Overpay Mortgage vs S&S ISA

KCailey

My mortgage is currently fixed at 1.24% for another 22 months.

So I have an extra £500pm.

Option 1:
Should I put overpay my mortgage. £500 for the next 22 months will get my LTV under 65%. Then I could remortgage at a better rate in 22months since my LTV is under 65%

Option 2:
Add the £500 to my S&S isa - VLS80

atush

Personally id go thru door number 2. You could always use the money later to help with LTV.

What pensions do you pay into?

dunstonh

What about pension?

The number of people who ask the same question as you who then (usually later in the thread) happen to drop in that they are higher rate taxpayers is quite frequent. Overpaying the mortgage when you are a higher rate taxpayer can be staggeringly bad thing to do from a financial point of view. (although there can still be some justification in some scenarios)

kidmugsy

KCailey wrote: »

My mortgage is currently fixed at 1.24% for another 22 months.

So I have an extra £500pm.

Option 1:
Should I put overpay my mortgage. £500 for the next 22 months will get my LTV under 65%. Then I could remortgage at a better rate in 22months since my LTV is under 65%

Option 2:
Add the £500 to my S&S isa - VLS80

Neither. The VDSL is a mad investment if you want the money back in 22 months. The 1.24% return is dud too.

Bung the £500 p.m. into a Flexclusive saver at Nationwide, paying you 5% p.a. In a year's time use another regular saver, one where you can remove much of the money without penalty after 10 months. That will be the time to consider reducing the LTV.

KCailey

dunstonh wrote: »

Overpaying the mortgage when you are a higher rate taxpayer can be staggeringly bad thing to do from a financial point of view.

Is this because your paying 40% tax but not making anywhere close to 40% in interest?

KCailey

kidmugsy wrote: »

Neither. The VDSL is a mad investment if you want the money back in 22 months. The 1.24% return is dud too.

Bung the £500 p.m. into a Flexclusive saver at Nationwide, paying you 5% p.a. In a year's time use another regular saver, one where you can remove much of the money without penalty after 10 months. That will be the time to consider reducing the LTV.

My Question is more long term. Say my repayment is currently £1000 and I have 20 years left.

If I overpay £500pm this will reduce my term by +- 7 years. So should I pay £1500pm into the mortgage for the next 13 years, then pay £1500 for the next 7 years into an investment.
or
Pay £1000pm into the mortgage and £500pm into an investment for the next 20 years.

copperclock

dunstonh wrote: »

What about pension?

The number of people who ask the same question as you who then (usually later in the thread) happen to drop in that they are higher rate taxpayers is quite frequent. Overpaying the mortgage when you are a higher rate taxpayer can be staggeringly bad thing to do from a financial point of view. (although there can still be some justification in some scenarios)

Please could you explain this to me like I am five. Confused.

dunstonh

KCailey wrote: »

Is this because your paying 40% tax but not making anywhere close to 40% in interest?

Interest rates are at all time lows. Investment returns, even in your bog standard basic funds have been returning over 5.5% a year through multiple ups and downs. So, there is that to consider. However, the 40% tax relief is certainly the big thing.

Pay £6000 off the mortgage and you know 2% off your interest rate. £6000 net into a pension for a higher rate taxpayer is £10,000 in the pension. (plus those just over £50k in earnings could get back some or all of their child benefit where applicable). Those earning over £100k can get back some or all of their personal allowance.

40% relief is a possibly going to be a future casualty. It is here now but may not be forever.

jamesd

One of the most efficient ways to repay mortgage capital is with the tax free lump sum from a pension, currently available from age 55. That's because you effectively get tax relief on the repayment.

The interest rate saving from 75% to 60% or maybe 65% is there but it's not usually big.

atush

copperclock wrote: »

Please could you explain this to me like I am five. Confused.

6000 off your mtg is just 6000.

6000 into a pension for a HRTaxpayer is 10,000.

jimjames

KCailey wrote: »

My Question is more long term. Say my repayment is currently £1000 and I have 20 years left.

If I overpay £500pm this will reduce my term by +- 7 years. So should I pay £1500pm into the mortgage for the next 13 years, then pay £1500 for the next 7 years into an investment.
or
Pay £1000pm into the mortgage and £500pm into an investment for the next 20 years.

If the investment returns more than the mortgage then you're losing 13 years of investment growth on option 1. You also are potentially not able to access that money as it's within the mortgage - very few do allow access to overpayments