Overpayment v S&S ISA

geocatwest

I know this question has been asked many times in the past and I know it is down to personal choice.
1. I have a mortgage, fixed at 1.74% at the moment. My mortgage comes in at just over £400 a month. I have been putting into overpayments at around £500 a month.
2. I also have a Vanguard stocks and shares ISA  - now I know, 'traditionally' the rate of return in this is likely to be higher. I put around £200-300 respectively away in different ETF's. 
Question  - I'm in my late 20's and have the comfort of doing both overpayments and investing.  I'm thinking of being more savvy and would like to think about maximising my returns for paying off the mortgage much earlier, as you can make a case that putting overpayments into a mortgage (whilst you may see your value go down quicker, you do not gain any interest from it. If I were to make mortgage overpayments less often, and use that capital to put directly into the S&S ISA - let's say, £500 that I would have put away for overpayments  + the existing £200 a month reserved for S&S ISA - totalling £700 a month - let's say that £700 grew 3-5% over 3 months, are there any  'consequences' to taking out money from the S&S ISA on a 'regular' basis, i.e. 3-6 month intervals and then putting it into the overpayment (i.e. interest gained from that period of time)
Am I correct that generally with a S&S ISA you should keep it tucked away long term without having to withdraw?

eskbanker

geocatwest said:

let's say that £700 grew 3-5% over 3 months

That's not a particularly realistic assumption to be making - it may happen in some three month periods, but you also need to be prepared for such periods in which you'll lose money.  Investing is generally a long term activity so on average you ought to make a net 3-5% annually over many years but your mortgage repayment plan would need to factor in the volatility.

geocatwest

eskbanker said:

geocatwest said:

let's say that £700 grew 3-5% over 3 months

That's not a particularly realistic assumption to be making - it may happen in some three month periods, but you also need to be prepared for such periods in which you'll lose money.  Investing is generally a long term activity so on average you ought to make a net 3-5% annually over many years but your mortgage repayment plan would need to factor in the volatility.

Hi - yes I'm fully aware and only gave a hypothetical example - my question is pertaining to whether there are any drawbacks from withdrawing from a stocks and shares ISA on a 'regular basis?'

eskbanker

geocatwest said:

eskbanker said:

geocatwest said:

let's say that £700 grew 3-5% over 3 months

That's not a particularly realistic assumption to be making - it may happen in some three month periods, but you also need to be prepared for such periods in which you'll lose money.  Investing is generally a long term activity so on average you ought to make a net 3-5% annually over many years but your mortgage repayment plan would need to factor in the volatility.

Hi - yes I'm fully aware and only gave a hypothetical example - my question is pertaining to whether there are any drawbacks from withdrawing from a stocks and shares ISA on a 'regular basis?'

Just the volatility really, i.e. you can't rely on there being growth over multiple short term periods, so you'd put your £2,100 in over three months and, depending on how you invest it, it might be worth anywhere between, say, £1,000 and £2,500 at the end of the quarter (crashes tend to be much steeper than recoveries).

DireEmblem

Whats your loan to value rate?  The reason I ask, is that I believe the best rates can be achieved when this is 60% or less and you might be better off getting to this level first if not already there.

Lets say your outstanding mortgage is 120k at 1.74%, and < 60% LTV you could get a rate of 1.44%.  That 0.3% less interest payable across the full amount of 120k is £360 of interest each year.

Now you are putting away 200-300 a month into ETFs.  Lets just say you've done that for a year and currently have £3600.  To be better off with your investments, it has to gain 10% in value at least.

Hope I have explained this correctly as I think you might be better looking at this option first.  Then, the investing part comes into play depending on how long you are willing to invest for.

Thrugelmir

geocatwest said:

2. I also have a Vanguard stocks and shares ISA  - now I know, 'traditionally' the rate of return in this is likely to be higher. I put around £200-300 respectively away in different ETF's. 

There's no traditionally higher rate of return as far as stock market investing is concerned. Pick the wrong market (ETF) and the result could be disappointing. 

geocatwest

DireEmblem said:

Whats your loan to value rate?  The reason I ask, is that I believe the best rates can be achieved when this is 60% or less and you might be better off getting to this level first if not already there.

Lets say your outstanding mortgage is 120k at 1.74%, and < 60% LTV you could get a rate of 1.44%.  That 0.3% less interest payable across the full amount of 120k is £360 of interest each year.

Now you are putting away 200-300 a month into ETFs.  Lets just say you've done that for a year and currently have £3600.  To be better off with your investments, it has to gain 10% in value at least.

Hope I have explained this correctly as I think you might be better looking at this option first.  Then, the investing part comes into play depending on how long you are willing to invest for.

When I started my mortgage last year I secured it at just over 60% LTV. I have made around £6000 in overpayments (capped at 10% for 3 years) so should be under 60% by now.
Yes, if I were to withdraw from the vanguard once per year to capitalise on the overpayment - so £3600 and (hopefully) any profit gained from it.

Eco_Miser

geocatwest said:

 If I were to make mortgage overpayments less often, and use that capital to put directly into the S&S ISA - let's say, £500 that I would have put away for overpayments  + the existing £200 a month reserved for S&S ISA - totalling £700 a month - let's say that £700 grew 3-5% over 3 months, are there any  'consequences' to taking out money from the S&S ISA on a 'regular' basis, i.e. 3-6 month intervals and then putting it into the overpayment (i.e. interest gained from that period of time)
Am I correct that generally with a S&S ISA you should keep it tucked away long term without having to withdraw?

Yes, ideally you never withdraw from an ISA until the event you've been saving/investing for occurs.

• You can't replace the withdrawn money (though at the £2,400-3,600 pa rate you're suggesting this doesn't matter.
• You will incur costs buying and selling your investments, unless your platform doesn't charge them, in which case you'll be paying a different way.

You appear to be suggesting taking a series of short term punts on the market.  This rarely works.

Either take the security of overpaying your mortgage each month, or a long term punt on the market, or both.

You could invest in your ISA until your mortgage fix ends, then take out enough to reduce your LTV sufficiently to get a better rate for your next fix.

Alexland

geocatwest said:

When I started my mortgage last year I secured it at just over 60% LTV. I have made around £6000 in overpayments (capped at 10% for 3 years) so should be under 60% by now.

Well if you are at a good enough LTV to have access to the best interest rates the most 'savvy' thing to do would be to invest in higher likely growth rate S&S assets efficiently with government help via your pension or a Lifetime ISA (depending on your tax circumstances) and not bother overpaying the mortgage. Or as an extreme, and not without additional risk, convert to long duration interest only and repay it from your pension tax free lump sum or when you can get access to your Lifetime ISA without penalty. That is assuming you don't need to build equity in the property to support any future upgrades.

geocatwest

Eco_Miser said:

geocatwest said:

 If I were to make mortgage overpayments less often, and use that capital to put directly into the S&S ISA - let's say, £500 that I would have put away for overpayments  + the existing £200 a month reserved for S&S ISA - totalling £700 a month - let's say that £700 grew 3-5% over 3 months, are there any  'consequences' to taking out money from the S&S ISA on a 'regular' basis, i.e. 3-6 month intervals and then putting it into the overpayment (i.e. interest gained from that period of time)
Am I correct that generally with a S&S ISA you should keep it tucked away long term without having to withdraw?

Yes, ideally you never withdraw from an ISA until the event you've been saving/investing for occurs.

• You can't replace the withdrawn money (though at the £2,400-3,600 pa rate you're suggesting this doesn't matter.
• You will incur costs buying and selling your investments, unless your platform doesn't charge them, in which case you'll be paying a different way.

You appear to be suggesting taking a series of short term punts on the market.  This rarely works.

Either take the security of overpaying your mortgage each month, or a long term punt on the market, or both.

You could invest in your ISA until your mortgage fix ends, then take out enough to reduce your LTV sufficiently to get a better rate for your next fix.

My LTV was just over 60% when I bought my property - knowing this information - would this work to put take out the value - the 2400-3600 pa rate (hopefully) gained from the S&S ISA - once per year or to do a mixture of both stocks and shares and overpayments each month?

Eco_Miser

Taking money out of the ISA once a year is a bit better than taking it twice, but not much. I suppose you could take some out when the market is high, to crystallise your gains.  Really, the choice is yours.

Personally, I didn't overpay the mortgage until it was small enough I could pay it of completely from the cash emergency and provisional funds I'd got (and hope I didn't need the cash before I'd replaced it). But that was long ago, and interest rates and investment returns were different then.