Pay off mortgage or invest into index funds?


Hi All,
I would like to ask for your advice on whether financially I’m doing the right thing for my future.
Here’s my situation:
I’m now 31 years old, I started working at age 26 after some postgraduate study. My current salary equates to around £34k per year including overtime. I have a house with a mortgage, £64k is outstanding (@1.59% interest + BOE interest rate, on this deal for 1 more year) and the house is presently worth around £110k. I have a student loan and owe £15k (currently @1-1.5% interest, Plan 1 – pre-2012).
I have a pension through Standard Life, to which I contribute 7% and to which my employer adds 7% bringing the total to 14% of my salary. I’m not sure what’s in my pension pot as it’s been a while since I’ve looked at the statement. I have £6k in emergency cash savings in an easy-access account – this amount would keep me going for at least 6 months. I’m also owed around £2k from family and friends. Additionally, I invest a small amount in index funds each month and currently have around £7k in my account.
Each month after expenses I have £1k to play with, and up until now I’ve been using the majority of this to overpay my mortgage. Should I continue to do this, or would it be wiser to invest further into index funds? I don’t need to touch the money for the foreseeable future (15 years+). I’m single, not married and I have no kids, if that matters…
Thanks for reading this.
Comments
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Index funds carry a risk, all equities do. A mortgage free house carries no risk..._0
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DiggerUK said:Index funds carry a risk, all equities do. A mortgage free house carries no risk..._
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Is your aim to move to another (larger/more expensive) property in the future?0
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Thrugelmir said:Is your aim to move to another (larger/more expensive) property in the future?No, I want to stay in this house until the day I die. It’s a 4-bedroom house. £100,000 goes quite far in a small village in Scotland.5
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Pensions is the right answer. Double your contribution.1
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Overpaying the mortgage or invest is up to the risk appetite of the person.
Overpaying offers certainties. You will make a small but sure gain (on the interest) and reducing the short-to-mid-term financial risk (you'll own your home outright sooner).
Invest while still paying for mortgage offers the possibility of a better return with increased risk. You will likely to make a bigger gain (on average, returns on equities is higher than mortgage interest rate) but it isn't guaranteed (we don't a crystal ball), and increasing the short-to-mid-term financial risk (if you lose your job amid a recession, you might find it hard to get access to cash and keep up with the mortgage repayment).
In the long-term, you will almost certainly be better off if you invested instead of overpaid the mortgage, as long as you don't default on your mortgage. In reality, repossession is the last resort a mortgage lender would take, they usually will work with the borrower to come up with an alternative arrangement, such as payment holidays, reduce the monthly repayments by increasing the mortgage term, or temporarily change it to an interest-only mortgage. But don't bet on it, you should have your own plan too. Will you be able to access more cash savings than your emergency fund? Will you be able to liquidise some types of investments that are less affected by a market crash, such as govn bonds, gold, etc.? Do you have close friends and/or family members who might be able to offer you a loan?
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burner01 said:Pensions is the right answer. Double your contribution.
A person age 50 with a 600k pension pot but no other savings will have to work for 5 more years before he can retire, but a person age 50 with a 500k pension pot and 100k ISA pot can retire anytime he likes.
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Mr.Saver said:burner01 said:Pensions is the right answer. Double your contribution.
A person age 50 with a 600k pension pot but no other savings will have to work for 5 more years before he can retire, but a person age 50 with a 500k pension pot and 100k ISA pot can retire anytime he likes.0 -
burner01 said:Mr.Saver said:burner01 said:Pensions is the right answer. Double your contribution.
A person age 50 with a 600k pension pot but no other savings will have to work for 5 more years before he can retire, but a person age 50 with a 500k pension pot and 100k ISA pot can retire anytime he likes.
Plus, the 600k is just an example. For another person it could be 300k in pension and zero outside or 270k in pension and 30k outside, they are going to face more or less the same problem - retire before 55 or after 55.
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Financially, paying into the pension rather than overpaying is often the best financial option. Average medium risk pension funds returning around 5.5% pa. plus tax relief on that (even more if higher rate taxpayer) vs paying off a mortgage from money received after paying tax which is only costing ~2%.
If the mortgage is affordable and low cost then there is no hurry to clear it.
S&S ISA is an annual allowance that is lost forever if not used.
in reality, a combination of things is usually the best. Not necessarily financially but it ticks the head and heart boxes.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.3
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