stocks and shares isa vs mortgage overpayments.

1adf1991

Hi, hopfully this is in the right place...

I've got a mortgage at 2.24% fixed for 5 years with 30 years left. I can overpay this without any intrest charge. (upto 10% but wont be paying that much).

do I overpay £100 a month or set up a stocks and shares isa and put the money in there then in 20 years or so I should have enuff cash just to pay the rest of my mortgage off.

I've already got money in an easy access saver for upto 6months wages and I have a sipp I put money into as well as work place pensions at both my jobs.

thanks for all the advice.

bowlhead99

What will your mortgage rate be at the end of the fixed period? Answer: you don't know what it will be, because it will depend on what rates are available for you in the market at that time, what your house is valued at (and therefore its 'loan to value' ratio), what your personal financial position is (are you still employed), etc etc.

It might be that at that point, long term fixed rate deals are at substantially higher rates than 2.24%. At that time, you might regret not having (60 mths@ £100 = £6000) or so of cash around to help pay the mortgage down to a better loan-to-value rate which would save interest on the whole balance (i.e. not just on the £6000 you pay off but the overall rate on everything). If no good deals are available and you fall onto the lender's 'standard variable rate' it could be substantially higher than their best rate which itself could be substantially higher than your current rate.

Some people would put their spare £100pm away in a top paying 'regular saver' account paying 3-5% which is a higher rate than your mortgage is costing you and likely better than the 'easy access saver' you mentioned. And then re-evaluate in a few years time, keeping the flexibility to make overpayments at that point without needing to raid your investments to do it. Investments are best suited for terms much longer than 5 years.

If you have maxed out all the top current accounts and regular saver accounts and/or don't think there is a risk you would want the money back to help pay down some of your mortgage in 5 years time, then S&S investing could be OK. If you are really thinking of investing for 20 years, and that length of time would leave you over personal pension access age (e.g. you are close to 40 years old already), you could use more pension rather than S&S ISA for your investing, as the tax relief is useful.

But obviously a SIPP is inaccessible, whereas if you had messed up your planning and really wanted to get hold of the cash to settle your mortgage early if rates go up, or had some other major problem (like a period of unemployment had wiped out your 6 month emergency fund), you might regret having locked away more money in a SIPP and the chance to cash in some S&S ISA money might be handy - even if you take a loss on the investments due to them falling in value just before you need the money.

pjread

It really does depend on income (value and stability), current/likely future LTV and plausible future interest rates.



Personally, I'd model it - you need to make some assumptions but if you run pessimistic options you should be ok 90%+ of the time. But appreciate not everyone thinks that way.



If not - for what it's worth, I overpaid the mortgage when I was at 90LTV, then slowed and redirected gradually to investment after hitting 70 then 60 LTV (switching deals as they ended or it was beneficial).



Once you're hitting the lowest rates (<2%), I *personally* decided that the historic average return from the market was a lot higher than I was paying, so *on balance* I'm more likely to do better shovelling it in to investments and it's unlikely I'd be forced to liquidate. Of course this is not a zero risk strategy, but I'm certainly comfortable with it.



At first I prioritised the pension (as Bowlhead says; the tax relief is useful - assuming you're paying higher rate tax. If you're not, but expect to later - I'd argue its worth keeping it outside until you are so long as you trust yourself not to spend it...). If you're not getting maximum employer contributions (assuming employed) then that is a no-brainer. Then other investments (ISA etc) once that was secure/I was comfortable about the size of the pension.

steampowered

The average long term return on stock market investments is 8-10% a year.

You are probably paying something more like 2% on your mortgage.

On a balance of probabilities, the great likelihood is that you will be better off having the money in a S&S ISA.

There is really no rush to pay off a mortgage which is easily affordable while interest rates are at historic lows.

If you have a bit of cash set aside for emergency situations, that should cover you for contingency situations e.g. if you unexpectedly lose your job. And even in those situations tying up cash in your mortgage is not desirable.

george4064

If I were you, I'd invest it.

fiisch

pjread wrote: »

It really does depend on income (value and stability), current/likely future LTV and plausible future interest rates.



Personally, I'd model it - you need to make some assumptions but if you run pessimistic options you should be ok 90%+ of the time. But appreciate not everyone thinks that way.



If not - for what it's worth, I overpaid the mortgage when I was at 90LTV, then slowed and redirected gradually to investment after hitting 70 then 60 LTV (switching deals as they ended or it was beneficial).



Once you're hitting the lowest rates (<2%), I *personally* decided that the historic average return from the market was a lot higher than I was paying, so *on balance* I'm more likely to do better shovelling it in to investments and it's unlikely I'd be forced to liquidate. Of course this is not a zero risk strategy, but I'm certainly comfortable with it.



At first I prioritised the pension (as Bowlhead says; the tax relief is useful - assuming you're paying higher rate tax. If you're not, but expect to later - I'd argue its worth keeping it outside until you are so long as you trust yourself not to spend it...). If you're not getting maximum employer contributions (assuming employed) then that is a no-brainer. Then other investments (ISA etc) once that was secure/I was comfortable about the size of the pension.

Exactly my strategy. We are in a high LTV situation so focus much of our spare funds on overpaying the mortgage (although we do invest a small % of monthly income to S&S to keep our hand in).


Whilst at 90% LTV, at current rates there is still an argument to say investing is likely to perform better in the long term, there is an intrinsic value to having a greater chunk of equity in your home and protected from house price crashes etc.

pjread

fiisch wrote: »

Exactly my strategy. We are in a high LTV situation so focus much of our spare funds on overpaying the mortgage (although we do invest a small % of monthly income to S&S to keep our hand in).


Whilst at 90% LTV, at current rates there is still an argument to say investing is likely to perform better in the long term, there is an intrinsic value to having a greater chunk of equity in your home and protected from house price crashes etc.

Yeah, I think there's a "reverse leverage" angle too, if e.g. overpaying £10k brings you down a LTV band and opens up a 0.5% rate reduction on a £200k debt, well you could look on that as a guaranteed 10% tax free annual return... But that of course depends on details and mortgage deals available at the time so is more of a tactical play.