What to invest my money in and still overpay mortgage

KrisP87

Hi, could do with some advice regarding what to do with my money. Here’s a little info.. I’m 32 and I earn £29,000 a year and I bought my first house a year ago using the Lifetime ISA - currently in a 5 year fix (£113,000 purchase price with 10% deposit at 2.59%. I have £20,000 in savings in a current account so more than enough for an emergency fund; I plan to start overpaying my mortgage from next year as a lump sum each year until the fix ends. I save around £700 a month after all bills, etc and I think I’m in good shape financially. My partner has now moved in with me but it’s only my name on the mortgage and he has no savings but he contributes £200 a month towards utility bills. What should I do with the £20,000 in my bank? Should I be thinking of investing my money, the interest rates in savings accounts are so low that it almost seems pointless. Can anybody offer some advice please?

Alistair31

What is your pension situation?

MinuteNoodles

Courtesy of the ukpersonalfinance sub on Reddit.

KrisP87

Alistair31 said:

What is your pension situation?

I have a workplace pension where both myself and my employer have a combined contribution totalling 14%. Currently I have around £13,000 in my pension pot with my employer from the 4 years I have been employed with them. I also have another pension pot with B&CE from previous employment but it doesn’t have much in it.

Thrugelmir

Why pay down the mortgage with a lump sum. Make overpayments as when you can. The earlier you do the more interest you'll save. 

steampowered

Personally I would be putting most of that £20k into a stocks & shares ISA, invested in a low cost fund, such as a Vanguard fund.

This has a few advantages over keeping the money in cash or overpaying the mortgage:
- Superior investment returns - the major stock markets have historically generated 7-8% per year on average. 
- Cash loses value over time due to inflation.
- Tax efficiency: You are making the most of your ISA allowance so that your returns are tax free.
- At the age of 32 you should be saving for the long term and are in a perfect position to take a sensible level of investment risk.

It might be worth making some overpayments so that you can remortgage at a lower LTV onto a cheaper interest rate when you get to the end of your fixed term. 

KrisP87

Thrugelmir said:

Why pay down the mortgage with a lump sum. Make overpayments as when you can. The earlier you do the more interest you'll save. 

Thanks - that’s a good point, I just thought that as long as I make any overpayment in the year before my mortgage provider’s cut off point then it doesn’t really matter.

KrisP87

steampowered said:

Personally I would be putting most of that £20k into a stocks & shares ISA, invested in a low cost fund, such as a Vanguard fund.

This has a few advantages over keeping the money in cash or overpaying the mortgage:
- Superior investment returns - the major stock markets have historically generated 7-8% per year on average. 
- Cash loses value over time due to inflation.
- Tax efficiency: You are making the most of your ISA allowance so that your returns are tax free.
- At the age of 32 you should be saving for the long term and are in a perfect position to take a sensible level of investment risk.

It might be worth making some overpayments so that you can remortgage at a lower LTV onto a cheaper interest rate when you get to the end of your fixed term. 

Thanks for the advice - I will be looking into that

Thrugelmir

KrisP87 said:

Thrugelmir said:

Why pay down the mortgage with a lump sum. Make overpayments as when you can. The earlier you do the more interest you'll save. 

Thanks - that’s a good point, I just thought that as long as I make any overpayment in the year before my mortgage provider’s cut off point then it doesn’t really matter.

Interest on the majority of mortgages is calculated daily and charged monthly. The beauty behind reducing your mortgage balance is that should times become financially challenging. It's possible to reduce your monthly outgoings. 

Albermarle

You should keep some cash back as an emergency fund . Enough to tide you over 3 months without a job and/or major unexpected expense on the house etc . Best to keep this in an interest paying easy access savings account.
the interest rates in savings accounts are so low that it almost seems pointless. 
This is a Money Saving Expert forum so the above statement is verging on blasphemy 

puk999

Thrugelmir said:

KrisP87 said:

Thrugelmir said:

Why pay down the mortgage with a lump sum. Make overpayments as when you can. The earlier you do the more interest you'll save. 

Thanks - that’s a good point, I just thought that as long as I make any overpayment in the year before my mortgage provider’s cut off point then it doesn’t really matter.

Interest on the majority of mortgages is calculated daily and charged monthly. The beauty behind reducing your mortgage balance is that should times become financially challenging. It's possible to reduce your monthly outgoings. 

An excellent point about overpaying when you can to give your future self more flexibility. I used to have a Cheltenham and Gloucester mortgage and had to ring them up whenever I wanted to make an overpayment or get a balance. I then got a Lloyds current account (not main account, just opened to get an incentive but I digress). One day the mortgage account appeared in my Lloyds online banking and I could view the balance and pay some off whenever I wanted just with a few clicks of the mouse. This was a real boon and I would throw little (and sometimes larger) bits of money at the mortgage, sometimes multiple times per week. It was really exciting seeing it go down over time and then finally go to zero just over a year ago. This was a 25-year mortgage I took out in 2005 so I'd still have a decade left if I hadn't overpaid. If I had waited until I had large lump sums to overpay then I'm sure I'd still have the mortgage.

Final comment is to not make reducing the mortgage your only focus. Invest in S&S too.