Overpay mortgage or save into LISA or Pension?

steampowered

I would suggest a diversified fund with a low fee, such as HSBC All Share Index. Possibly Vanguard Lifestrategy 100 if you don't mind the 25% UK weighting.

The "ready made" portfolios tend to just be a byword for higher fees.

Moneybox will charge higher fees than a standard provider, suitable for ease with getting started for lower amounts only but not for substantial amounts over a long period of time. You could consider iweb or interactive investor.

DiggerUK

parsnip88, as you recognise you are not average, would it be possible to now get you to consider the 'leeding obvious, I'm sure once you do it will be easy to get yourself grounded. I would add that nobody knows what interest rates will be going forward either.

Your both well off, you already have good pension provision, fair savings and 60k p.a.. So why are you ignoring the gorilla in the room?.....I am of course referring to your debt which as you know must be paid off at some point. 

I should declare I'm in the get rid of mortgage a.s.a.p. brigade; in your case a sensible plan should see you debt free in under 15 years. Make the mortgage your number one financial objective..._

grumiofoundation

parsnip88 said:

parsnip88 said:

steampowered said:

parsnip88 said:

In summary taking into account everyone's advice it seems it would be sensible to
potentially reduce my LTV in the short term by overpaying mortgage to take advantage of better mortgage offers after my 5 year fix is over.
invest in a s&s isa as it will be a better rate of interest than what my mortgage is and if needs be I can access the money for well anything life throws at me.
Out of our £60k combined I earn £20k as I only work 4 days so it might seem a good idea to pay in more to my pension so I pay less tax 

It sounds like you have a good idea of what you are doing so it all sounds very sensible.

Mortgage rates drop a fair deal once you get below 85% LTV, and drop again once you get below 80%. After that point you start encountering diminishing returns. it might be worth planning to get down to 85% or even 80% LTV by the end of your 5 year fix. You might get there by a combination of mortgage repayments and slight house price increases without needing much in the way of overpayments.

If you are a basic rate tax payer there is a tax saving from boosting your pension contributions, but not as significant as if you were a higher rate tax payer. Personally I'd prefer the S&S ISA route in case the money is needed before retirement (particularly if you might have children) but that's your call. 

thankyou, I'll do a few sums to see if in 5 years what my LTV will be.

in 5 years with no overpayments it will be down to 76.8% LTV so looks like overpaying will be a waste of time really consider I'm in a fix for 5 years. 

Overpaying (whether per month over the next 5 years) or in a lump sum near the end to get to the <75% LTV band would be worth looking at as interest rates generally drop when you cross into this band. 

Alexland

steampowered said:

I would suggest a diversified fund with a low fee, such as HSBC All Share Index. Possibly Vanguard Lifestrategy 100 if you don't mind the 25% UK weighting.

Do you mean All Share (UK) or perhaps their FTSE All World tracker?

Even at 76.8% LTV after 5 years it might still be worth using some of the spare money to overpay the mortgage as the best interest rates are available to those with around 60% LTV or less. Much depends where the property valuation is, in the eyes of the lender, at the time the deal ends. A balanced approach of overpaying, saving and investing generally gives a good result.

steampowered

Alexland said:

Do you mean All Share (UK) or perhaps their FTSE All World tracker?

Even at 76.8% LTV after 5 years it might still be worth using some of the spare money to overpay the mortgage as the best interest rates are available to those with around 60% LTV or less. Much depends where the property valuation is, in the eyes of the lender, at the time the deal ends. A balanced approach of overpaying, saving and investing generally gives a good result.

I mean the latter

I had a quick look on the MSE best buy mortgage comparison website, and assuming a £500,000 property with a 25 year mortgage, I found that the best available rates were as follows:
- 85-90% LTV = 2.74%
- 80-85% LTV = 2.12%
-75-80% LTV = 1.69%
-70-75% = 1.57%
-65-70% = 1.57%
-60-65% = 1.42%
--- down to 1.28% at the very lowest LTVs.

While the rate does continue going down, it seems that the returns you get from reducing your LTV diminish once you get down to below 80% LTV, which may factor into the decision as to how much to overpay the mortgage versus how much to put into S&S ISAs or pensions.

Alexland

steampowered said:

While the rate does continue going down, it seems that the returns you get from reducing your LTV diminish once you get down to below 80% LTV, which may factor into the decision as to how much to overpay the mortgage versus how much to put into S&S ISAs or pensions.

Unsure you can draw that conclusion from the data as the deals are very different in type, duration and fees.

It's like comparing small apples with large bananas located in different parts of the world.

- that 2.12% Fixed mortgage is for 24 months with £30 setup

- that 1.69% Variable mortgage is for 30 months with £1,023 setup

So by crossing the 80% boundary the headline rate goes down but you are paying an extra grand in fees and not getting the certainty of a fixed rate which is usually worth more to people (even if it has worked against them in recent years)

- that 1.42% Fixed mortgage is for 63 months has a £1,525 setup

So the 60%-65% doesn't seem to offer much reduction but then it's a much longer fix which is again worth more but then with a higher setup fee. What does this all tell us? Not really anything. It would need to be a comparison of similar deal types/durations/fees at a more accurate loan value to determine the optimum LTV point and even then the percentage could vary for each and the market could be different when the OP's deal ends.

grumiofoundation

steampowered said:

Alexland said:

Do you mean All Share (UK) or perhaps their FTSE All World tracker?

Even at 76.8% LTV after 5 years it might still be worth using some of the spare money to overpay the mortgage as the best interest rates are available to those with around 60% LTV or less. Much depends where the property valuation is, in the eyes of the lender, at the time the deal ends. A balanced approach of overpaying, saving and investing generally gives a good result.

I mean the latter

I had a quick look on the MSE best buy mortgage comparison website, and assuming a £500,000 property with a 25 year mortgage, I found that the best available rates were as follows:
- 85-90% LTV = 2.74%
- 80-85% LTV = 2.12%
-75-80% LTV = 1.69%
-70-75% = 1.57%
-65-70% = 1.57%
-60-65% = 1.42%
--- down to 1.28% at the very lowest LTVs.

While the rate does continue going down, it seems that the returns you get from reducing your LTV diminish once you get down to below 80% LTV, which may factor into the decision as to how much to overpay the mortgage versus how much to put into S&S ISAs or pensions.

Although the headline rate may not seen that different the effective interest rate on the overpayment amount needed to get into the next LTV band can be much higher - (obviously the lower the amount needed to make this jump the better the effective interest).

An overpayment of 1.8% to get from 76.8% to 75% will save 0.12% on the whole mortgage balance* - a de facto interest rate of 5% on this '1.8%'.

*assuming no difference in fees etc, based on the numbers posted above.

MaxiRobriguez

I'd be tempted to up the pension contribution slightly if you can afford it given the tax breaks it offers and because £184k mortgage on a joint salary of £60k isn't too bad.

Your 10% matched is reasonably good but you're starting from a lowish salary so you're only ending up putting in £4k annually. If you continue to contribute this level for the next 32 year and retire at 65 then you're pot will be about £220k (assuming you're pot is c.£15k at the moment) and will give you drawdown amount of about £10k a year. That might be enough for you with state pension included in a few years after (assuming it still exists) and with 8 years of teachers pension but it's not a life of luxury, albeit your partners income from what would be their full teacher pension certainly will help.

Upping pension contribution could also mean retiring a few years earlier... Might not be your plan to do so but life could dictate it a necessity, you never know.

parsnip88

MaxiRobriguez said:

I'd be tempted to up the pension contribution slightly if you can afford it given the tax breaks it offers and because £184k mortgage on a joint salary of £60k isn't too bad.

Your 10% matched is reasonably good but you're starting from a lowish salary so you're only ending up putting in £4k annually. If you continue to contribute this level for the next 32 year and retire at 65 then you're pot will be about £220k (assuming you're pot is c.£15k at the moment) and will give you drawdown amount of about £10k a year. That might be enough for you with state pension included in a few years after (assuming it still exists) and with 8 years of teachers pension but it's not a life of luxury, albeit your partners income from what would be their full teacher pension certainly will help.

Upping pension contribution could also mean retiring a few years earlier... Might not be your plan to do so but life could dictate it a necessity, you never know.

thanks I have decided to up it to 20% contribution so with my employer match that'll be 30% overall so an improvement 

Thrugelmir

The major downside of tying up funds in a pension is accessibility. When is your mortgage term due to end?  Nor do we know what the Chancellor has in store now or in the future.