LISA or mortgage overpayment

22225

Hello I'd appreciate your opinions. Sorry if this is the wrong forum...

I'm 42 but have a stocks and shares Lisa. I have a large ish mortgage around £300k, most is fixed for ten years at 2%.

If I have spare cash, should I overpay my mortgage to get it down? Its over 33 years (yes I know it's a long time).

Or should I invest in the stocks and shares Lisa, benefit from the 25% bonus and at 60 use it to pay off the mortgage ? Eg put what I would've used to pay down the morthage debt in overpayments into the Lisa?

Obviously the Lisa strategy is more of a risk but there is the government bonus.

Basically there used to be an argument I saw on mse about why people should invest in a tracker pension etc rather than make overpayments, but was that more relevant before when there was cheap money and quantitative easing/bull market? Eg is it thought that the stock market may never really recover ?

Or actually is it now potentially a very good time to invest for a 20 year timeframe ?

I know no-one knows but can anyone give their opinion please. At the moment I only put the minimum each month into my lisa and save the rest in cash savings accounts. Thank you

22225

Sorry I put this in pensions because it's about investing over 20 years.

22225

I also have a DB pension

Nebulous2

This is an argument that has ran here a lot, with devotees on both sides. Some people like the security of owning their home outright, some point to the returns investment has achieved over the years. If interest rates are up and investment returns are down the pendulum obviously swings towards paying off the mortgage. 

I'd start by considering what you want. Do you want to retire early? At what age? How much money would you need to live the lifestyle you want in retirement?  Then plan - what will it take to get there?

For me - I certainly wouldn't want to be paying a mortgage through to 75, whichever way I wanted to do it.  

I often look for a middle route, there is nothing to stop you doing a bit of both, for £100 available £50 to invest and £50 to the mortgage, or 60/40 or 70/30 - you get the point. 

22225

Ok thanks
 I just wondered which was the 'accepted wisdom' but I take it its arguable. Thank you

kinger101

The main points I note from your post are;

(a) your mortgage extends well into retirement
(b) your current interest rate is lower than some of the savings rates currently available.

What would concern me is what might happen at the end of the fixed term.  Your current repayments are around £1000 pcm I'm guessing, but could become near £1,750 pcm if for example the rate jumped to 6%.  If wage inflation doesn't make up the difference, that could make things difficult.  There's also a small risk that you'll be forced onto lenders SVR at the end of the term, because mortgage market has tightened.

For me, this means waiting until LISA availability (or indeed pension) is a much riskier approach. My approach would be

(a) make sure you have say six months of expenditure in an easy access savings accounts.

(b) save some money into regular ISA using fixed term to get better rate.  I don't know how much you can save each month, but at the end of 10 years, your current mortgage will be ca. 230K. You can use a mortgage calculator to do some what if scenarios re term and interest rate.

 Depending on the amounts you save, a non-ISA account may be suitable in the short term, but for basic rate taxpayers, interest above £1,000 is taxable.  

(c) You might still consider LISA (with say 100% stocks and shares tracker) provided you're making good headway with the cash savings.  But one should compare LISA v pension to determine which is optimal.

Ordinarily, I'm one of those which would say stuff the pension, but I think in this case, getting yourself mortgage free by retirement, and a more comfortable position at the end of the fix, is the right thing.  Plus you have the advantage that you've got a long term fix at a great rate.

22225

Thank you. Food for thought. Yes if mortgage rates went up it would be difficult. 10 years seemed like a long time but it's not a life time. Plus over 33 years we are not paying much off the debt each year so it's a bit depressing.

kinger101

I wouldn't look at it as depressing.  Early years of a mortgage are always slower in terms of capital reduction.

Positives are

You're not paying off someone else's mortgage (rent).
You've got a great fixed rate 
Inflation is likely to play a large role in eroding that mortgage over the next decade.

It was a case of recognising you need a plan for when the fix ends 

dunstonh

I also have a DB pension

And what are the additional pension arrangements on that?   Some can be a lot better than personal pensions and LISAs.  Some can be woefully obsolete.

Basically there used to be an argument I saw on mse about why people should invest in a tracker pension etc rather than make overpayments, but was that more relevant before when there was cheap money and quantitative easing/bull market? Eg is it thought that the stock market may never really recover ?

Who thinks the stock market will never recover?  Which stock market are they referring to?
Only one has had that issue.  Japan.  Prior to its peak, it had boomed significantly very quickly and way above the long term average.    There is always a risk when you enter investments that have had recent performance that is way above their long term average.       Most markets are pretty much in line with their long term average following recent falls.

Using a tracker probably isn't the best idea (you dont say what area you would be tracking but it would either be too low risk or too high risk as they dont offer much in between).   A multi-asset fund is typically more suitable for most people.   Although you may have the risk tolerance, knowledge and understanding and correct behaviour to invest in high risk assets.

Mortgage vs investing is a bit of an FAQ.  However, your scenario is different to most as you have a mortgage term that goes well into retirement.     Looking to bring that end date down is common sense.    You can achieve this by overpaying the mortgage or by putting money aside.   In reality, a combination of things is likely to be best.    

Currently, your mortgage is dirt cheap.   So, investing would statistically be the more viable option but a small overpayment to the mortgage should also take place.  £100pm would knock 4 years off the mortgage.   (£100 brings it down to 29 years.  £150 brings it to 28 years. £200 to 26 years).  26 years would match state pension age.   I would aim to do that and keep the LISA for your retirement rather than debt clearance (assuming you are not a higher rate taxpayer as a pension would be better than LISA in that case)

Nebulous2

You've said 'most' is fixed at 2%. What is the rest at? 

Can you pay off the higher rate penalty-free or would you be limited in how much of it you can pay off? 

NedS

kinger101 said:

I wouldn't look at it as depressing.  Early years of a mortgage are always slower in terms of capital reduction.

Positives are

You're not paying off someone else's mortgage (rent).
You've got a great fixed rate 
Inflation is likely to play a large role in eroding that mortgage over the next decade.

It was a case of recognising you need a plan for when the fix ends 

Agreed. You could save any extra cash at zero risk achieving 4-5% return versus your 2% 10 year fixed rate deal, and allow inflation to devalue your debt over that time (combined with your 2-3% marginal savings rate over the 2% fix).