Noticed some changes? You can read all about the improvements we've made on the Forum in our latest announcement. We also have a new set of Forum rules so please take the time to give them a read and familiarise yourself.

Overpay vs Invest.

edited 30 November -1 at 1:00AM in Mortgage-Free Wannabe
6 replies 769 views
brianfallbrianfall Forumite
28 Posts
Part of the Furniture 10 Posts Combo Breaker
edited 30 November -1 at 1:00AM in Mortgage-Free Wannabe
Can someone explain to me in simple terms why it's better to overpay my mortgage rather than invest the money? I don't need a retirement fund as I have a good NHS pension.

My reasoning was that the interest rate on my mortgage is currently about 1.6% whereas if I invest I should be able to get about a 5% return.

I thought if I invested £500 per month over 10 years, this would generate more funds to pay off my mortgage than overpaying by £500 per month.

I spoke to a 'wealth advisor' with an interest in selling me stuff and he said I should be investing the money.

But when I spoke to an IFA with no vested interests, he told me that it makes more sense to overpay my mortgage. He did some calculations to demonstrate why, but I didn't understand these calculations. When it got to me asking him for the third time to re-explain it I was too embarrassed to ask again :embarasse

I still have £250k to pay off on my mortgage. Is it because this is a large amount of money to be generating 1.6% interest on, whereas if I started investing from scratch, 5% interest on a much smaller amount would take a long time to surpass any gains achieved by overpaying the mortgage?

Replies

  • julicornjulicorn Forumite
    1.4K Posts
    1,000 Posts Third Anniversary Name Dropper Photogenic
    ✭✭✭
    Mathematically, investing would make you better off with those figures. There are a few reasons why people prefer to overpay:
    - guaranteed returns (investments can go up and down, with overpaying a mortgage you know exactly what you're getting)
    - increased security, and a reduction in future fixed outgoings (if you have a hard time in a few years, then the overpayments will have potentially reduced the minimum amount you have to pay each month, or depending on the lender even allow you to make payment holidays)
    - peace of mind that comes with owning your home outright
    - increasing equity in your home for buying a bigger home in the future, especially if that 'future' is soon enough to make investments too risky
    - achieving a lower LTV to be able to get a better interest rate when remortgaging next.
    That's just off the top of my head, I'm sure there's other reasons.

    The different starting amounts don't really make a difference in your calculations btw, because you're only effectively saving interest on the amount you're overpaying, not on the total amount. So if you get 5% on a 10k investment, that's better financially than saving the 1.6% on the same amount through overpaying.
    Original mortgage: December 2017, £203,495
    MFW start: April 2018, £201,800
    Current: £113,200 (-£21,000 overpayment savings pot)
  • edinburgheredinburgher Forumite
    12.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    It's also worth remembering that your NHS pension only gets you so far. If it's like my local government pension, you won't be able to take it until relatively late and you may decide that you can't hack "normal" retirement age for one of a host of reasons. It's no bad thing to have a smaller private pension or ISA investments to fall back on to bridge the gap :)
  • dano17439dano17439 Forumite
    364 Posts
    Part of the Furniture 100 Posts
    ✭✭
    Remember investments can go up aswell as down. By overpaying your mortgage direct you have the certainty of winning by paying less interest
  • ThrugelmirThrugelmir Forumite
    81.4K Posts
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    ✭✭✭✭✭✭
    brianfall wrote: »
    My reasoning was that the interest rate on my mortgage is currently about 1.6% whereas if I invest I should be able to get about a 5% return.

    What investment provides a guaranteed 5% return with no loss of capital?
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • AnotherJoeAnotherJoe Forumite
    19.6K Posts
    10,000 Posts Fifth Anniversary Name Dropper Photogenic
    ✭✭✭✭✭
    brianfall wrote: »
    Can someone explain to me in simple terms why it's better to overpay my mortgage rather than invest the money?
    The difference comes in what "better" means.
    It could be financial, or certainty, or peace of mind or other things.
    Straight out financially over a long period then investing in a pension will almost certainly provide more returns. Second choice, investing in an ISA, would produce slightly lower returns (6.25% I believe) due to less tax relief.

    Paying off a mortgage is certain but almost certainly gives lower returns due to lower interest rate and also inflation, in that inflation whittles away your mortgage anyway so paying it off quicker misses out on that benefit.
    brianfall wrote: »
    I don't need a retirement fund as I have a good NHS pension.

    You plan to work until 67?
  • pjcox2005pjcox2005 Forumite
    856 Posts
    Part of the Furniture 500 Posts Name Dropper Combo Breaker
    ✭✭✭
    On pure numbers, then if you can get a higher return on an investment/savings account etc than the rate of interest you pay on your mortgage, then you'll be better off taking that route on any overpayment.


    The only time this wouldn't be the case is if your overpayment reduced your LTV to a point where better rates were on offer. For example you are currently at 90% LTV, and overpayments can take you to 75%. Reason being that creates a reduction in the borrowing rate which applies to the full balance of the mortgage.


    Conversely if you were already at 60% LTV (or moving from 74% to 73%) then you'll already have access to the best rates available.
This discussion has been closed.