Invest more in funds or overpay the mortgage?

steampowered

If your goal is to clear the mortgage as soon as possible, statistically it is likely to be quicker to:
- Take the most mortgage possible, keeping a low enough LTV to get good rates.
- Put the spare cash into a S&S ISA.
- Sell your S&S ISA and use it to pay the mortgage, once your S&S ISA is as big as the mortgage.
... than it will be to make overpayments on the mortgage. 

The nice thing about an S&S ISA is that it gives you flexibility. If you want to use your ISA to clear the mortgage, or to put towards a more expensive property, you can do that. If you want to keep it as a pot for retirement and generating investment returns you can do that too.

mark13

Well done for getting into this position. As long as you have a buffer I would put the money into funds and let it build up and use some of the profit to overpay the mortgage in a few years time.  

galileangoatee

Thank you everyone for your suggestions

I'm not a higher rate tax payer (I wish!) so I don't know if it's very tax efficient to pump more into the pensions, though I'm still making additional contributions alongside my current company scheme. I pay by salary sacrifice too (apart from the additional contributions which are from my net salary) - not sure if that changes anything.

Clearing the mortgage quickly is certainly an attractive prospect, especially when interest rates are low to benefit from the high capital repayments - my only reservation with just pumping money into the house is that's locked away until I either sell or take out additional borrowing. If it weren't for Covid I'd be looking to do some home improvements next year, but I've decided to park those for a while and see how it plays out. At some point in the future I might like to do them, which is one reason why I was contemplating putting more into my funds as it gives me better liquidity.

galileangoatee

steampowered said:

If your goal is to clear the mortgage as soon as possible, statistically it is likely to be quicker to:
- Take the most mortgage possible, keeping a low enough LTV to get good rates.
- Put the spare cash into a S&S ISA.
- Sell your S&S ISA and use it to pay the mortgage, once your S&S ISA is as big as the mortgage.
... than it will be to make overpayments on the mortgage. 

The nice thing about an S&S ISA is that it gives you flexibility. If you want to use your ISA to clear the mortgage, or to put towards a more expensive property, you can do that. If you want to keep it as a pot for retirement and generating investment returns you can do that too.

This is a really interesting suggestion....  As a single person on a single (BR) income, I definitely value the flexibility as I don't know what will happen with my job or finances in the next 12 months let alone longer term, so locking money away into the mortgage or pensions feels like an unwise choice. I guess the only question is how comfortable I am with the risk of shoving money in the fund in case things get a lot worse economically and it drops significantly, whereas the mortgage is a defined thing.

I haven't really thought about specific goals beyond wanting to retire as early as I can, whilst still having a good lifestyle. With the maths I've done, I think it might be possible for me to clear the mortgage and retire by age 50 and live off my investments before my private pensions and state pension kick in (although, let's be frank, I'm unlikely to even get a state pension the way things are going! So I'm fully prepared for that too). I could clear the mortgage a lot quicker if I wanted to.... the earliest I could manage on my current salary would be age 45 I think, but this would affect how soon I could retire. The only assumptions I used for this were a 5% annual growth on investments and pension, and 0% on savings as currently inflation wipes out interest gains. I deliberately didn't include any anticipated salary rises, and kept the payments flat, to try and be conservative.

Given I have already made significant overpayments on the mortgage, do you think it might be worth seeking to make underpayments accordingly to try and extract the cash already paid, so that I can further invest in other options? It's an option a friend floated to me today when I mentioned the home improvements piece. I think there's a limit to how much underpayment I can request (I don't think I can take the whole amount back, for example, I think it's a set number of months of normal payments) but this would still be a few thousand quid I could put somewhere else whilst the mortgage rate is low.

BuildTheWall

galileangoatee said:

steampowered said:

If your goal is to clear the mortgage as soon as possible, statistically it is likely to be quicker to:
- Take the most mortgage possible, keeping a low enough LTV to get good rates.
- Put the spare cash into a S&S ISA.
- Sell your S&S ISA and use it to pay the mortgage, once your S&S ISA is as big as the mortgage.
... than it will be to make overpayments on the mortgage. 

The nice thing about an S&S ISA is that it gives you flexibility. If you want to use your ISA to clear the mortgage, or to put towards a more expensive property, you can do that. If you want to keep it as a pot for retirement and generating investment returns you can do that too.

This is a really interesting suggestion....  As a single person on a single (BR) income, I definitely value the flexibility as I don't know what will happen with my job or finances in the next 12 months let alone longer term, so locking money away into the mortgage or pensions feels like an unwise choice. I guess the only question is how comfortable I am with the risk of shoving money in the fund in case things get a lot worse economically and it drops significantly, whereas the mortgage is a defined thing.

I haven't really thought about specific goals beyond wanting to retire as early as I can, whilst still having a good lifestyle. With the maths I've done, I think it might be possible for me to clear the mortgage and retire by age 50 and live off my investments before my private pensions and state pension kick in (although, let's be frank, I'm unlikely to even get a state pension the way things are going! So I'm fully prepared for that too). I could clear the mortgage a lot quicker if I wanted to.... the earliest I could manage on my current salary would be age 45 I think, but this would affect how soon I could retire. The only assumptions I used for this were a 5% annual growth on investments and pension, and 0% on savings as currently inflation wipes out interest gains. I deliberately didn't include any anticipated salary rises, and kept the payments flat, to try and be conservative.

Given I have already made significant overpayments on the mortgage, do you think it might be worth seeking to make underpayments accordingly to try and extract the cash already paid, so that I can further invest in other options? It's an option a friend floated to me today when I mentioned the home improvements piece. I think there's a limit to how much underpayment I can request (I don't think I can take the whole amount back, for example, I think it's a set number of months of normal payments) but this would still be a few thousand quid I could put somewhere else whilst the mortgage rate is low.

I don’t know how you can request underpayment, unless you have been paying more through a separate direct debit that you want to cancel. Or the next time you re-mortgage, you can extend the loan duration to keep your payments to a minimum. 
If your LTV is less than 60%, overpayment doesn’t add significant value, compared to investing in a S&S ISA. Of course pensions are more tax efficient, but try to build up a few years worth of spending in ISAs before adding to pensions. 

Eco_Miser

galileangoatee said:

Clearing the mortgage quickly is certainly an attractive prospect, especially when interest rates are low to benefit from the high capital repayments

When interest rates are low, clearing your mortgage quickly is easier, but it is when interest rates are high that quicker clearing is most worthwhile, as you save more interest.

galileangoatee

BuildTheWall said:

I don’t know how you can request underpayment, . 

My mortgage lender allows this if you've previously made overpayments. Having done some research today, it seems to be limited to 6 months of repayments, so I'd only be able to get a few grand back.

galileangoatee

Eco_Miser said:

galileangoatee said:

Clearing the mortgage quickly is certainly an attractive prospect, especially when interest rates are low to benefit from the high capital repayments

When interest rates are low, clearing your mortgage quickly is easier, but it is when interest rates are high that quicker clearing is most worthwhile, as you save more interest.

Isn't the whole point to try and clear it quicker?

Whilst interest rates are low, repayments make the most difference to the overall balance as proportionally you're paying more capital and less interest... overpaying while the rate is low means there's less of a balance in future for when the rate goes up, which in turn means paying less on the lower future balance.

However, since the current mortgage rates are so very low (and likely to fall a little further), as steampowered said I'm probably better investing the money I would have otherwise overpaid, and then putting a lump sum into the mortgage in the future when rates are due to rise again. This doesn't seem likely to happen for several years with the way things are currently going, so the investments should make a decent return in that time.

As of today, I've increased my fund payments to £1,000 a month, and kept the mortgage the same. This still gives me a few hundred to play with, so I'll bolster my emergency fund a little more, and then take the next few months to see how things are going and figure out what I want to do with it. I could put it all in the fund - doing so would max out my ISA contributions. I could always do this anyway towards the end of March.

Eco_Miser

galileangoatee said:

Eco_Miser said:

galileangoatee said:

Clearing the mortgage quickly is certainly an attractive prospect, especially when interest rates are low to benefit from the high capital repayments

When interest rates are low, clearing your mortgage quickly is easier, but it is when interest rates are high that quicker clearing is most worthwhile, as you save more interest.

Isn't the whole point to try and clear it quicker?

No, if it were, this thread wouldn't exist.

galileangoatee said:

Whilst interest rates are low, repayments make the most difference to the overall balance as proportionally you're paying more capital and less interest... overpaying while the rate is low means there's less of a balance in future for when the rate goes up, which in turn means paying less on the lower future balance.

Normal repayments are part interest and part capital repayment, so as you say, there's more repayment when interest rates are low.

Overpayments are all capital repayment, so the interest rate doesn't affect this. They do affect future interest, but less so when rates are low.

Overpaying always means there's less of a balance in future. However investing in S&S instead may mean that you can pay off the mortgage, including interest you could have avoided by overpaying, and have something left over as well.