Mortgage or Sharesave?

shade82000

Hi everyone.

We've got a mortgage maths question and are wondering if anyone can work out the best way to channel our wages, or maybe show us how to work it out ourselves?

Basically my girlfriend and I have started buying our house this year and we both work for the same company. We have the option to enter into a sharesave scheme at work. Although we have signed up they haven't actually started taking the payments yet. We are now thinking that it might be better to channel this money straight into the mortgage each month instead of the sharesave.

Here are the rough figures for each:

Mortgage:
25 years, started March 2014
Amount outstanding is 211,000
Interest rate is 3.99%
Monthly payments are 1,130
Allowed overpayments are 10% of debt per year.
In our last overpayment we were given several options and elected to reduce our monthly amount.

Sharesave:
5 year term, starts December 1st
Monthly payment between us would be 750
Share option price 5.24
Current share value is 6.50

We would like to work it out roughly based on the assumption that the shares do not go up or down because we understand that shares are a gamble but mortgage interest is a certainty

We guessed that the mortgage route would be the better option but we aren't very good at maths.

Any help with working this out would be very much appreciated

Annisele

I'll have a go, but I'm not sure I've understood the sharesave properly. In both cases I've assumed you've used £750 per month, as that's the maximum you can put into the share save scheme and below the maximum for overpayments.

On the mortgage, I've made these assumptions:

Current balance £211,000 (I know it'll have gone down a bit in reality)
Remaining term 25 years
Interest rate fixed at 3.99% for the next five years (I doubt that one is true)

In that case, this calculator shows that monthly overpayments of £750 over the next five years would bring the balance down to £133,881 (compared to £183,758 if you'd made no repayments). That would mean that £45,000 of overpayments (£750 x 12 x 5) took £49,877 off your mortgage, and in pure cash terms you made £4,877.

On the share save scheme, I've made these assumptions (and I don't know if they're how the scheme works):

You save £750 a month for five years, making £45,000 over 5 years.
If the option price is below the share price at that time, you exercise your option and buy the shares. If the option price is at or above the actual share price, you get your £45,000 back. (This is the bit I'm least sure about - I'm not sure how the scheme works).
There are no transaction costs (not a reasonable assumption).
You can exercise the option and then sell immediately without incurring any tax.
After five years, there are no early repayment penalties on your mortgage.
The share price doesn't change (that one is your assumption, not mine).

If my assumptions are right, then I think you'd be able to immediately exchange your £45,000 of cash for £55,820 worth of shares (because £55,820 = (£45,000 / 5.24) * 6.50), and you could then sell the shares. You'd have a mortgage of £183,758 (because you hadn't been making any overpayments).

In pure cash terms, you'd have made £15,820 on the share save scheme - but it would have cost you £4,877 in mortgage interest you wouldn't otherwise have had to pay. Overall, you'd be about £10,943 better off for having put your money in the share save scheme rather than overpaying your mortgage.

However, change the assumptions slightly and say the share price falls to £5.24 or less. In that case, you'd be £4,877 better off if you used your money to repay your mortgage rather than invested in the share save scheme.

The calculations change significantly if you get any interest on the share save scheme money - and they may also change massively because I've plain misunderstood something. Don't rely on what I've said!

mymuk

Active Sharesaves cannot total more than £250/month per person.

downhillfast

mymuk wrote: »

Active Sharesaves cannot total more than £250/month per person.

I think it changed as of April this year. You can now save £500 a month in a Sharesave I think... although some companies haven't rolled it out yet - our's hasn't

Wh05apk

This is not a pure maths question but one of risk, there is the potential for the sharesave to do much better, especially as it already has a 20% headstart, however, if the company was hit by scandal, or just market conditions, the shares could tank, having said that you normally have the option to take the cash + interest at the end of the term.


Personally I would take the risk, but given you both work for the same company, you have all your eggs in one basket, do you both intend to continue working there for the term?

dimbo61

Read a very interesting article in the Daily Mail ( get if free with my Kindle fire HD)
about sharesave.
Some companies have done very very well and share price has doubled in 5 years so some very happy staff.
You will pay tax at your normal rate so not a good idea to cash all the shares at once!
Now if you overpay by £750 each month you have a slightly smaller balance!
If you ask your lender to keep your mortgage payment Static you will be overpaying more than £750 a month after the first month. Snowballing of Interest.
It is a gamble as you may change jobs ? The shares may do nothing or drop ? then you would just get back the £45,000 you put in.
If you overpay you save 3.99% Tax Free and No ISA or other normal investment can guarantee to match that.
Unless you work for Apple, Facebook, Microsoft, and a number of other companies who have seen huge rises in the share price.

regprentice

Paid into a sharesave for 5 years. Back then it seemed inevitable that share prices would improve but obviously that didn't happen to the extent that excercising the share option would have been worthwhile.

Now i would say that it seems inevitable that share prices will rise over the coming years...but then i did just read an article about europe going into another recession...

shade82000

Annisele wrote: »

I'll have a go, but I'm not sure I've understood the sharesave properly. In both cases I've assumed you've used £750 per month, as that's the maximum you can put into the share save scheme and below the maximum for overpayments.

On the mortgage, I've made these assumptions:

Current balance £211,000 (I know it'll have gone down a bit in reality)
Remaining term 25 years
Interest rate fixed at 3.99% for the next five years (I doubt that one is true)

In that case,
shows that monthly overpayments of £750 over the next five years would bring the balance down to £133,881 (compared to £183,758 if you'd made no repayments). That would mean that £45,000 of overpayments (£750 x 12 x 5) took £49,877 off your mortgage, and in pure cash terms you made £4,877.

On the share save scheme, I've made these assumptions (and I don't know if they're how the scheme works):

You save £750 a month for five years, making £45,000 over 5 years.
If the option price is below the share price at that time, you exercise your option and buy the shares. If the option price is at or above the actual share price, you get your £45,000 back. (This is the bit I'm least sure about - I'm not sure how the scheme works).
There are no transaction costs (not a reasonable assumption).
You can exercise the option and then sell immediately without incurring any tax.
After five years, there are no early repayment penalties on your mortgage.
The share price doesn't change (that one is your assumption, not mine).

If my assumptions are right, then I think you'd be able to immediately exchange your £45,000 of cash for £55,820 worth of shares (because £55,820 = (£45,000 / 5.24) * 6.50), and you could then sell the shares. You'd have a mortgage of £183,758 (because you hadn't been making any overpayments).

In pure cash terms, you'd have made £15,820 on the share save scheme - but it would have cost you £4,877 in mortgage interest you wouldn't otherwise have had to pay. Overall, you'd be about £10,943 better off for having put your money in the share save scheme rather than overpaying your mortgage.

However, change the assumptions slightly and say the share price falls to £5.24 or less. In that case, you'd be £4,877 better off if you used your money to repay your mortgage rather than invested in the share save scheme.

The calculations change significantly if you get any interest on the share save scheme money - and they may also change massively because I've plain misunderstood something. Don't rely on what I've said!

Sorry for the late reply on this. Thank you so much for taking the time to explain. Mostly your assumptions are correct but importantly I now have a much better understanding of the rough costs/benefits of the 2 options available to us.

At first we both thought that putting the money into the mortgage seemed the better option but it just goes to show that it's always best to ask especially when you know as little about this subject as we do:)

Thanks again

shade82000

Wh05apk wrote: »

This is not a pure maths question but one of risk, there is the potential for the sharesave to do much better, especially as it already has a 20% headstart, however, if the company was hit by scandal, or just market conditions, the shares could tank, having said that you normally have the option to take the cash + interest at the end of the term.


Personally I would take the risk, but given you both work for the same company, you have all your eggs in one basket, do you both intend to continue working there for the term?

Thanks for taking the time to reply. I think we'll probably take the risk to be honest now that we have a better idea of the risk involved.

It's quite likely that we will stay with the company for the term of the sharesave and work really hard to get the share price up

Thanks again

shade82000

Hi all,

Just one more little question if I may....

We currently have our overpayments set to bring down the monthly mortgage payment but do you think we'd be better off setting it to reduce the term of the mortgage?

Just after some opinions really.

Thanks in advance

Credit-Crunched

Also you need to build into account any possible CGT, if your company does very well and this is reflected in the share price, then it is a consideration you need to think of.

I have always done share saves mind, I think it's a solid way to save.