What is the most optimal way to become mortgage free? 24 January 2021 at 5:05PM in Mortgage-free wannabe 7 replies 171 views

idkwhattosay

I have a standard 25y mortgage with a 5y initial fixed period. Is it better to

1) overpay as max allowed by t&c every year

2) not overpay and put the savings down as a deposit on remortgage

As I understand remortgaging, there's no limit to what you can deposit when you remortgage so would it make more sense to save as much as possible in 5y time and then use that as a deposit when the time comes to remortgage? Or do people tend to overpay annually and chip away slowly like that?

I'm not quite clear on overpaying, does that decrease the monthly payment amount but the length of the mortgage stays the same or is it the other way around?

I'm interested to hear from people who are close to being mortgage-free or already are, what have you done that worked?

TimSynths

My "overpayments" go into a S&S ISA. Mortgage rate 2.6%, ISA + 20%. When the ISA balance = the mortgage balance I'll be mortgage neutral and can then decide what I want to do.

idkwhattosay

TimSynths said:

My "overpayments" go into a S&S ISA. Mortgage rate 2.6%, ISA + 20%. When the ISA balance = the mortgage balance I'll be mortgage neutral and can then decide what I want to do.

But you have to pay tax on that don't you?

TimSynths

idkwhattosay said:

TimSynths said:

My "overpayments" go into a S&S ISA. Mortgage rate 2.6%, ISA + 20%. When the ISA balance = the mortgage balance I'll be mortgage neutral and can then decide what I want to do.

But you have to pay tax on that don't you?

Of course not, its in an ISA the whole point of them is they are tax free.

TimSynths

"A Stocks and Shares ISA is an account that lets you invest free from capital gains and income tax. By saving on tax more of your money stays in your pocket."

Stocks and Shares ISA | 2020-2021 Investments | Vanguard UK Investor (vanguardinvestor.co.uk)

idkwhattosay

TimSynths said:

Of course not, its in an ISA the whole point of them is they are tax free.

Isn't there a limit to what you can earn every year tax-free? Out of curiosity did you model this formula? I understand we're all in different financial situation so there's no one solution for everyone, I'm just wondering whether I should consider the same approach.

The thing here is that you are putting your savings into an S&S ISA, so you are not decreasing your mortgage at all, you are paying your debt to the lender in full, so you will be at the mercy of remortgaging deals or accepting SVR at the end of the fixed period. How long will it take to save enough money in an ISA to pay off the mortgage? If it's a few years then I can see why it would be worth it, but if it takes 15y then in the mean time you will have being paying off interest on the mortgage. When you offset it against the ISA, is it worth it compared to taking that money gradually and putting it into overpayments or remortgaging?

caeler

Both. I’ve been overpaying max allowed and saving hard. It’s quite personal and it depends on all of your other commitments too. 

TimSynths

idkwhattosay said:

TimSynths said:

Of course not, its in an ISA the whole point of them is they are tax free.

Isn't there a limit to what you can earn every year tax-free? Out of curiosity did you model this formula? I understand we're all in different financial situation so there's no one solution for everyone, I'm just wondering whether I should consider the same approach.

The thing here is that you are putting your savings into an S&S ISA, so you are not decreasing your mortgage at all, you are paying your debt to the lender in full, so you will be at the mercy of remortgaging deals or accepting SVR at the end of the fixed period. How long will it take to save enough money in an ISA to pay off the mortgage? If it's a few years then I can see why it would be worth it, but if it takes 15y then in the mean time you will have being paying off interest on the mortgage. When you offset it against the ISA, is it worth it compared to taking that money gradually and putting it into overpayments or remortgaging?

You can pay £20k a year into an ISA, if the balance in it grows to a £million its all still tax free. I'm currently saving approx £3k per year but rather than reduce the balance on my mortgage which only costs 2.6% i'm choosing to gamble/bet on the stock market which will grow more than 2.6% (currently +20% since I started in June) there fore I will be able to pay the mortgage off earlier than if I was just putting the same amount direct into the mortgage. Also has the advantage of the money being available should I need it for anything else. I only have 7 years left to go and 4.5 years on my current fix, rather than have to re-mortgage or take a new deal I would like to be in the position to pay it all off- should I choose to, might blow it all on a Porsche though but I'll have the choice.