Mortgage overpayment vs investing

redpete

I think it comes down to timescales and a bit of psychology. If I had a 25 yr interest-only mortgage I would be reasonably confident that investments would grow sufficiently to survive the odd market crash and provide enough to pay it off.

In my case I suspect my interest-only mortgage is going to start getting more expensive when the current deal expires and I don't have that long to ride out significant drops in the investments I have put aside to pay it off. So I am starting to cash in some of those long-held investments to cover at least the 10% overpayment. It's effectively getting me 4.8% on the overpayment (what I'd have to make as a 40% taxpayer to earn more than the mortgage interest).

It does make me feel good to see the outstanding debt drop nice and quickly.

As an aside, I'm realising that for me it's more difficult to sell a fund and see the price continue to rise than it was to hold on to it when the price was dropping - seems more final. Then my brain over-rides my heart and I remind myself that the cash is protected against a market correction if and when it comes (which I suspect it will). Locking in the 8-10% annual growth the funds have returned over the last 15 or so years is a good feeling as well.

jamesd

Thrugelmir wrote: »

Being mortgage free removes one of life's greatest insecurities. That you cannot put a price on.

At the same time it inhibits ending one of life's greater uncertainties: the ability to pay all of your obligations. Payment obligations don't stop at the mortgage and having a cleared mortgage does you little good if you have to sell the place because you can't pay the bills. Accumulating non-pension assets does let you cover all of the bills for ever-increasing times, greatly reducing risks due to life's unfortunate events.

At the moment I have a mortgage and so much money in investments that i don't need to worry about the mortgage or my other living costs if I didn't work any more. If I was prevented from working I have insurance that would cover it in many cases.

jamesd

chockydavid1983 wrote: »

Is it simply are my investments likely to return more (after any tax) than what my average mortgage rate over the time of investing is likely to be (currently 2.69%) or is there more to it than that?

That's fundamentally all there is to it when pitched as an investment question.

It's not just an investment question. some people perceive a mortgage as a really bad thing and just want it gone. Others have no problem at all mentally offsetting the value of their investments against the mortgage balance and dealing with investment volatility. Overpaying the mortgage is not efficient but efficiency is not always the factor that dominates thinking.

chockydavid1983

Thanks guys, some really interesting points.
From my point of view, I have a long time horizon (currently 31, retirement age will probably be close to 70 by the time I get there) so I think it makes sense to invest.
One thing that did occur to me is that if I decided I wanted to move to a more expensive property (no plans at the moment) then at that point I'd maybe want to cash out investments to improve my LTV ratio. In that case, it may have been better to overpay some over the years so more of the current mortgage debt has been paid off.
I really appreciate your input guys- I feel like I'm learning a lot and there's a lot more to it than I originally thought.

Thanks,
Chris.

ajdj

chockydavid1983 wrote: »

Thanks guys, some really interesting points.
From my point of view, I have a long time horizon (currently 31, retirement age will probably be close to 70 by the time I get there) so I think it makes sense to invest.
One thing that did occur to me is that if I decided I wanted to move to a more expensive property (no plans at the moment) then at that point I'd maybe want to cash out investments to improve my LTV ratio. In that case, it may have been better to overpay some over the years so more of the current mortgage debt has been paid off.
I really appreciate your input guys- I feel like I'm learning a lot and there's a lot more to it than I originally thought.

Thanks,
Chris.

I'm the same age as you, currently using a strategy of saving and investing instead of overpaying the mortgage.

I use a regular investment S&S ISA (£1.50/trade via AJBell You Invest) into low cost ETF's (no ongoing charges to hold) and a couple of Regular Savings accounts (paying 5% and 4%). The regular saving accounts are then deposited into the S&S ISA on maturity. Although S&S are easy enough to liquidate if you need access to the money, I feel the regular savers give me a little more flexibility if I needed it.

In addition to this, I hold 6 months expenditure in a cash ISA (from previous years allowances) paying 2% and contribute 15.5% of salary (including employers contributions) into a pension.

My aim is to be mortgage neutral by 40 and then start using a SIPP to maximise my retirement pot.

chockydavid1983

Thanks ajdj.
I hadn't considered using regular savers in that way and seems like a good idea as the returns are closer to average investment returns with the flexibility to easily withdraw.
I currently hold my 6 month emergency fund in a Santander 123.
I do contribute to an employer's pension but I need to evaluate what it's paying and what income it will likely give me (it's defined contribution).
I understand that paying into an employer's pension is automatically good due to your employer's contributions being added but are there any difference in contributing more to that fund (or a personal pension) than just investing in a fund?

Thanks,
Chris.

AndyT678

chockydavid1983 wrote: »

are there any difference in contributing more to that fund (or a personal pension) than just investing in a fund?

The main benefit is that pension contributions are tax free so £100 of pension contribution would only be £80 (or £60) in an ISA or unwrapped fund.

The main downside is that you can't get at your pension until you're 55.

redpete

Originally Posted by chockydavid1983
Is it simply are my investments likely to return more (after any tax) than what my average mortgage rate over the time of investing is likely to be (currently 2.69%) or is there more to it than that?

jamesd wrote: »

That's fundamentally all there is to it when pitched as an investment question.

But do take into account the small phrase "likely to" and consider what would happen if what was considered 'likely' doesn't actually come to pass.

jimjames

chockydavid1983 wrote: »

Thanks for your replies guys.
OK, so say I pick Hargreaves Lansdown as my platform:
http://monevator.com/compare-uk-cheapest-online-brokers/
It says it charges 0.45% so is that a percentage of what I invest or is it also a percentage of the growth I achieve? Also, what is my decision as to which platform to use based on? Do they provide any different services?

Then through H&L, I invest in the Legal & General UK Index:
http://www.hl.co.uk/funds/index-tracker-funds
What do the charge columns mean and which is most important to me?

Thanks,
Chris.

0.45% is their fee which is paid against the total value of your portfolio with them. Other platforms charge 0.25% which may not be significantly different for a £10k investment but does start to add up when you have £100k.

I don't think many people would recommend just having a single UK tracker as your portfolio though so have a read about different options. As well as here one place to do so is www.monevator.com

atush

chockydavid1983 wrote: »

Thanks for your replies guys.
Very true Thrugelmir, very true.
Atush, I'm not exactly sure where I will be investing yet but at the moment I'm thinking some kind of tracker fund. I'm not sure what index, maybe the FTSE all shares or maybe something that includes international markets.
It looks like it's best even as a basic tax payer to invest to do it all within a stocks & shares ISA but I'm a bit confused on the process. Say for example I decided I wanted to invest in the Legal & General UK index trust. Could I then just open a stocks and shares ISA with anyone and tell them that's what I want to invest in? I've only used cash ISAs previously.

Chris.

Do you have a pension at all? Does your employer? Gotta say, that is where I would start and maybe have a S&S isa on the side.