Overpay mortgage or other investment?

Anonymous101

aj23 wrote: »

If you're paying the minimum, or interest only, all that counts towards your net worth is what you've paid off already, which would be minimal. If you have a 70% mortgage still, only 30% of that is "your money" if you like. Your net worth wouldn't be very high at all as it's nearly all liability, not asset (only to the bank as they'd clean up after).

If you lost your job and are mortgage free, you wouldn't have the burden of defaulting on your mortgage and potentially being blacklisted. You can cancel Sky etc. But again, you're assuming someone would have no investments or savings, and more people have savings than investments. Presumably if you've become mortgage free, that is then money that you can save in addition to whatever you could save before. Wouldn't necessarily have to sell your house, and you often get a few months grace anyway while you get another job, and you most probably got redundancy.. You're not taking into account that people would have savings, some if any investments, or maybe retired and have taken their pension early.

Yes you make fair points and I thinking about it there's definitely some middle ground.

The main difference I see that that someone like me would choose to invest any monies over and above their regular mortgage repayments rather than make over payments. I see that as more efficient since you're more likely to get a better return than your mortgage rate.

I do know people that have leveraged their houses back up to the maximum LTV and invested that equity. I suppose this is where I'd draw my own personal line in the sand. I wouldn't be comfortable doing that even though I know its mathematically a sound decision.

Thats is the crux of what I was trying to say in my first post on this. There's a scale of what level of risk every individual is willing to accept. Overpaying your mortgage is right at the lowest end of that spectrum and perhaps me keeping on my regular repayment mortgage and choosing to invest rather than overpay is somewhere in the middle to slightly risky area of the scale. As we know riskier investments tend to make more money in the long run but the variance and therefore chance of failure is also increased so where everyone puts themselves on the scale is very personal.

Zola.

Everything in moderation as they say, hedge your bets

- Contribute a good chunk to pension
- overpay on the mortgage every quarter
- drip feed invest every month

That to me is the best combo

atush

aj23 wrote: »

Some people put security of a dry roof to sleep over investments and work towards being debt free. As a mortgage is a debt.. Especially if you're a family with young children.

I do not see why you'd have the value of your mortgage in an investment when you still have that mortgage, at all. I would have cleared that mortgage already.

Some people with children value the better returns availble thru pensions and investments over wasting it paying off a mtg.

After all, if you have cahs and investments availble to pay off your mtg but dont- then you could if you needed to so the roof over your childrens heads is not at risk.

By doing it our way (ie initally overpaying mtg alongside other things to reduce term as was over our target retirment date then swithing off overpayments later) we put 3 children thru Uni with no student debt. all 3 are in good graduate jobs earning and saving. And we will be able to help with property purchase later when they are ready.

Dont think we would have had the money for that last bit had we kept overpaying once our rate was so low.

adonis10

AnotherJoe wrote: »

That simply is not going to happen unless you become such a financial basket case you need to borrow from a lender that deals with extreme cases.


There is almost zero chance that base rates will rise much above where they are now. Carney has already backed away from his statement about rises to the next move being a decrease!


Whilst Brexit is bandied around as an excuse for every ill, if it does imply anything in the financial world, its suppressing iUK nterest rates, and over the next 3 years in the midst of a brexit exit shambles, to raise rates in any significant way would be financial suicide.



I also agree with others, you should not be overpaying your student loan. You are doing a lot of things that are what if this that and the other happens in 5-20 years and ignoring the one absolute certainty, you'll be wanting a decent pension then. A pension is just a reverse debt, from your older self to your younger self. Ignore that in contrast with all the ifs buts and maybe's about mortgages and student loans, to your elder selfs detriment

Fair points, and taken onboard.


Regards the student loan, if I stopped overpaying I'd have an £800/month surplus so it is only 1/8, with the remainder going in cash and investments. I may up my pension conts by 3-4% out of that £100 and whatever is left I will still pay to the loan, thus still having £700 to invest/save myself. I can't get away from the fact that I do not like debt (other than mortgage which I do not mind as it enables one to buy a house to live in and potentially make money from).


If I had £180 left over each month and was spending £100 of it on SL overpayments then I would most likely think differently.

Zola.

Is your student loan interest not something like 1%?

adonis10

zola. wrote: »

is your student loan interest not something like 1%?

1.5% .

DrEskimo

There are several aspects of a student loan make it entirely different from traditional debt, and thus treating it like a a normal debt that you want to pay down as quick as possible is not always the best approach (these are based on a type 1 student loan).

1/ The amount you pay is not linked to the size of the debt, but to the amount you earn. You will only ever pay 9% of everything you earn above ~£18k. If you no longer earn above that, you stop paying.

2/ The interest rate is either; BoE base rate + 1%, or RPI, which ever is the lowest of the two. Right now, BoE base rate is 0.5%, whereas RPI is around 3% (2.8%?), hence why the current interest rate is 1.5%. As such, you will never pay above inflation in interest.

3/ The loan is cleared after a set period. Either 25yrs from the start of repaying or at retirement depending on when you first took out the loan.

I agree with your general sentiments about debt. I avoid debts where possible, even clearing 0% interest credit as I just don't like them hanging over me. To date I only have two debts; mortgage and student loan. I make overpayments on my mortgage to reduce the term to a more comfortable level, but I have no intentions of overpaying my student loan due to the above.

I view it as a pretty low level graduate tax, which was an extremely worth while investment as it's got me to where I am today.

adonis10

DrEskimo wrote: »

There are several aspects of a student loan make it entirely different from traditional debt, and thus treating it like a a normal debt that you want to pay down as quick as possible is not always the best approach (these are based on a type 1 student loan).

1/ The amount you pay is not linked to the size of the debt, but to the amount you earn. You will only ever pay 9% of everything you earn above ~£18k. If you no longer earn above that, you stop paying.

2/ The interest rate is either; BoE base rate + 1%, or RPI, which ever is the lowest of the two. Right now, BoE base rate is 0.5%, whereas RPI is around 3% (2.8%?), hence why the current interest rate is 1.5%. As such, you will never pay above inflation in interest.

3/ The loan is cleared after a set period. Either 25yrs from the start of repaying or at retirement depending on when you first took out the loan.

I agree with your general sentiments about debt. I avoid debts where possible, even clearing 0% interest credit as I just don't like them hanging over me. To date I only have two debts; mortgage and student loan. I make overpayments on my mortgage to reduce the term to a more comfortable level, but I have no intentions of overpaying my student loan due to the above.

I view it as a pretty low level graduate tax, which was an extremely worth while investment as it's got me to where I am today.

Agree with your points the bit in bold is contradictory to your strategy (much like mine) as in so much as you would keep a 1% debt but not take on a 0% debt. Much like I am paying £100 to my student loan to the detriment of investing it at a higher rate of return.


I'm saving and investing the best part of £1,500 (including e'er contribution) per month so I think I may just continue with the £100 to SL just to satisfy the nagging voice that says "pay off the loan".

DrEskimo

adonis10 wrote: »

Agree with your points the bit in bold is contradictory to your strategy (much like mine) as in so much as you would keep a 1% debt but not take on a 0% debt. Much like I am paying £100 to my student loan to the detriment of investing it at a higher rate of return.


I'm saving and investing the best part of £1,500 (including e'er contribution) per month so I think I may just continue with the £100 to SL just to satisfy the nagging voice that says "pay off the loan".

No, because that ignores everything I wrote above about how student loan debts differs to that 0% 'normal' debt.

To me, the greatest risk in having any 'normal' debt is the fact that it becomes a liability when you no longer have an income to service it. The repayments will still need to be made on a 0% interest loan, despite the fact I have no job.

This is not the case with student loans. If I no longer have a job, I stop paying for it. Yes it will accrue interest, but as stated this is a very small amount, and will never rise above inflation. Since March 2009, it has remained at <1.5%, even dropping to 0%, meaning it has been costing less than inflation. Furthermore, if I never earn enough to pay it off, it is just written off. It does not get passed on.

Student loans represent very low risk IMO.

I appreciate your logic in that you are only paying a small proportion of your surplus income towards it, so if that's what you are comfortable doing, then who am I to say otherwise! I just wanted to be sure you had all the information about how student loans work to make an informed decision.

Comparisons of student loans to just about any other type of debt is not really of any use, and as such it needs to be treated completely different...well IMHO anyway..:)

aj23_2

Anonymous101 wrote: »

Yes you make fair points and I thinking about it there's definitely some middle ground.

The main difference I see that that someone like me would choose to invest any monies over and above their regular mortgage repayments rather than make over payments. I see that as more efficient since you're more likely to get a better return than your mortgage rate.

I do know people that have leveraged their houses back up to the maximum LTV and invested that equity. I suppose this is where I'd draw my own personal line in the sand. I wouldn't be comfortable doing that even though I know its mathematically a sound decision.

Thats is the crux of what I was trying to say in my first post on this. There's a scale of what level of risk every individual is willing to accept. Overpaying your mortgage is right at the lowest end of that spectrum and perhaps me keeping on my regular repayment mortgage and choosing to invest rather than overpay is somewhere in the middle to slightly risky area of the scale. As we know riskier investments tend to make more money in the long run but the variance and therefore chance of failure is also increased so where everyone puts themselves on the scale is very personal.

Yeah there is. It's a balance. If you're knowledgeable about investments and also have a mortgage, then I can how you could make some decisions to help you out a bit, provided you have that knowledge. You can lose money in investments just as well as gaining. Losing while paying a large mortgage is the worst of both worlds. I personally would want rid of a mortgage before I seriously and largely made investments where risk is involved.