Stocks & Shares ISAs vs Overpaying Mortgage

Alan2020

Hello MSE's, 
I am tempted to go for either the Vanguard or Welthify stocks and shares ISA, £500 starting and £100 a month deposit for the next 10 years.  The other alternative would be to overpay the mortgage of current value of £390K fixed at 2.17% for the next 2 years (paying ~£1400 pcm) . Which is the best strategy and if S&S ISAs are Vanguard or Wealthify any good?
Thanks

DireEmblem

If you do wealthify, see if you can get in on the MSE offer as it is a good head start.  If not, then I would pick vanguard and an all world tracker fund.

10 years is probably a long enough time to ride out some high/lows and give a better return hopefully than the interest you will save on the mortgage.

The one thing I would say, is that you generally get the best mortgage rates with less than a 60% LTV.  2.17% seems quite high for a 2 year rate, but that depends when you 'fixed'.  For comparison, mine is 1.41%.  It might be worth targeting 60% LTV for when you renegotiate your mortgage if not already there?

Thrugelmir

Be a double whammy if interest rates were to rise and markets fall. LTV on the mortgage is something to be considered, if overpaying would be beneficial. . 

george4064

1. What’s your current mortgage LTV? (Key point is if you made OPs would it bring your LTV down to a better ‘sleeve’ and hence shift you onto a lower interest rate?)

Compare your mortgage rate vs current savings rate, clearly if your mortgage rate was as high as like 5% then I think we’d all know what is the best option! However it’s down to your personal preference and risk tolerance.

N1AK

Alan2020 said:

Hello MSE's, 
I am tempted to go for either the Vanguard or Welthify stocks and shares ISA, £500 starting and £100 a month deposit for the next 10 years.  The other alternative would be to overpay the mortgage of current value of £390K fixed at 2.17% for the next 2 years (paying ~£1400 pcm) . Which is the best strategy and if S&S ISAs are Vanguard or Wealthify any good?
Thanks

Both likely good options so don't let the following put you off; the answer is rarely simple.

If you can't afford to have the value of the investment fall in the short/mid-term then a S&S ISA is unlikely to be your best option; in that situation paying off the mortgage removes the investment risk. However if your investing over a longer term and can accept some risk then S&S returns have historically beaten the interest rate on your mortgage.

If you really don't want to spend a fair bit of time reading investment advice, which I can understand, then you're generally best using any additional money in the following order:

1. To pay off any high interest debt (credit cards for example)

2. To build up an emergency fund that you can access quickly. The ability to make unexpected purchases without having to resort to expensive lending is financially beneficial. At the moment premium bonds (with a 1% return) aren't a bad home for this, but an easy to access cash ISA would be fine if you really want to lock in the allowance for future use.

3. Now you're into saving and investment territory. Looking at just your two (good) options, consider your risk tolerance and time frame. If you incline to low risk and/or may need the money mid-term < 10 years then the mortgage is probably the best option; otherwise the S&S.

N1AK

george4064 said:

1. What’s your current mortgage LTV? (Key point is if you made OPs would it bring your LTV down to a better ‘sleeve’ and hence shift you onto a lower interest rate?)

Mortgages don't move to different rates because of overpayment; the OP would have to remortgage to avail themselves of a lower rate; and it's almost certainly not worth them doing that until the end of the fixed term as any arrangement costs would outweigh the saving. Given that any investments in an ISA could be withdrawn and used when remortgaging neither options precludes using the money saved for this if desired.

Thrugelmir

N1AK said:

george4064 said:

1. What’s your current mortgage LTV? (Key point is if you made OPs would it bring your LTV down to a better ‘sleeve’ and hence shift you onto a lower interest rate?)

Mortgages don't move to different rates because of overpayment; the OP would have to remortgage to avail themselves of a lower rate; and it's almost certainly not worth them doing that until the end of the fixed term as any arrangement costs would outweigh the saving. Given that any investments in an ISA could be withdrawn and used when remortgaging neither options precludes using the money saved for this if desired.

Markets are volatile. Value at specific future date can never be guaranteed. 

Alan2020

DireEmblem said:

If you do wealthify, see if you can get in on the MSE offer as it is a good head start.  If not, then I would pick vanguard and an all world tracker fund.

10 years is probably a long enough time to ride out some high/lows and give a better return hopefully than the interest you will save on the mortgage.

The one thing I would say, is that you generally get the best mortgage rates with less than a 60% LTV.  2.17% seems quite high for a 2 year rate, but that depends when you 'fixed'.  For comparison, mine is 1.41%.  It might be worth targeting 60% LTV for when you renegotiate your mortgage if not already there?

Thanks for the tip.
It was fixed 5 years, 2 more left on the fixed term of 80% LTV, should be about 60% LTV due to improvements on the home - it was a wreck when we got it.
Thanks

N1AK

Thrugelmir said:

Markets are volatile. Value at specific future date can never be guaranteed. 

Good job I didn't say markets weren't volatile, or that values at specific future dates could be guaranteed then... if you think the OP shouldn't be considering S&S, as they said they were in the original post, as an option for a 10 year plan feel free to take it up with them.

george4064

N1AK said:

george4064 said:

1. What’s your current mortgage LTV? (Key point is if you made OPs would it bring your LTV down to a better ‘sleeve’ and hence shift you onto a lower interest rate?)

Mortgages don't move to different rates because of overpayment; the OP would have to remortgage to avail themselves of a lower rate; and it's almost certainly not worth them doing that until the end of the fixed term as any arrangement costs would outweigh the saving. Given that any investments in an ISA could be withdrawn and used when remortgaging neither options precludes using the money saved for this if desired.

Yep, I’m aware of that. I should’ve explained in more detail;
Overpayments may bring your LTV down such that when you are next able to remortgage you may have cheaper interest rates available to you due to the lower LTV.

MX5huggy

The alternative is putting the extra in to a pension. The tax relief goes along way to helping ensure it beats paying off the mortgage.