Invest more in funds or overpay the mortgage?

galileangoatee

I'm debt-free as of 1 October (woohoo!) apart from my mortgage, and although I've already built myself a buffer, I'm finally able to start squirreling money away for my future in earnest.

I feel like I have 2 options:
a) My mortgage rate is currently very low, and my fixed rate is about to expire meaning I can probably benefit from the lower rates expected in the next few months. So it might make sense for me to shove a load of money into the mortgage while it's cheap, to reduce my risk/exposure once rates inevitably jump up again (though due to Corona that's not likely to be for a while yet).

Or... b) I could invest more in my ISA funds. I'm intending to build up a sizeable pot for retirement (with the advantage that I can take money out at any time should I need to).

Facts & figures...
I'm 33, single, no children, and basic rate taxpayer.

Mortgage -
Balance outstanding - £142,000ish & 30 years to go
Monthly payments - £550 (overpayment of a few quid - previously I was overpaying about £700 but decided to stop to speed up clearing some debts I owed to family)
Interest rate - 1.3%, due to expire, my LTV is about 50% so I am usually able to get a decent rate even without the interest rate dropping further as it is likely to do in the next few months

ISA - 
Fund value currently around £16,000 (I only started paying into it 18 months ago)
Monthly payments - £500 split across indexes HSBC World Global Strategy and VLS 80
Gain to-date is around 10%

I've got up to £1,000 a month spare to play with... wondering if I should split it 50/50, or shove more into the fund. Whilst paying down the mortgage quickly is very tempting, it's not costing me that much compared to what I could make from investments, even assuming low growth, and it locks the money away for the future as my lender won't allow me to increase my mortgage again without basically re-applying. On the other hand, putting everything into the fund is riskier, and whilst in some ways the value dropping is a good thing as it makes it cheaper, I don't know if I could stay committed to paying a large monthly sum if the markets did completely crash!! 

I don't see the point in saving money in the bank or regular savers given the interest rates are so crap - I've already maxed out the current accounts that pay a decent amount of switch bonuses, cashback or interest, and I'm sitting on a good 6-12 months of savings should I lose my job etc.

steampowered

Congratulations on becoming free of non-mortgage debt. 

What is your pension situation? As you are 33, you are well into your working life, so it is really important to do some planning there. If your pension contributions are not up to scratch then that could be a higher priority than overpaying the mortgage - due to the investment returns and tax relief you get.

If your pension situation is sorted, it makes sense to focus on your S&S ISA. You might get an investment return of perhaps 6-7% per year over the long term from a diversified stock market investment. Given that fact it is difficult to see why you would instead rush to clear an ultra low cost debt costing you 1.3%.

BuildTheWall

Agree with steam powered above. Once you move into the ‘less than 60%’ LTV bucket, the gains made from mortgage repayment is minimal. Repayments make more sense if you are at higher LTVs. Obviously for some it gives a sense of satisfaction but financially it’s better to invest through pension and S&S ISA. 

ColdIron

Any reason you went with the HSBC World rather than the HSBC Global range? Similar objective but quite a difference in OCF. 0.81% vs 0.18%

galileangoatee

ColdIron said:

Any reason you went with the HSBC World rather than the HSBC Global range? Similar objective but quite a difference in OCF. 0.81% vs 0.18%

I mis-spoke, it's actually the HSBC Global Strategy Dynamic one that I have

galileangoatee

steampowered said:

Congratulations on becoming free of non-mortgage debt. 

What is your pension situation? As you are 33, you are well into your working life, so it is really important to do some planning there. If your pension contributions are not up to scratch then that could be a higher priority than overpaying the mortgage - due to the investment returns and tax relief you get.

If your pension situation is sorted, it makes sense to focus on your S&S ISA. You might get an investment return of perhaps 6-7% per year over the long term from a diversified stock market investment. Given that fact it is difficult to see why you would instead rush to clear an ultra low cost debt costing you 1.3%.

Thank you
I currently pay 6% into my workplace pension, my employer pays 12%. This is the max they'll pay. I also pay £100 a month into each of my previous 2 companies' pensions. So far I've got about £50k built up across the 3 pots.

I agree with you - it feels more sensible to put the money in the fund, since (a) I can get it back easily whereas mortgage is somewhat locked away, and (b) should give a greater return even after fees. 

DireEmblem

Congratulations, I am of a similar age/scenario.

I am assuming you are also in the higher rate tax bracket, so first if all I would consider increasing your pension contributions with your company.  You will get relief from the higher rate of tax, and then on retirement receive 25% tax free.  Play about with a pension calculator, but from increasing your contribution an extra £200 a month from now, I think you could receive an extra 3k if retiring around 60.  Or consider building a bigger pot to retire early?

Second point - you have an emergency fund so kudos to that.  Investing or saving cash really depends how easily you want access to your funds.  You already have enough paid off your mortgage to negotiate the best rates, and longer term, investing should return more to you than the interest savings in your mortgage, or cash.  Anything less than 5 years, and I would hold cash. 

Personally I wouldn’t overpay your mortgage, I would instead invest, and see what sum you have achieved in 10-15 years time.

£1000 x 12 x 15 years at 5%(assuming average investment return), is 134k with 90k saved.  You could then overpay your mortgage with some left to spare at that point.

Albermarle

For a basic rate taxpayer, pension beats ISA by 6.25% due to the tax relief . However the pension is not accessible for 25 years .
For a higher rate taxpayer the uplift is 41.5% , so in this case a 'no brainer ' 

L9XSS

Do both, 30 years is a long time........to finally own your home.
your priorities may change, not having a mortgage can give you more choices around work life balance etc.
im maxing out on both at present.

Sailtheworld

I doubt interest rates are going anywhere for a long time but I'd do both. Your attitude to that mortgage debt will change for the worse. You've got to pay it off sometime - no rush but no point dawdling for 30 years.

Some will say you should just go the investment route for best return (and they're probably right) but even if your only takeaway from this is that retirement savings are better in pensions than ISAs then you'll be quids in anyway.

Thrugelmir

Spread your money out between the various pots. You never know what curved ball you may be thrown at you in the future.