Should I overpay mortgage or save in stocks and shares ISA?

JadEle

I am buying my first house and about to take out a £450K mortgage over 30 years, fixed at 1.04% for five years. 

I expect at the end of the month to have £1500 leftover after all other expenses, my plan is to put £500/month into premium bonds to build savings for emergencies.

What is the best option for the remaining £1000/month, should I overpay the mortgage, and try to reduce the amount of interest owed...or should I put this into my stocks and shares ISA (currently has about £3K in and recently getting a return of 2-4%) and then at the end of the five year fixed period use the savings that have built up to pay off some of the mortgage then?

Would I save more money paying off the mortgage each month? or by building that money over five years in the ISA and paying off a lump sum?

Any input on what is the most sensible option would be great, I want to be smart with my money but my brain is frazzled.

Thanks!

Edi81

I assume you are a higher rate taxpayer. 

Are you maximising your pension contributions?

csgohan4

pensions/LISA/S+S ISA in that order after you have a good emergency fund. 


Some on here have taken it further and gone interest only mortgage with the excess invested in S+S ISA after pensions. Which to be fair, if you are low enough LTV, the interest rates are going to be low anyways. You can probably get yields of 5%  per year in S+S ISA now a days 

JadEle

Thanks both for your thoughts, the info above relates to the combined finances of my partner and I.

We both are paying into our workplace pensions but we could do additional contributions. Neither of us have a LISA, so we will certainly look into this.

From your responses do I take it, that you don't think overpaying the mortgage should be a priority?

csgohan4

JadEle said:

Thanks both for your thoughts, the info above relates to the combined finances of my partner and I.

We both are paying into our workplace pensions but we could do additional contributions. Neither of us have a LISA, so we will certainly look into this.

From your responses do I take it, that you don't think overpaying the mortgage should be a priority?

Depends on your situation. Don't underestimate the feel good factor of paying it off early, even though financially you may do better putting the spare cash into S+S ISA. It is the leap of faith you must consider. Some are too risk averse and just pay off mortgage, nothing wrong with either approach.

S+S ISA will take some research as you need to decide your own strategy and risk appeite. I would start on the monevator website for reading.

Passive investing Archives - Monevator

dimbo61

Maybe a mix of both ?
Overpay and save extra into your Pensions, LISA ( please get a Stocks and Shares LISA not a Cash one )
S&S ISA,s and regular savers paying more than 1.04%
Overpaying the mortgage once you have £16,000 in emergency savings is to me always a good idea.
Your putting down a good deposit to get a rate of 1.04% so what LTV have you got ?
Would overpaying by £1,000 each month. £60,000 over 5 years get you too 60% LTV ?
We have in the past used our overpayments to have a " Mortgage holiday " but we were nearly £10,000 ahead in our mortgage payments

JadEle

@dimbo61 yes with overpayments we would get to 60% LTV which will be good when it comes to remortgaging. For us it seems that setting up LISAs and doing some mortgage overpayments is a good route forward. Thanks for your help.

dimbo61

You can only use a LISA for 2 things

1 helping to save towards a deposit for your first home. 
You can't use the LISA for that as you already own a property.
2 Saving towards your retirement !
You need to read the Rules of an LISA very carefully
You can save £4,000 a year and get the government bonus of 25% £1,000.
You can pay into a LISA until your 50 and draw on the money/shares at 60

Thrugelmir

JadEle said:

Would I save more money paying off the mortgage each month? or by building that money over five years in the ISA and paying off a lump sum?

With a £450k debt owing. How comfortable are you with the risk you are taking and the curved balls that life throws up?  Are you prepared to suffer a capital loss after 5 years of investing in an ISA?  

london21

Depends on your risk appetite.
The safe option will be to overpay on your mortgage.
interest rates are very low at present, investment likely yield higher returns but investment can increase or decrease in value.  
Funds are a good place to start but do your research and due diligence. 

steampowered

Stocks & Shares ISAs are clearly a better option than overpaying the mortgage.

Stocks & shares have historically returned 7.5% on average over the long term, so that is what you would expect to get from a simple stock market tracker fund. That is clearly better than 1%. Plus you are building up a pot which generates tax free returns through the ISA. 

Increasing your pension contributions could be an even better option, especially if you are a higher rate taxpayer, since pensions generate both investment returns and tax relief. What is your current pension situation?

As a very general rule of thumb, most people should be contributing at least 15% of their income into their pension (including both employer and employee contributions) during their working life - so if your employer puts in 5%, you should put in 10%.