Finally debt clear and aggressively saving - what to do with the money?!

CharlesD

Many thanks for everyone's suggestions!
In response to your point below Reaper:

Reaper wrote: »

Regarding the mortgage it may not be worth paying off because:
* It sounds like you are limited in how much you can overpay on the mortgage each year, so if interest rates change in future you can't just take your savings and pay it all off.

We've gone for a pretty standard setup - we can overpay 10% of the remaining balance (determined on yearly anniversary) - and then after 5 years, provided we haven't remortgaged, can lump sum overpay as much as we want.

Thanks for the input again Maxi.

We definitely have the resolve to put the money aside and not spend it - we live quite spartan lives.

Based on the advice - sounds like we should look into seeing what we can do with our incomes with a 5 year time frame in mind. If investing is going to vastly surpass the mortgages 1.64% in that period, we should probably not overpay, invest what we would have overpayed, then pay off the whole mortgage using the invested funds after the 5 year term.

I suppose the risk is that 5 years, which could be destabilised in the medium term by Brexit, may not make the predicted returns.

I'm still curious about any knock on effect overpaying the mortgage has on the compulsory repayments. If for example our monthly payments of £680 are usually split (for arguments sake) as £500 interest and £180 capital, but after some overpayments, those £680 the capital portion goes up and the interest goes down - this would be something else to factor in to the overpayment vs savings/investing calculation - wouldn't it?

atush

Congrats on the house!

I agree with the above, paying extra on your mtg may not be the best thing to do with your money.

the good this is if you are saving 1400-3K each month it is easy to do loads of things with the cash. Save some, overpay a bit, up your pensions (in your case with a DB pension you can open an AVC or use a PP/Sipp instead) and invest some.

I know you are risk averse, but if this is money that wont be touched for decades, then there is pretty much zero chance you'll lose out. investments have done better than cash and property over pretty much any and all investment horizons for hundreds of years (since records began).

So open a couple of S&S isas, invest in something passive, simple and diversified (such as a global tracker or a Vanguard 80). Put in a hundred or more each of you each month and let it ride. In the meantime, you'll be paying off the mtg, building your cash savings back up, and increasing your pension savings. A win all round.

Clive_Woody

CharlesD wrote: »

I'm still curious about any knock on effect overpaying the mortgage has on the compulsory repayments. If for example our monthly payments of £680 are usually split (for arguments sake) as £500 interest and £180 capital, but after some overpayments, those £680 the capital portion goes up and the interest goes down - this would be something else to factor in to the overpayment vs savings/investing calculation - wouldn't it?

With Nationwide we have the option that they can recalculate the monthly payment following each overpayment (keeping the mortgage duration the same) or keep the monthly payment the same and reduce the duration.

We picked the second option and continue to pay the regular mortgage payment and also have a standing order to make a regular overpayment. This has knocked years off our mortgage. We fixed for 10 years with the aim to get the mortgage cleared within that timeframe - if nothing else it focused our minds on this and also looking at saving/investing approaches.

Reaper

CharlesD wrote: »

I'm still curious about any knock on effect overpaying the mortgage has on the compulsory repayments. If for example our monthly payments of £680 are usually split (for arguments sake) as £500 interest and £180 capital, but after some overpayments, those £680 the capital portion goes up and the interest goes down - this would be something else to factor in to the overpayment vs savings/investing calculation - wouldn't it?

It's true for a repayment mortgage (not endowment or pension) that in the early years most of your monthly payments consist of interest whereas in later years they are mostly made up of capital repayments.

If it helps you can play around with a mortgage repayment calculator on MSE here:
https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Sailtheworld

Are the underlying reasons why your partner was in £30k of credit card debt resolved? It's not as if they saw the light and grafted to get it clear - it good luck and generosity so it's not clear.

If not then maybe you should focus on mortgage overpayments and pensions rather than ISAs which are accessible in an 'emergency'.

CharlesD

Clive_Woody wrote: »

With Nationwide we have the option that they can recalculate the monthly payment following each overpayment (keeping the mortgage duration the same) or keep the monthly payment the same and reduce the duration.

We picked the second option and continue to pay the regular mortgage payment and also have a standing order to make a regular overpayment. This has knocked years off our mortgage. We fixed for 10 years with the aim to get the mortgage cleared within that timeframe - if nothing else it focused our minds on this and also looking at saving/investing approaches.

Thanks for the insight Clive - I suppose I'll have to have a discussion with the bank about this once we start the mortgage (we haven't exchanged yet). We would definitely be looking to reduce the term. Essentially I'm working out doing it one of two ways:

• Either save / invest for 5 years and just make the £680 monthly payments. Then At the end of the five years, make a single overpayment of £144,773 to clear the remainder.
• Or max the yearly overpayment allowance - reducing the term - and make a final unrestricted overpayment after the 5 years of £75949

Sailtheworld wrote: »

Are the underlying reasons why your partner was in £30k of credit card debt resolved? It's not as if they saw the light and grafted to get it clear - it good luck and generosity so it's not clear.

If not then maybe you should focus on mortgage overpayments and pensions rather than ISAs which are accessible in an 'emergency'.

Thanks - and good point. My partner's massive CC debt stemmed from living an overly lavish lifestyle and being overly generous in helping out family (including an ex partner who proved problematic financially speaking). Confident the problem is resolved now - in fact during the debt repayment period, he made very big changes to his lifestyle to squeeze in extra payments over the £1000 or so minimum repayments. I do have a slight doubt in my mind that maybe our saving resolve will be hindered by the potential of doing work on the house to improve its value...but I think I would rather do this after the mortgage.

Reaper wrote: »

It's true for a repayment mortgage (not endowment or pension) that in the early years most of your monthly payments consist of interest whereas in later years they are mostly made up of capital repayments.

If it helps you can play around with a mortgage repayment calculator on MSE here:

Thanks again Reaper. Having just had a look at the calculator you signposted and used it as a basis, I've gone on to use an an excel spreadsheet to try and work this out. I'm using it to try and work out which of the two scenarios above would work out better - but its difficult as its hard to predict what sort of return I could make on investing over 5 years were we not to make massive overpayments.

I think that even though there is a sense of us being able to make more money keeping the mortgage in the very long term and making the money work elsewhere - we both want to be mortgage free after the 5 year fix (reading the mortgage terms felt quite soul sapping as it really strips away the sense of ownership of the house - particularly as we may want to make structural additions).
So i'm trying to work out the best pathway to paying it off in full after 5 years.

Basic projections in the spreadsheet show that with overpayments maxed - the loan will have cost £10,103 in interest after 5 years.

Without overpayments, it will cost £13,042. The difference isn't as huge as I expected because in both scenarios we pay it off after the 5 years, so the interest payments don't have time to reach their full swing.

Interestingly however the difference in the, very estimated, bank account bottom line at the end of the process, is actually only £1,185 in favour of overpaying because of the interest generated by the extra savings available when not overpaying.

So bearing in mind that if we don't overpay, we would have an extra £65,000 built up over 5 years available to invest / save.

In my calculations so long as I can make that £65,000 earn more than £1185 (this would require me to make it earn more than the 1.5% base rate interest i've used for projections sake here) - then not overpaying will work out more profitable.

That could prove difficult however as it would require me to have access to a savings product over the 5 years, that we can add to every month, that earns more than 1.5%. I also need to factor in the precarity of my own employment (darned temporary contracts :P).

Anyway thanks for all the food for thought - at this stage probably best to wait and see what type of Brexit we end up with as that could give some insight into the level of stability to be expected over the next 5 years anyway.

Alexland

Will either of you be paying 40% tax in your attempt to clear the mortgage in 5 years? If so then its really worth considering putting enough in the pension to keep within basic rate tax.

Also if under 40 you could be missing out on a 25% bonus (until age 50) on putting up to £4k of your basic rate income into a S&S Lifetime ISA for use from age 60+.

Rather than focusing on the mortgage terms try optimise your contribution pattern against a number of concurrent but equally important objectives within an acceptable risk profile.

Alex

Eco_Miser

CharlesD wrote: »

That could prove difficult however as it would require me to have access to a savings product over the 5 years, that we can add to every month, that earns more than 1.5%.

How does 3% suit?
Admittedly only for a year at a time (so overpay with a lump sum at the year end), and only £250 per month per account, but there's two of you and more than one account available to each of you (with different providers, although Virgin have brought out a new issue every two months, and you could open each issue while it's current).
What am I talking about? Regular Savers - see https://forums.moneysavingexpert.com/discussion/5776240

bostonerimus

Do you have any idea how your pensions are invested. You should know the funds. You should also have a couple of S&S ISAs and also invest in some sensible funds ie probably a mult-asset fund.

So as with most people

Do a budget and spend less than you earn
Put a year's spending in the bank as emergency cash
Contribute to your workplace pension and buy inexpensive multi-asset or index funds if it is a DC plan
Contribute to S&S ISA and buy inexpensive multi-asset or index funds
Save for a house deposit
Prepay mortgage if you can/want to but bear in mind that the interest rate on your mortgage is probably less than the return you might expect in the stock market.....but of course it's guaranteed and there's a big psychological factor in being mortgage free.

kangoora

CharlesD wrote: »

We definitely have the resolve to put the money aside and not spend it - we live quite spartan lives.

Loads of great suggestions on this thread regarding savings and investments but this stood out for me a bit for a different reason.

Please don't take the comments below as personal criticism, maybe they don't apply in your case.

Presumably you're both happy with a spartan lifestyle or you wouldn't be where you are now with the money situation but don't forget to have some fun along the way with the cash also.

I probably could have retired 5 years earlier than I did but I wouldn't trade in those family holidays to Disneyland/Orlando, (seeing our 5 year old meeting Barney the dinosaur was priceless), Las Vegas or family cruises (to name just a few) to retire a little earlier.

Assuming you have sufficient earmarked for savings/investments to be able to achieve your aims then there's not much point being the richest corpse in the cemetery