Saving options

The_Leopard

Hello

I'm currently looking at shoring up our finances and starting to look longer term. I'm 38 and my wife is 32, we have 2 young children and have managed to move up the property ladder to our family home that we plan to stay in for the foreseeable future. We are due to remortgage in December and are at a point where we now have the opportunity to save. We spent what savings we had on home improvements and making up the maternity leave shortfall so we are starting from scratch.

We have around 60% LTV including borrowing around 15k to replace a lease car and for a few final jobs on the house which actually frees up £300 per month. We will be borrowing approximately £198000. I'm exploring an interest only mortgage but these seem to have a much more strict criteria than what they once had. I am curious about the option of taking an interest only mortgage and investing the additional funds to pay down on the mortgage sooner. We are currently looking at 1.8% interest only or around 1.6% repayment both with a five year fix. I want the certainty of a fix in relation to the mortgage but am more comfortable with greater investment risk elsewhere.

IF the interest only mortgage is a possibility what are people's thoughts? Repayment of the mortgage (and overpay whilst cheap) or make the most of the low interest rate and try to maximise compounding interest with the money interest only would free up? Am I missing something obvious here? I would look to invest s&s ISAs but that is a whole other discussion that is also occupying my mind right now! Priority is emergency fund first and then use the my ISA allowance and the amount will be dictated by the size of our mortgage payments. With a repayment mortgage we would have around £1150 to invest for longer term per month and interest only around £1550. This is separate to the emergency fund and junior ISAs for the children. So, is exploring the interest only route further a genuine option or would you stick to a repayment mortgage (I appreciate this could be hypothetical if we can get an IO mortgage)? Many thanks.

bigadaj

I don't pay particular attention to the mortgage market but interest only seems difficult currently due to the historic issues.

We've had a hell of a bull run in equities iver pretty much the last decade, ant revision to money could well mean losses or minimal returns in the future, having said that whilst interest rates remain at near zero then the prospect of dividends with potential capital growth is attractive.

One big issue is matching liabilities in terms of timescales, which needs to be considered, what flexibility could you absorb if investments under performed, this is essentially what happened with endowments in the noughties and nineties.

P2p offers potential high returns but with associated risk.

Many people look to overpay their mortgage, this has produced far lower returns in recent history rather than investing, so maybe a halfway house is adopt a repayment mortgage, avoid overpayments and invest that sum.

The_Leopard

Thanks Bigadaj. Challenge with interest only appears to be the amount of income (combined in our case) seems to be pretty high for the average family to access the better rates but I will continue to explore. I'm not hugely worried about overpaying at this point in time for the reasons you mention and at least if it's repayment mortgage it's reducing a debt. I just think about what more we could do longer term with the extra £500 or so a month IO would give us to invest! My wife goes back to work in November so our income will be a bit more healthy so I want to have a clear investment plan ready to go by then but to get cracking with the mortgage asap.

Alexland

I would stick with a repayment mortgage to have certainty that it will conclude when I want to stop work.

TheShape

The_Leopard wrote: »

Thanks Bigadaj. Challenge with interest only appears to be the amount of income (combined in our case) seems to be pretty high for the average family to access the better rates but I will continue to explore. I'm not hugely worried about overpaying at this point in time for the reasons you mention and at least if it's repayment mortgage it's reducing a debt. I just think about what more we could do longer term with the extra £500 or so a month IO would give us to invest! My wife goes back to work in November so our income will be a bit more healthy so I want to have a clear investment plan ready to go by then but to get cracking with the mortgage asap.

Your answer may be contained in your question. If you are considering an interest only mortgage it's because you wish to pay off the capital later. If an interest only mortgage is not an option, taking a repayment mortgage but for the longest term possible will also have the effect of delaying the repayment of some of the capital for as long as possible.

The_Leopard

That is a good point I hadn't considered and will do some sums on.

Alexland

Investing excess income is great especially when done in advantaged wrappers (we contribute to 4 pensions, 2 LISAs, 2 ISAs and one JISA each tax year) however going interest only might be a step too far. I have a suspicion you will do it anyway regardless of the feeling on this board.

The_Leopard

Thanks Alexland. Genuinely open to suggestion as not entirely sure what's best at present. Certainly the thought of paying off the mortgage is nice and there is something in the back of my mind that says overpay whilst borrowing is cheap... with another voice saying invest elsewhere and make the money work better for us!

Alexland

If half you head says overpay (while rates are low) but the other half says underpay (interest only) why not cut it down the middle and just repay your mortgage at a normal rate? Unless you feel your mortgage is excessive for your age or future income in which case overpay.

We are also in our 30s and pay our mortgage (under £500 per month), invest in our pensions (over £4k per month), fill our LISA/JISAs, spend on living expenses (I try not to think about parting with money but it's not excessive) and invest the rest in ISAs.

I would repay the mortgage if we ever received a lump sum (inheritance, etc) but otherwise it will be repaid slowly over the next 20 years. We could go interest only in the knowledge one of my 25% pension commencement lump sums would cover the balance but I would prefer to keep the pensions for retirement and withdraw an extra 25% tax free each month.

Alex

grandst

I watched a webinar on the effects of QE, yes I am that sad, and the conclusion is that asset prices are very high and future returns will be low. Maybe not the best time to invest with borrowed money.

TheShape

The_Leopard wrote: »

Thanks Alexland. Genuinely open to suggestion as not entirely sure what's best at present. Certainly the thought of paying off the mortgage is nice and there is something in the back of my mind that says overpay whilst borrowing is cheap... with another voice saying invest elsewhere and make the money work better for us!

In terms of getting the best return on your money, overpaying whilst borrowing is cheap would be the least advantageous thing to do. It's when borrowing is expensive that you'd consider overpaying.

It is always useful to look at the difference between your borrowing rate and your saving/investing rate. For example;

My mortgage interest rate is 1.74%. If I can earn a better rate than that in savings/investments then I prefer to do that than overpay. As a basic rate taxpayer I have my £1000 PSA that I can use and above this any savings/investments that earn approx 2.2% or more before tax give me a better net return than overpaying the mortgage.