Mortgage overpayment or invest for better return

SamDude

We have a mortgage of around £120,000 and are on a tracker rate of 1.99% (+1.49% over base). The mortgage term has 18 years left.

We've been making overpayments of around £1000 for a few months and this will bring the mortgage term down to 7 years if we keep up the overpayment at the same rate. However, this forecast does not take into account the increase in interest rate whenever that happens or other financial factors if we have to reduce the overpayment commitment.

I've been thinking about the best way to maximise the 'return' of the funds that we're using for the overpayments.

What I mean is - where can I invest the £1000 per month to get a better return than the 1.99% mortgage rate?

I don't mind a low/medium risk investment in funds/shares, but would like some guidance from others to point me in the right direction.

jimjames

Putting that money into a S&S ISA is likely to give a better return that mortgage at that kind of rate. No guarantees but I prefer to have the investment growing and keep mortgage to give more flexibility

suebfg

I'm in the 'pay off the mortgage camp' as it is a guaranteed saving and it sure is nice to be mortgage free.

Broken_Biscuits

personally, i would continue to overpay but maybe only 25% of what you have been paying... Its nice to see your debt drop!

with that low rate you can profit from saving in bank accounts for no risk or look to gain more from peer to peer or investing.


at the end of 7 years you may find you have the money to pay off the remainder of the mortgage and a tidy sum left over too.

lalman

Will you live in this house forever do you think? I think you should have an emergency fund too... But getting rid of your mortgage will free up significant cash after that to save etc... Rates are likely to stay low for sometime to come though...

jimjames

Horses for courses. Some prefer security of not having mortgage, I prefer knowing I've got 3x my mortgage in investments should I want to pay it off. Not paying mortgage off also means that I've got substantial funds if I ever need it. Having no mortgage might mean you would need to borrow again if you needed access to money.

But everyone is different and has their own priorities.

SamDude

Thanks all (so far).

We have a savings/emergency fund that is sitting in a Santander 123 account collecting 3% interest (-tax).

I agree about wanting to be mortgage free as soon as possible, the overpayments are the start of our 'aggressive' push to reaching mortgage-zero.

As a rough forecast*, if we continue the current overpayment for 7 years, we would save around £13000 in interest payments compared with no overpayments for the full 18 years. The overpayments at £1000 for 84 months would be £84000.

(*as before, the forecast does not take into account future interest rate increases or any missed/reduced overpayments)

The idea of diverting the overpayment into an investment or shares would be to hopefully accelerate the growth value of the money used to pay down the mortgage (and as stated, also allow us to keep the money available if we ever need it).

I'd like to research the ISA S&S funds to learn more about the options available (I'm very much willing to do my own homework and not just asking for a "what's the best ISA" answer).

So, where do I start...

pathtofreedom

http://monevator.com/category/investing/passive-investing-investing/ and a book called smarter investing by tim hale are your first steps to ss nisas.

Broken_Biscuits

pathtofreedom wrote: »

http://monevator.com/category/investing/passive-investing-investing/ and a book called smarter investing by tim hale are your first steps to ss nisas.

i've spent the last 3 months or so knowing redundancy is just around the corner which for me fortunately now means a decent lump sum and a new job that pays a little more. In that time ive been researching investing and would just like to second that smarter investing and monevator (and here) have been my most useful sources for knowledge.


both the site and the book will lead you towards passive investing and keeping a balanced and diverse mix.

the basic concept of investing is fairly simple after you have done your homework and im sure what stops most getting started is fear of the unknown.

AlanP_2

Depending on your age and tax rate paying the "spare cash" into a Personal Pension and then withdrawing 25% tax free could be an option.

Currently need to be 55 to access pension pot so if you are in your 40s that could work for you - particularly if you pay higher rate tax.

atush

Broken_Biscuits wrote: »

personally, i would continue to overpay but maybe only 25% of what you have been paying... Its nice to see your debt drop!

with that low rate you can profit from saving in bank accounts for no risk or look to gain more from peer to peer or investing.


at the end of 7 years you may find you have the money to pay off the remainder of the mortgage and a tidy sum left over too.

I agree with this point of view, and in fact practice it myself. We overpay a bit (even though we probably should not) to bring down the length of term. We also pay into pensions, save in cash and in investments too.

You haven't mentioned a pension, and this is as important if not more than overpaying a mtg.

So split your money. Overpay by 250, put 250 into pension and 500/m into a S&S isa.