SAYE vs Mortgage

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w8ynesworld
w8ynesworld Posts: 4 Newbie
edited 20 September 2016 at 2:43PM in Savings & investments
I'm currently being offered a SAYE scheme through my employer and have the option to buy company shares with the savings I make (amount up to £500 per month). With the option of a 3 or 5 year contract. Once the contract ends I can then buy shares in the company at a set reduced rate and should the share price increase over the contract length, then the increased difference will be my profit once I sell the shares.

My question is, would I be better doing this to pay a chunk off the mortgage in 3 - 5 years or to over pay on the mortgage each month and reducing the number of years by saving interest or would it make more sense to have a pot of savings/profit and pay a chunk off the mortgage after the contract ends from SAYE (in 3 or 5 years time)?

Alternatively, would I be better to overpay up to £400 per month on the mortgage every month for the next 3 to 5 years + ?
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  • atush
    atush Posts: 18,730 Forumite
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    What % is the share discount? If you d ont buy, will you receive interest?

    What % is your mtg?

    It is a matter of doing the maths really.
  • w8ynesworld
    w8ynesworld Posts: 4 Newbie
    edited 20 September 2016 at 4:13PM
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    Thanks for the reply, the % share discount is a guaranteed percentage, it is currently 60p per share lower than today's share price. No interest is received if you don't buy shares after the contract. % of the mortgage is around 70% currently at 3.6% interest (about to change when I re-mortgage hopefully to around 2% by December this year).
  • AndyT678
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    I'm currently being offered a SAYE scheme through my employer and have the option to buy company shares with the savings I make (amount up to £500 per month). With the option of a 3 or 5 year contract. Once the contract ends I can then buy shares in the company at a set reduced rate and should the share price increase over the contract length, then the increased difference will be my profit once I sell the shares.

    My question is, would I be better doing this to pay a chunk off the mortgage in 3 - 5 years or to over pay on the mortgage each month and reducing the number of years by saving interest or would it make more sense to have a pot of savings/profit and pay a chunk off the mortgage after the contract ends from SAYE (in 3 or 5 years time)?

    Alternatively, would I be better to overpay up to £400 per month on the mortgage every month for the next 3 to 5 years + ?

    Nobody can tell you the answer for certain. It all depends on the share price at the time your option matures compared to the option price.

    I had a share save with one employer that was binned half way through when the share price crashed and it became clear that they were not going to get anywhere near the option price again anytime soon.

    Equally I've had others which have more than doubled the money put in.

    It all depends on what you think will happen to the share price in 3 or 5 years. It is also the only time you are ever going to get a practically risk free way to invest in the stock market.
  • dunstonh
    dunstonh Posts: 116,630 Forumite
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    t is currently 60p per share lower than today's share price.

    We need to know the share price. 60p on share price of 1200p is not much. 60p on a share price of 300p is a lot.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • w8ynesworld
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    Thank you for the replies, the share price is currently around 300p
  • HouseBuyer77
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    So roughly 25% discount.

    SAYE also has a different tax treatment to normal income.

    Assume the share price of your company remains the same (obviously a poor asumption but useful for simplifying how this works), you go for the 3 year plan.

    You put in £400 a month, £14'400 total contribution. At the end of the scheme you receive shares and immediately sell them, you now have £18'000 a gain of 25%, roughly equivalent to 8% per year. Unless you have a truly awful mortgage rate you're making more via SAYE than you would have saved by overpaying.

    However tax complicates the situation. The important thing with SAYE is when you sell the shares capital gains tax is due based on the gain between the selling price and the *discounted* buy price (Not fair market valye when you acquire the shares). So that £3'600 you made is a £3'600 capital gains.

    You have a capital gains threshold, which that is under, so if you have no other capital gains that gain is tax free. If you have other gains you may owe tax on it.

    There is a risk the share price is reduced when you finish the scheme however SAYE scheme operate using options. So you have an option to buy. This means that if the share price is such that you would loose money to buy, you simply take the cash.

    We don't know who you work for or how volatile their shares are likely to be, but it may well be worth taking the risk to assume share price in 3 or 5 years is equal to or greater than now. If it is you'll come out ahead. If it's more than 25% worse then take the cash and pay off a chunk of mortgage. You gamble will have failed but the loss isn't too huge.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 20 September 2016 at 9:18PM
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    If you put about £400 a month into a savings account or paid off your mortgage, the savings or the mortgage overpayments would build up to £14.5k after 3 years. But you only reach that figure at the end of 3 years having started at £0. So the average amount that would really be earning you savings interest (or saving you mortgage interest) is about half that, say £7.25k on average.

    The £7.25k average for three years at 2% (your new mortgage rate) is going to save you under £500 of mortgage interest. It is not a life changing amount of money, in fact it's only about one monthly payment.

    Whereas the gain from spending £14-£15k on shares at a 20% discount and instantly selling them in the market at full price, is getting on for £3k: it's more like 7 monthly payments as your upside, compared to the 'cost' of extra mortgage interest you've been paying which we said was just about 1 monthly payment over the entire three years. In other words the 'bet' is highly skewed in your favour.

    And that assumes the share price just stays constant so the discount is 'only' 20%. If the share price was higher and the discount allowed to get bigger (depends on the term of the scheme), the profit could be much more than 7 monthly payments. Whereas if the company does badly and the share price tanks and you don't buy them, you just take back your £14-£15k of saved cash. All you missed out on was the 1 month's worth of contributions, under 500 quid, of saved interest.

    So, I tend to see these as nice one-way bets. You can gain well on them if they do well, and won't lose too much if they don't.

    One thing to recognise is that company share prices do go up and down quite a bit. It might be that at 3 years the price is down and not worth buying the shares, but at 5 years they are OK again. And the benefit from a full 5 years worth of growth can be high. So to give yourself a better 'chance', you could hedge your bets by putting £200pm into the three-year plan and £200pm into the five year plan.

    There really isn't too much downside here with your mortgage rate low from the end of this year and savings accounts rates at a pittance anyway. If you were a really cautious person I guess you could pay off some mortgage and put less in the SAYE. Depends where you sit on the scale from ultra cautious to not cautious at all.

    Personally if it were me and I was confident I could afford the 5 year commitment and I would like to actually stay at the company that long... I would be maxing out the opportunity at £500pm across the two schemes (instead of just doing £400pm) and finding some other savings or super-cheap borrowing to help me afford it if necessary (interest free credit card, low rate personal loan or whatever). But I don't mind a bit of risk and others would be more cautious and just stick to the £400pm or whatever they can afford without making other lifestyle compromises or commitments.

    ---
    There are a few different schemes about, my comments above assumes that it works by you saving the money away in their account without actually buying the shares and there is an option to just have it returned (without interest) if you don't want to buy the shares at the end of the contract, as you implied in post #3. Rather than another type of scheme which involves actually buying shares as you go and holding onto them... which introduces the possibility of making actual losses if you hold them while they fall in value beyond the level of discount you were granted.
  • bigfreddiel
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    Whst company is this! FTSE100, AIM, that will give all of us experts a better chance of helping you. Cheers fj
  • w8ynesworld
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    Thank you all for your replies again and thanks HouseBuyer and bowlhead. I appreciate your advice.
  • PeacefulWaters
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    Do the Sharesave.

    The leverage obtainable by a higher share price is potentially huge compared to the cost of interest that could have been saved on the mortgage if you end up only recovering your initial investment.
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