S & S ISA payments v mortgage overpayments

sab77

Any advice would be appreciated please.
I have a £96,000 mortgage which is up for renewal in April next year.
I have £1,400 a month to dedicate to the mortgage/investments or both.

Would it be better (in the long term) just to throw it all at the mortgage (reducing the term to 7 years) or to pay say,£900 a month on the mortgage and £500 into S and S ISA (the mortgage would be paid off in 13 years this way).
I am only 30 and pay into a good pension scheme.
Thanks,
Simon:o

Ian_W

Hi Simon,
I think it's down to your own personal attitude to risk more than anything else.
There's another thread discussing this HERE.
There's no doubt about it that for most peeps the mortgage is the cheapest form of debt you can have and that historic investment returns - 7-9% on a fairly moderate risk portfolio including the bad years - will beat current interest rates and make investments the best option. However markets do crash and can stay low for quite a long time - two and a half decades in the case of Wall St 1929 - now I'm not suggesting that's remotely likely but it's happened before so it [or something similar] could happen again. None of us know the future but if you're happy with the risk that's your call. As well as your pension I would suggest you have a decent amount of rainy day cash savings as a hedge against losing your earnings for one reason or another.
Personally, as someone who bought into an endowment mortgage which went t1ts-up but has now paid off their mortgage I'd pay off the mortgage ASAP then you'd have £1400 a month to invest. Surprising how good it feels to own your property outright and not have to make those payments each month as I'm sure you'll find out much earlier than I did by the sound of it!
BoL whichever you decide.

egamar

I went for paying off my mortage. Owning my own house outright at 40 was a really good feeling - and of course I also then had the mortgage payments to invest as well as my "spare" cash. I am now insulated from interest rate changes (except inasmuch as the affect my investments - but they don't affect my disposable income) and I'm also sitting on a house worth £350k+ which is costing me nothing.

I think it's more an emotional decision than a straight number-crunching exercise, and I think the latter would lead you to invest the money.

However: for how long will you have this spare £1400? If it ever goes away, you might be more glad you've paid of a huge chunk of your mortgage than having to sell off some investments which aren't performing terribly well at the time you need the cash.

Just my 2p. And I'm a cautious type.

dunstonh

I invest instead of paying the mortgage. Borrowing is cheap and my returns are about 3 times more than the mortgage I pay. Plus utilising ISA allowances is far more valuable to me as both myself and my wife will be higher rate tax payers for the rest of my life. Not using the ISA allowance would be foolish.

egamar

dunstonh wrote: »

I invest instead of paying the mortgage. Borrowing is cheap and my returns are about 3 times more than the mortgage I pay. Plus utilising ISA allowances is far more valuable to me as both myself and my wife will be higher rate tax payers for the rest of my life. Not using the ISA allowance would be foolish.

It CAN certainly work out that way, but I've always been risk averse, and wouldn't bet the faqrm on my choice of investments being guaranteed to 'outperform' the cost of my mortgage. But some folks back themselves to win - and do!

dunstonh

egamar wrote: »

It CAN certainly work out that way, but I've always been risk averse, and wouldn't bet the faqrm on my choice of investments being guaranteed to 'outperform' the cost of my mortgage. But some folks back themselves to win - and do!

It's not difficult to outperform though over the long term. Spread the investments and rebalance with low risk investments.

If all you were going to do was stick it in a FTSE tracker on the hope of getting more on than the mortgage, I wouldn't bother as it doesn't offer the potential over the risk taken and you may as well pay off the mortgage. However, go for a decent spread which you keep under review and actively manage and the potential is improved and worth the risk.

You also have to consider the risk against the tax benefit. My ISAs are likely to be in place for the next 40-50 years. My mortgage is gone in 14 years. Paying extra into that may bring it down to 7-10 years. However, that is 7-10 years of lost ISA allowance which I can never get back.

egamar

There's also the question of how long the OP is going to have that yummy £1400 a month surplus for! But as with so much in this field it really does "all depend".

And, like I said above, the numbers would have lead me one way (your way) but my emotions and cautious nature sent me the other.

Jonbvn

In my circumstances, I have gone for a balanced approach. Me & OH, fully invest in ISA's (and some other tax-free savings), then we overpay the mortgage. Of course, I am fortunate to have a well paid job that allows us to do this.

robp

Balanced approach works for us also, at the moment.

ISA's, emergency savings, then pay off chunks of the mortgage.

Of course, that may change as our jobs change (we're both self-employed).

Might be worth making some notes, and working out what you feel comfortable with.

jamesd

Simon, if your risk tolerance allows it investing is the way to go for long term choices like this. You might usefully read this discussion of how to reduce the risks near the end of the mortgage term.

You can invest in unit trusts and OEICs outside the ISA wrapper and that is also likely to beat overpaying the mortgage. Outside the tax wrapper you can do things like selling one fund and buying another to exploit your capital gains tax allowance each year and reduce the CGT gain at the end. Normal trading for rebalancing may use the CGT allowance anyway after many years of investing and growth.

Joey122

dunstonh

Is that really the case - Are you saying that your returns are > 9K a year and thus over the CGT allowance?

If not then you could invest outside the ISA when finishing mortgage and then get into funds?

I akways believed that paying off your mortgage was the best thing to do IF YOUR INTEREST IS OVER THE BASE RATE.