one off vs lump overpayment - to invest or not to invest (S&S ISA)?

aoleks

hi all,

long story short, we started paying our mortgage this month. the plan was always to overpay the mortgage by £1000 every month, reducing the duration by around 19 years. in fact, I made the first overpayment yesterday (payment date on the 1st, overpayment date on the 1st, interest starts from the 1st, so most efficient way of doing it).

I also have a vanguard S&S ISA where I recently started investing some money. £500 one off + £100 re-occurring, the minimum required until I make up my mind how much to invest and what to invest in.

what I would like to ask if whether overpaying a lump sum after, let's say, 24 months (£24k) will achieve exactly the same saving as overpaying £1000 monthly for 24 months. if the answer is yes, I'd probably be better off investing the £1000/month in my ISA and repay not £24k after 2 years, but £24k + returns. on top of that, we have savings of around £25k, so we could top-up the ISA to the maximum £20k yearly limit, to maximise the return.

according to the calculator on this website, paying off £24k after 2 years reduced the mortgage to roughly the same as overpaying monthly, there's a ~£600 difference. as returns are not likely to be huge, I'd rather go for the safer option unless there's something I'm missing.

any advice?

steampowered

Mortgages accrue interest daily. Overpaying monthly will reduce the interest you pay, as compared to paying 24 months at the end.

Of course the amount of interest you save on the mortgage will be less than the return you would have got on the mortgage.

If you want to clear your mortgage over a timeframe like 19 years, you will do that faster by investing into an S&S ISA; and then paying off your mortgage when your S&S ISA matches the size of your mortgage.

[Deleted User]

Obviously, if you overpay £1000 mortgage monthly you'll pay less interest than if you pay £24k as a lump sum off after two years.

Will the income derived from the lump sum invested during the 2 year period outweigh the extra interest paid? Depends entirely on your interest rate and the returns your investment makes! The "safe" option is to pay the mortgage down monthly and you'll know in advance what you save.

The fun (or scary) option is to gamble on stock market returns being higher than the interest rate costs. However it's very random over a 2 year period. You should normally invest with a 10 year horizon so if you invest after 2 years you'll probably have something like (to pick a random figure) a 25% chance of losing a significant chunk of your money. If that happens you might have to wait another 5-10 years before (historically speaking) you've made back your losses. Does that sound like something you'd enjoy? If so: go for it! Otherwise, monthly repayments.

P1Fanatic

With mortgage rates so low the saving between monthly and final lump sum over 2yrs is not going to be massive unless you have a huge mortgage (which it doesn't sound like you have with £24k reducing the term by 19yrs). But investing in S&S you have no guarantee of where your balance will be in 2yrs. For such a short timeframe I would go with the overpayments as you just don't know what will happen within the 2 years. Or you could hedge your bets and split it i.e. £500 overpayment and £500 ISA. But there is something nice seeing big chunks go off your mortgage and hitting those big milestones heading towards paying it all off.

I assume you have checked the overpayment terms on your mortgage as can usually be around 10% pa max of the starting balance that year and if you go over that there are penalty fees.

Albermarle

I'd probably be better off investing the £1000/month in my ISA and repay not £24k after 2 years, but £24k + returns. on top of that

You  have to take account in your planning that your S&S investments could have gone down after two years.

The longer you leave them , the more likely you will see a positive return . Basically your two year time frame is too short.

You could hedge your bets and overpay the mortgage and invest in S&S at the same time . £500 per month each ?

aoleks

for the record, the £24k would not reduce the mortgage by 19 years. the £24k is the £1000/month saved for 2 years, the duration of our 2 year fixed term. to reduce the mortgage by 19 years, I'll need to overpay £1000/month for 16 years, should the rate stay at 1.94% as it is now.