Savings Account vs Mortgage Investment

LS123456

On MSE it references that "The simple rule of thumb is: If you can get a higher rate on your savings than you pay on your mortgage, saving wins. But if your mortgage rate is more than your savings rate, then it makes sense to overpay."

What are everyone's thoughts on investing money into overpaying on your mortgage? Now that savings account rates have slumped, has anyone moved from savings to mortgage investment?

DireEmblem

Investing is more of a gamble, but they do say on average you could expect 6-7% in a global tracker fund on average over time.

barnstar2077

Compared to a regular savings account, paying down the mortgage looks pretty good.  Compared to a stocks and shares ISA, or a pension though, the mortgage option doesn't look so good (Assuming you don't mind locking the money away for some time.)  This has been debated a lot in other threads.  On paper the investments look good, but paying down the mortgage is the safer option and comes with a feel good factor / peace of mind.  I am paying into a S&S ISA and overpaying into pensions instead of reducing the mortgage, but it may not be everyone's cup of tea!

bowlhead99

There are several of these threads every month.

- Borrowing is quite cheap at the moment so if you have a good deal already or can get one, there is not necessarily a lot of point in paying down the debt if you are financially secure and could do something better with the capital over the long term (e.g. invest in pension or S&S ISAs).

- However, if you are just looking at a home for cash that you would definitely be willing to pay off the mortgage with at some point, and you already have adequate savings / rainy day funds for emergencies and other short or medium-term needs like buying your next car or replacing the boiler or a new roof or whatever, then there is little point saving excess money at 1% a year in a bank account or NS&I when you could instead overpay and avoid 2% mortgage interest.

- If you overpay, depending on the rates involved you will quite possibly get a better rate of return than you could get with savings accounts and at some level of overpaying you may reduce your mortgage to a bettter 'loan to value' ratio, enough to achieve a lower rate on your entire borrowing when you are ready to look around for a remortgage. However, if you ever wanted the money back for some emergency you wouldn't be able to have it without borrowing more against your house and this might not be possible if circumstances conspire against you (e.g. lose your job or house values plummet etc). So, while you might be happy to put every last penny into a bank account for safekeeping until you need the money for whatever reason, you should probably not be so keen to put every last penny to reduce your mortgage by a bit. 

Life is about balance so if you routinely find yourself with spare money at the end of the month, some mix of pension investing, ISA investing, mortgage overpayments and rainy day cash savings is probably going to suit you better than all one or the other.

george4064

What is your current loan-to-value (LTV) ratio on your property at the moment? As previously mentioned, if you can help get yourself into a lower LTV ratio ‘sleeve’. For example if you’re at 62% LTV ratio then it might be worth overpaying to get your LTV ratio under 60% so that when you come to remortgage you should have better mortgage rates available to you, as you will then be in the 50-60% LTV sleeve rather than the 60-70% LTV sleeve.

Tied in with that and reinforcing what bowlhead99 has already suggested, a ‘safe’ option is to simply diversify your savings just like you would invest your portfolio diversified across different regions/sectors etc and hence put some of your spare cash into a mixture of savings, investments, pension, overpay mortgage etc..

Thrugelmir

Remember when everyone moved to endowment policies to repay their mortgages as investment returns were so good?

AnotherJoe

And in most cases, even when the endowment fell substantially short, it was still a better deal. 

The issue was, people didn't monitor progress to correct if needed, splurged the extra they had rather than save or put into pensions, ignored the fact they got house price appreciation they otherwise wouldn't have had because they bought a  bigger house or even a house at all. 

steampowered

Investing rather than overpaying the mortgage makes complete sense.

Investing over a short period of time is a gamble. Investing over a longer period of time is a safe bet. Most mortgages are 20+ years, over that period of time it is almost a statistical certainty that a diversified investment will outperform the interest paid on the mortgage.

The other critical point is tax. You do not get any tax relief on mortgage repayments. You potentially get 40% tax relief on pension contributions (as a higher rate tax payer). Or, you can exempt yourself from income tax and capital gains tax in future by investing through a Stocks & shares ISA.

People of working age should really should not be keeping large amounts of money in savings for anything longer than 5 years at the absolute most. Over long time periods, inflation poses a greater risk to capital than the fluctuations of the stock market.