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Overpay Mortgage vs S&S ISA

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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
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  • atush
    atush Posts: 18,730 Forumite
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    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
    dunstonh Posts: 116,696 Forumite
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    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)
    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.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    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.
    Free the dunston one next time too.
  • KCailey
    KCailey Posts: 25 Forumite
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    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
    KCailey Posts: 25 Forumite
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    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
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    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
    dunstonh Posts: 116,696 Forumite
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    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.
    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.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    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
    atush Posts: 18,730 Forumite
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    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
    jimjames Posts: 17,686 Forumite
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    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
    Remember the saying: if it looks too good to be true it almost certainly is.
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