of your financial eggs into one basket. Each month I overpay my mortgage by £100 a month and put £150 into a S&S ISA.

kidmugsy

1) What's your current LTV for the mortgage?
2) How old are you?

marathonic

I agree with the other posters. The fee for an IFA will be too high for your level of investment and the value added by an IFA is unlikely to result in enough returns to cover their fee when compared to just opening an account with Charles Stanley Direct and investing monthly in one of the Vanguard Life Strategy Funds (or similar).