What do I do with the extra money I have

Adrian_london

Hi all.

I have a problem (luckily it is a pleasant problem to have).

I have a mortgage with 23 yers left on it (it is fixed for 5 years at 5.25% and it is a repayment mortgage not interest only). At the moment my monthly payment is £868.

Being single with no family to support I do have about £300 per month to play with after paying off all my monthly bills (gas, sky, broadband, council tax etc)

Would I be better trying to pay off my mortgage early or would I be better puting it into an ISA/PEP/TESSA

I also have, through work, the chance to set up an AVC (advanced voluntary contribution).

The problem is, I don't know what to do. I am leaning towards paying off my mortgage early but I also realise that this won't help me when I retire at 65.

Someone please help me. All opinions will be grateful.




Adrian

grumbler

Adrian_london wrote:

...Would I be better trying to pay off my mortgage early or would I be better puting it into an ISA/PEP/TESSA...

Generally, making overpayments is the most efficient option. However, if you pay off the mortgage it is usually difficult or impossible to withdraw overpaid money in case you need it. Best cash-ISAs pay now about the same tax-free interest as you pay on your mortgage. £300x12=£3600 - just a little more than your annual cash-ISA allowance. If you put £3000 p.a. into cash-ISA financial result is the same as you repay £3000 of the mortgage, but you have instant (or almost instant) access to your money.
There are also regular saving accounts. Halifax 7% regular saver (up to £250 p.m.) pays 5.4% after tax (for base rate taxpayer - 20% on interest) - more than you pay for mortgage.
However, there are some other things to consider:
1)Your mortgage rate is fixed for 5 years. Saving rates can drop (or rise?). There are fixed rate ISAs also, for example Fixed Rate Halifax ISA Saver 5.4% for 4 years.
2)Usually overpayments are restricted by some monthly or yearly limit. If you do not overpay now you lose your current 'allowance' and cannot overpay extra later.

Fatboy_NSS

Putting at least some of the money into your pension as AVCs is very sensible. Your pension fund is likely to average far more than 5.25% pa over it's lifespan, plus you get tax relief from the govt on any contributions you make. You should of course make sure you have enough in "rainy day" savings, but after that look for the long term.

Adrian_london

The only doubt I have with AVC's is that I can only draw on them when I am 60 or 65 and I feel as though I won't be making full advantage of the monthly income from then unless I live till I'm 90 or so (if you know what I mean)

Any ideas on the above paragraph?





Adrian

isasmurf

There is not enough information in your post to give you an answer (and really you should seek the advice of a professional IFA for such a wide ranging question).

What you should do depends on your personal circumstances.
Do you have any current savings? You should always have some 'rainy day' money stashed away somewhere. If you don't start a Cash ISA. You could as suggested by Grumbler, make some overpayments to your mortgage, this will reduce the interest you pay over the life of the mortgage, but depending on the terms of the mortgage you may not be able to get them back.

Are you a higher rate taxpayer?
If you are it may be worthwhile putting something extra into your pension as you get higher rate relief now, but will probably not be higher rate when you retire. However, with the pension rules coming in next year and you envisage yourself being a HR taxpayer for a while, perhaps it may be better just to invest this in a savings or equity ISA to begin with and in a few years time (when you can put in 100% of earnings into a pension) you could transfer it into the pension and get the tax relief.

As you can see their are so many possibilities, which only a professional would be able to narrow down by assessing what you currently have, what your circumstances are and what your attitudes are. But I hope we've given you a few ideas to go away and explre further.

Now, the suns beating down on my neck so I'm going out to enjoy this wonderful weather.

dutchie

I was in similar situation as you. As others have said, overpaying my mortgage is the option I went for. It also depends on the T&Cs of your mortgage, so phone them up and check. Mine allows all overpayments to be taken back when I want.

The advantage of overpaying your mortgage, is that you can then reduce either the term (length) of the mortgage, or the monthly payment. I went for the latter, and this is nice in that it means you will have a bit more to overpay every month, and also it is useful in case you have a rainy day, you have smaller mortgage payments. It also lowers you risk to interest rate rises.

Paul_Varjak

1. You can certainly put money into an ISA but not into a PEP or TESSA as they ended a few years ago. £300/month is well within the maxi-ISA limit (£7000/year) but a little over the mini-cash ISA limit (£3000/year).

2. Are there early repayment charges on your mortgage? If so, I would forget paying off the mortgage earlier.

3. Do you have savings at the moment? If not, you could put the money into a mini-cash ISA and/or regular saver account. A&L pay 5.40% on a cash ISA and Halifax have a 7% Regular Saver account. HSBC have an 8% Regular Saver but you have to have a current account with them to qualify.

4. Do you pay tax? If so, at what rate? If you a higher rate (40%) payer an ISA or pension would seem a suitable choice. If you are not a taxpayer it may be better to pay off mortgage (assuming no early payment penalties), though I think you can still get tax relief on contributions to pensions (£3,600/year) even if you do not pay tax. If you are a 20% taxpayer then the decision is, perhaps, more finely balanced.

5. Will your employer contribute more to your pension if you make AVCs?

Please note, these are things to think about, and possibilities to explore; they are certainly not recommendations!