Pay off mortgage or invest?

thriftalissimo

Hello All, my first post on this forum after following the site for a few years, hoping someone can help me out:
I recently received £20000 from a house sale which is at present sat in a current account and I am struggling with the maths regarding how best to use it. I don't have any credit cards I could pay off, as all these are on 2 year 0% interest deals. My mortgage of £110,000 is currently fixed at 2.49% until Oct 2016, however there is a 1% penalty for any extra paid off during this time, so to pay £20000 would cost £200, yet would reduce the payments by approx £100 per month.

Given that I don't want to tie the money up, the best easy access savings account which allows me to deposit the whole amount at once is the santander current account 3% AER which will yield £473 interest in the first year after tax, (minus the £24 annual cost of keeping the account open, but this would be negated anyway by the cashback deals)
I'm a bit confused because traditional wisdom always favours paying off your mortgage, but investing at 3% AER would seem to do better, - have I got this right, or is my maths even worse than I thought??
Would really appreciate some goodwill guidance on this, as financial advisors are only interested in selling me more of their products.

Many thanks in advance guys

T

Archi_Bald

What emergency cash funds do you have?

What pension arrangements do you have?

thriftalissimo

Hi, I have employer's stakeholder pension, only just opened. As for emergency cash funds, this is the £20000 which I have to invest, hence why I am looking to place it in an easy access account rather than tie it up.

atush

How old are you and what % of your salary (incl yours and employers contribs and tax rel ) goes into your pension?

Do you have any medium term upcoming spending plans?

Yorkie1

I would not overpay if I had no savings at all. The conventional opinions on here are to aim to have 3-6 months' worth of savings in easy access funds in case you need them, and then to look at alternative provisions e.g. pension top-up and overpaying mortgage.

You can't necessarily assume you'll be able to get overpayments back if you need to, so don't put money there if it's all the savings you've got.

planteria

i think i would probably invest it in this & next year's ISA allowance...picking some funds or shares.

racing_blue

If you repay £20k now, minus the £200 penalty, your mortgage balance shrinks to £90,200. Ignoring any further repayments of the principal (because I don't know the term) you would pay 22 months interest on that: 22/12 x 2.49% of £90,200 = £4,118.

If you put it in a bank, and can 3% for the whole period, will the interest you earn will be subject to tax? Eg. for a basic rate tax payer 20%, 3% gross is 2.4% net. In that case, you would earn 22/12 x 2.4% x £20,000 = £880. But you pay your mortgage lender 22/12 x 2.49% x £110,000 = £5,022. £5,022-£880 is £4,142. With these assumptions it costs you marginally more to save (£24), but you have access to your money should you need it.

I have an interest only mortgage and am investing in S&S ISAs as a repayment vehicle. This is a whole different topic which often results in healthy debate!

colsten

planteria wrote: »

i think i would probably invest it in this & next year's ISA allowance...picking some funds or shares.

I would most definitely not invest all my emergency cash in funds, and I would never contemplate individual shares if all I have is £20K.

In the OP's situation, I would keep at least half but probably all of it in cash for the next couple of years. I would probably not put the entire £20K the 123 as it pays the least interest of all. So I would distribute it as follows:
1 x £2,000 into TSB Plus (5%)
1 x £2,500 into Nationwide FlexDirect (5%, 1 year only)
1 x £5,000 into Club Lloyds (4%, account fee easily avoidable)
1 x £10,500 into 123 (3%, use DDs to neutralise account fee and earn some extra)

This yields a bit over £585 in interest over 12 months, over £110 more than just using the 123.

Then dripfeed, from the 123, a First Direct Regular Saver (6%) with £300 a month, or a Club Lloyds Regular Saver (4%) with £400 a month (but must to watch that the 123 balance does not slip below £3,000 - so stop payments into regular savers after 10 months). On maturity, put the money back into the 123 and start new Regular Savers. The MSE dripfeed calculator suggests this could yield another £80 approx a year after BR tax

I would also set up a Halifax Reward to collect the monthly fivers. Plus I would look into collecting all the account switching offers on the way (£550 in total at present), and I would set up a couple of donor bank accounts just for that purpose.

To set up the extra DDs required, I'd open a couple of Tesco savings accounts. Te minimum monthly payments can be done by SO on the same day each month: £1.5K in a daisy chain 123 - Lloyds - TSB - Nationwide - 123.

I would not even investigate cash ISAs as they don't come anywhere close in terms of returns.

In the run-up to Oct 2016, review the situation. May be use some of the money then to reduce your mortgage, but may be also begin to investigate investing some of the (then hopefully increased) money in funds in an S&S ISA. But always keep back a solid emergency cash fund.

So I would definitely not overpay the mortgage now, for 3 reasons:

1. the penalty would wipe out the minute gain you would make
2. you can make substantially more in current & RS accounts
3. I wouldn't want to be without a cash emergency fund

thriftalissimo

Hi, I am 42, and completely new to the world of pensions - my contribution is 1% (£20 / month), matched by my employer, and no current spending plans except keeping hold of my house if I lose my job, which is not that secure.
Thanks for your advice

T

Thrugelmir

thriftalissimo wrote: »

I don't have any credit cards I could pay off, as all these are on 2 year 0% interest deals.

You'll need to pay the balances off at some point in time. There's no guarantees that further 0% deals will be around in the future.

Thrugelmir

thriftalissimo wrote: »

and no current spending plans except keeping hold of my house if I lose my job, which is not that secure.

Best not to risk your capital. Put the money on deposit.