Investing to Pay Off Mortgage - thoughts?

ian1246

Afternoon All.
                   Just after some thoughts/feedback/advice.

I'm currently 31. Wife is 28. We own our own house - currently £106,500 left on the mortgage, 20years 3months left on the repayment mortgage. Rough Value is £205,000 for the house (Brought for £165,000 in November 2015). Mortgage is due for renewal October 2020 - we've chosen to reserve a 5 year fixed rate at 1.92% (allowing overpayment up to 50% remaining capital per year). This will be £529.23 per month.

We're very keen to pay off the mortgage as rapidly as possible - partly for peace of mind, but mostly since we'd one day like to upgrade to a larger house (we're currently in a 3 bed semi). We are hoping to start a family within the next 12months - so we'd be ideally be looking to move in probably 7-10years time (once we've had 1 or 2 children and they've started School i.e. no more huge child-care fee's!).

My Initial thoughts were to simply overpay the mortgage - but given the historic returns which have been obtained from the Stock-Market, I think we might be making a mistake to overlook ISA's. 

Therefore we're considering whether it would be better to split the £££'s which would be used for  the overpayment - 50% still going towards the mortgage Overpayment (Our "Safe" Investment), but the other 50% going into a ISA - given our "Safe Investment" Mortgage Overpayment, I'd be tempted to opt for the Vanguard Life Strategy 100% Equity Fund - a higher risk of volatility, but also higher returns when the market is doing well.

In the event of the market being in a "Down" Period when it comes to when we'd be considering moving, we'd either simply not move or just utilise our existing equity in the property & take out a larger mortgage, rather than cashing in our ISA and capitalising the loss.

Needless to say: The £££ which would be going into Mortgage Overpayment (& Investments) would be spare money - rather than anything we couldn't make do without.

##############
Since the question pops up often on these threads: In terms of Pensions - I've got a Police Pension (5+years invested, another 29years to go!) & Wife Currently has a NEST Pension (£200 going in per month) which wouldn't be touched until I'm dead. I've also budgeted, on top of the planned mortgage overpayments/investments, for us to each open a LISA (£50 per month each, initially), plan being to use them to top up my pension from 60 to 68years old, when the state pension would kick in.

In terms of emergency funds: Currently stand at £7,650 (Plus a few thousand set aside to buy wife a "new" 2nd hand car next year).

Is splitting the planned overpayments sensible? Or are we better off, given the shorter-time frame (7-10years), just focusing on repayments only and avoiding investing?

Thrugelmir

Initially I would personally opt for overpaying the mortgage. If moving home in the short term is the aim. Investment returns are far from guaranteed. 

Albermarle

If you have a secure job(s) then usually the rational thing to do from a financial point of view is not to overpay the low interest mortgage and invest the money instead. However clearing the mortgage asap is often seen as good from an emotional point of view. As we are all  human beings we feel the pull both ways , some more in one direction than the other. So it is largely a personal decision and splitting it 50:50 seems as good a road forward as any, especially if you both feel comfortable with it. 

Emmia

I think your approach sounds sensible - I'm presuming you already have an easy to access cash buffer to cover you for 3-6 months of outgoings that you can access if necessary (rather than needing to tap the investment fund). If you don't I'd get that together first. 

Voyager2002

Albermarle said:

If you have a secure job(s) then usually the rational thing to do from a financial point of view is not to overpay the low interest mortgage and invest the money instead. However clearing the mortgage asap is often seen as good from an emotional point of view. As we are all  human beings we feel the pull both ways , some more in one direction than the other. So it is largely a personal decision and splitting it 50:50 seems as good a road forward as any, especially if you both feel comfortable with it. 

I second this. Equity investments are generally considered sensible for a period of five years or more, and your house move is seven years in the future at a time of your choosing. So it would be financially rational to put the mortgage overpayment money into equities, or at least a decent share of this money.

And I would not choose the Vanguard Life Strategy because it is weighted too heavily to UK companies. Look for a truly global tracker with similarly low fees.

AnotherJoe

I wouldnt overpay. Interest rates are really low, possibly lower than inflation, so let inflation do its work on the mortgage.

A pound you pay off today is probably only worth 50p that you'd pay the same £1 off in 15-20 years time.

If you do overpay, maybe via the 50:50 route dont fall into the trap of the monthly DD dropping so you dont really end up overpaying. So you'll have to gradually up the overpayment (since they will drop it to keep the term to the original length)

The one upside of overpaying in your specific circumstance is, you plan to move so you will need that equity anyway.

And consider where the money you arent overpaying with is going. If a high rate taxpayer, its a no brainer to put it in pension, if standard rate maybe as said ISA is better for you but make sure you put enough in  your pension to get maximum employer contribution.

Lastly, there are better funds than VLS.  Including from vanguard. Just dont pick one thats overconcentrated in oil and finance, which VLS is.

Cam93

This is exactly what I do.

50% on mortgage OP for peace of mind, 50% into a VLS for a long term investment 

My mortgage rate is 2.09% and my VLS currently stands at +16% so hindsight is a wonderful thing but I'm happy as I know its not always up and up

83705628

Nothing in your OP sounds bad or not well thought out. But a mortgage has a known return, investing doesn't. There are dumber things out there like paying off your student loan early, subletting on Air BnB, not using savings to pay off a high interest credit card.

I would only do this if I was reasonably certain about not needing the money til after the mortgage is paid off. So a balance between topping up your cash savings (I would go for having the next year's expected spending in cash), overpaying the mortgage and money into S&S ISAs would be sensible.

If you are going to invest, it is only worth investing in something that is has a chance of returning more than the mortgage. That rules out bonds (look at the yield to maturity or ytm on the fund's page, as far as I know only Vanguard and iShares publish these). That means that anything less than 100% equity is not worth holding. Even LS80 because the yield on the 20% bonds is maybe 1% before fees.

Buying Vanguard Lifestrategy 100 within a Vanguard S&S ISA (other platforms are available) would be entirely sensible. Vanguard publish long-tetn return outlooks and at the start of the year they expected a 4% return from a fund like VLS 100%, during the crash they published an update expecting 6% from then on. That's what we can expect over the next 10-15 years so if we do get that than yes, thia decision will have been worthwhile

But short term Returns don't matter. +16% on a money weighted basis can become -20% the next year. So don't kick yourself if on the day of your last mortgage payment your vanguard account shows a money weighted rate of return of less than the mortgage rate.

ian1246

Thanks for the feedback guys. In terms of pension contributions - both of us have maxed the available employer pension contributions. Neither of us are higher rate tax-payers. We're comfortable with how much we putting away for retirement - I've got a Police Pension (Nearly 6 years contributions so far, another 29 to go) & Wife puts £200 a month into her (Higher Risk) NEST Pension. We're also going to take out a LISA each and put £50 per month in each, to supplement my pension until State Pension Age, given I can take my full pension at age 60, which is the expected retirement age -  the plan for Wife's pension is it will not be used and will be left to accumulate for as long as possible i.e. when I die or end up in a care-home.

In terms of easy-to-access cash, for an Emergency Fund: We ve got £7,650 specifically set aside across a couple of Interest paying current accounts should it be needed - however hopefully both our jobs are secure (I m in the Police so can't be made redundant and Wife has just gone back to her Nursery off Furlough, working full-time, which is over-subscribed for September so hopefully should be OK!). In the event of Wife being made redundant, my wage is enough to cover all outgoings - so £7,650 is a comfortable amount for an emergency fund.

In terms of alternative funds to the Vanguard Life Strategy - does anyone have any recommendations? Ideally I just want something we can put whatever £££ we can spare into and let compounding do its magic!

tcallaghan93 said:

Nothing in your OP sounds bad or not well thought out. But a mortgage has a known return, investing doesn't. There are dumber things out there like paying off your student loan early, subletting on Air BnB, not using savings to pay off a high interest credit card.

I would only do this if I was reasonably certain about not needing the money til after the mortgage is paid off. So a balance between topping up your cash savings (I would go for having the next year's expected spending in cash), overpaying the mortgage and money into S&S ISAs would be sensible.

If you are going to invest, it is only worth investing in something that is has a chance of returning more than the mortgage. That rules out bonds (look at the yield to maturity or ytm on the fund's page, as far as I know only Vanguard and iShares publish these). That means that anything less than 100% equity is not worth holding. Even LS80 because the yield on the 20% bonds is maybe 1% before fees.

Buying Vanguard Lifestrategy 100 within a Vanguard S&S ISA (other platforms are available) would be entirely sensible. Vanguard publish long-tetn return outlooks and at the start of the year they expected a 4% return from a fund like VLS 100%, during the crash they published an update expecting 6% from then on. That's what we can expect over the next 10-15 years so if we do get that than yes, thia decision will have been worthwhile

But short term Returns don't matter. +16% on a money weighted basis can become -20% the next year. So don't kick yourself if on the day of your last mortgage payment your vanguard account shows a money weighted rate of return of less than the mortgage rate.

Thanks for the feed-back.

The volatility in S&S is one of the reasons I'd look to overpay some of the mortgage, rather than putting 100% of the available pounds into S&S - we still have 20 years 3months left on our mortgage (which is a repayment one as well), so in the worst-case scenario and the market dips when we were hoping to "cash out" our investments, we'd just leave them alone and would have to either stay where we are, or still move but with a larger mortgage - overpaying the mortgage will help increase our equity in our current property in the event that we have to do this. 

At least, thats my current thought process!

83705628

ian1246 said:

Thanks for the feedback guys. In terms of pension contributions - both of us have maxed the available employer pension contributions. Neither of us are higher rate tax-payers. We're comfortable with how much we putting away for retirement - I've got a Police Pension (Nearly 6 years contributions so far, another 29 to go) & Wife puts £200 a month into her (Higher Risk) NEST Pension. We're also going to take out a LISA each and put £50 per month in each, to supplement my pension until State Pension Age, given I can take my full pension at age 60, which is the expected retirement age -  the plan for Wife's pension is it will not be used and will be left to accumulate for as long as possible i.e. when I die or end up in a care-home.

In terms of easy-to-access cash, for an Emergency Fund: We ve got £7,650 specifically set aside across a couple of Interest paying current accounts should it be needed - however hopefully both our jobs are secure (I m in the Police so can't be made redundant and Wife has just gone back to her Nursery off Furlough, working full-time, which is over-subscribed for September so hopefully should be OK!). In the event of Wife being made redundant, my wage is enough to cover all outgoings - so £7,650 is a comfortable amount for an emergency fund.

In terms of alternative funds to the Vanguard Life Strategy - does anyone have any recommendations? Ideally I just want something we can put whatever £££ we can spare into and let compounding do its magic!

tcallaghan93 said:

Nothing in your OP sounds bad or not well thought out. But a mortgage has a known return, investing doesn't. There are dumber things out there like paying off your student loan early, subletting on Air BnB, not using savings to pay off a high interest credit card.

I would only do this if I was reasonably certain about not needing the money til after the mortgage is paid off. So a balance between topping up your cash savings (I would go for having the next year's expected spending in cash), overpaying the mortgage and money into S&S ISAs would be sensible.

If you are going to invest, it is only worth investing in something that is has a chance of returning more than the mortgage. That rules out bonds (look at the yield to maturity or ytm on the fund's page, as far as I know only Vanguard and iShares publish these). That means that anything less than 100% equity is not worth holding. Even LS80 because the yield on the 20% bonds is maybe 1% before fees.

Buying Vanguard Lifestrategy 100 within a Vanguard S&S ISA (other platforms are available) would be entirely sensible. Vanguard publish long-tetn return outlooks and at the start of the year they expected a 4% return from a fund like VLS 100%, during the crash they published an update expecting 6% from then on. That's what we can expect over the next 10-15 years so if we do get that than yes, thia decision will have been worthwhile

But short term Returns don't matter. +16% on a money weighted basis can become -20% the next year. So don't kick yourself if on the day of your last mortgage payment your vanguard account shows a money weighted rate of return of less than the mortgage rate.

Thanks for the feed-back.

The volatility in S&S is one of the reasons I'd look to overpay some of the mortgage, rather than putting 100% of the available pounds into S&S - we still have 20 years 3months left on our mortgage (which is a repayment one as well), so in the worst-case scenario and the market dips when we were hoping to "cash out" our investments, we'd just leave them alone and would have to either stay where we are, or still move but with a larger mortgage - overpaying the mortgage will help increase our equity in our current property in the event that we have to do this. 

At least, thats my current thought process!

/
Fair enough, there's no right or wrong answer but as for VLS100 you won't get much better for much less fees. According to the SPIVA report 95% of global equity funds underperformed the global stock market from 31/12/09-31/12/19, by 2% a year on average. And it has a 25% UK tilt, the UK is cheap compared to the global market so it is reasonable to expect higher returns from UK equity over your kind of timeframe than global (I am more than happy to defend this unpopular position in more detail).
Other fund managers and platforms are available, I can only comment on what I know. I like the Vanguard platform.

ian1246

Thanks for the replies guys. I have today made our first overpayment on the Mortgage - £650.00, with £650 available to invest. I think I'll likely stick to Vanguard for investments - I've been considering the Life Strategy 100% Equity Fund, however taking on-board the feedback from some of you on this thread with regards to choosing a more global focused fund, another fund has caught my attention - the Vanguard Global Equity (Accumulation) Fund, which is an active managed fund, meaning higher fee's (0.48%) vs. the normal 0.22%. 

It looks heavily weighted towards the US (52.2% North America), then 19.3% in Europe, 14.7% Emerging Markets & 13.5% In the Pacific - is this likely to be a more suitable fund vs. the Life Strategy 100% Equity - which does look like it is split a bit more equally across the various regions via its various index's? I'm just conscious of the Covid19 situation in the USA & the upcoming US Election and its possible impact on US Economic performance.