Spare cash into Isa or overpay mortgage???

Jennywrens

We have some funds available that we would like to invest somewhere. We already have a Maxi and Mini Isa.
Is is best to make an overpayment on our mortgage (we are allowed to pay some £ without penalty), or stick the funds into our ISA's?

dunstonh

This is a bit of an FAQ. Indeed, last time it was asked was just a day or two ago. You may want to search.

Its a matter of opinion, experience and risk profile. If your mortgage is say 6% and your long term average on investment returns is 10% then investing would clearly be better. If you have a decent portfolio under review and averaging double digit figures then investing is good if you accept the investment risk.

If you are a higher rate taxpayer then using up the ISA allowance each year can be for more beneficial in the long run than paying off the mortgage as ISA is a use it or lose it allowance.

If you are just going to stick the money in a bog standard fund or tracker fund then you may as well pay off the mortgage.

Jennywrens

Thankyou - I will look into the percecntages - we have a fixed rate mortgage that we took out 3 years ago and finishes in 2009. We are making a payment towards the mortgage, plus interest every month. We save monthly into our Maxi which will is intended to hopefully pay off the mortgage. Two years ago we withdrew a large sum of money from the Maxi and paid a huge chunk off the mortgage.

We just want to pay off the mortage as soon as poossible, but I will read other posts to see if this is really advisable at the moment, as we have a great rate.

Thanks.

Jonbvn

An interesting relevant thread in the MFW board:
http://forums.moneysavingexpert.com/showthread.html?t=376779

& from the ISA Board
http://forums.moneysavingexpert.com/showthread.html?t=581806

HTH

jamesd

Jennywrens, so long as the investments are growing faster than the mortgage interest rate you can pay off the mortgage most quickly by leaving the money invested. Anything you take out just stops growing at the higher rate and falls to the lower mortgage rate.

If you don't have to pay the mortgage back at a specific time in the near future it's also likely to be better to leave the money invested until close to the end of the mortgage term, so it can grow as long as possible.

If you'll be 55 before the mortgage has to be repaid another approach is to invest via a pension so you get tax relief added to your investments. Then at any time from 55 you can take 25% of the pension pot value as a lump sum to pay off part of the mortgage and leave the remaining 75% to continue growing as your main pension. As with the other investing approaches you'd leave the repaying to near the end of the term so the investments can grow at the higher rate for as long as possible, leaving you the highest possible remaining pension sum to continue growing and provide you an income whenever you decide to retire.

If you have a large mortgage, going interest only and putting the difference between repayment and interest only payments into the investments can further increase the growth potential.

A_Nice_Englishman

Note that the 'borrow to invest' method will only beat the 'pay off the mortgage as quickly as you can' one if you get the investments (and timing) right. Lots of people regret taking out endowment mortgages. Although the charges on these are higher than many modern investments the principle is the same.


A mixture of the two may be best, the proportion and choice of investments depending on the attitude to risk of the individual.

jamesd

The transparency, control and low costs of investing directly in funds makes a big difference. It's easy now to shift to different funds or different investment wrapper providers if the one you started with does a bad job.

Timing doesn't make that much difference when you're investing regularly for 20 years then start moving 10% of the investment value a year for the last five years into low volatility investments to use to pay off the mortgage at the end of the term. This sort of thing lets you handle a 40% stock market drop in the last year and still pay off the mortgage. It would be prudent to do the remortgaging along the way for 25 year terms each time so there is no fixed deadline in the mortgage, just the one you know, 25 years after first starting. This eliminates the forced to sell at the wrong time potential.

A_Nice_Englishman

Thanks jamesd, that's a really clear explanation.

I didn't go that way myself to repay my mortgage but want to do something similar for my retirement savings. I'll start a new thread to discuss this as I don't want to hijack this one