ISA/Stocks/Savings/Mortgage? Advice needed.

B3AR

Good evening, 

A bit of background, I've just finished paying off a large amount of consumer debt and spanking money on holidays and other non essential things. I am 35 and need to start saving for my future. I have a mortgage £165,000 @ 3.14% (~£175,000 equity) fixed until December 2027 the only other debt I have is a car lease @ £600 per month which ends in May. I have ~£10,000 and am looking to save an additional £1,650 per month. 

The problem I have is that I've been in debt for such a long time that I have never really paid any attention to planning for the future and although I know I need to do it I don't know the best way of going about it. I am not looking to be spoon-fed but if anyone could give me some advice on what and where I should be spending my time researching, it would be greatly appreciated. 

What I have so far is...

Option 1
Use the additional savings to pay off my mortgage over the next 6 years. This saves me around £56,000 in interest over the course of the 25 year mortgage. 

Option 2
Invest the £10,000 and £1,650 per month into an S&P500 index. The historical growth is ~8% per year, which is greater than the mortgage rate of interest and the money is available to withdraw should I need it in an emergency. 
- What are the pitfalls with this? (other than fluctuations in the market) It sounds too good to be true. 
- What taxes would I have to pay on this? 
- Is there a tax efficient way of doing this? If so; would the money still be accessible? 

Option 3 
Use the additional savings to pay down the mortgage until the fixed term ends, strip the equity out of the property and use the money to purchase 2-3 buy to let properties. 

As I said, I don't really have much of an idea about the above options so any advice and direction for research will be really helpful. 

jimjames

You've missed an option 4 - pay into pension.

Really depends on priorities and what you already have as provision

BTW Investments are not too good to be true but are also not in a straight line. How would you feel about a 40% drop even if the average over 20 years is 8%?

B3AR

Thank you for taking the time to reply. 

Am I right in saying that if I invest the money into a pension that the 'fund' is invested much like it would be in something like an S&P 500 index but isn't accessible should other opportunities present themselves? As I said I am new to 'planning for the future' could you explain what advantages paying into a pension have over the other options please?

Also; with regards to your comment about the 40% drop, has that ever happened? If we are talking about investing over 20 years surely we must have to listen to the math and take the average? 

george4064

What pension(s) do you have? What’s the total value of them? How much are you contributing per month to them? Do you work for a company or are you self employed?

Read up on the basics of pensions here: https://www.moneysavingexpert.com/savings/discount-pensions/

El_Torro

If you're going to invest, either in a pension or a Stocks & Shares ISA I wouldn't put it all in the S&P 500. Better to put it in a global tracker or multi asset fund. 

If you're going to overpay your mortgage it makes sense to put the money in savings for now. Your mortgage interest rate is relatively low, you can make more money by having money in savings and making a big overpayment at the end of your fixed rate. This could change of course, depending on what happens to bank savings interest rates. 

The right answer for you is likely to be to: Put some money aside for mortgage overpayments, put some money in your pension and put some money in Stocks & Shares ISAs. It doesn't need to be an all or nothing approach. We can't say much more than that now, since you haven't given a lot of details on your financial situation and goals for your money.

VikingFjordIFA

As @El_Torro says, wait until the end of the fix before overpaying on the mortgage. You will get better returns in savings now. 

When remortgaging, you may only get 5 or 6% interest rate, so the effective "return" on every £ you overpay the mortgage is 5-6% (what you don't have to pay in interest, every £ saved is a £ earned). This is risk free return, as opposed to any stocks & shares investment however low-risk or diversified.

So as an IFA I would have recommended you:

1. Put the money in a fixed term savings account until your fixed rate mortgage comes to an end (December 2027) 
2. In December 2027, use the balance in this savings account to pay down on the mortgage, saving you mortgage interest on this amount (your risk-free return).

This would make your IFA no money (unless you use them for your remortgage!), but be the right thing to do.

One proviso, check the mortgage rate you can get in December 2027. If it is very low, you may be better off investing the money, taking into account the risk (investments may go up as well as down).

Good luck!

Albermarle

B3AR said:

Thank you for taking the time to reply. 

Am I right in saying that if I invest the money into a pension that the 'fund' is invested much like it would be in something like an S&P 500 index but isn't accessible should other opportunities present themselves? As I said I am new to 'planning for the future' could you explain what advantages paying into a pension have over the other options please?

Also; with regards to your comment about the 40% drop, has that ever happened? If we are talking about investing over 20 years surely we must have to listen to the math and take the average? 

A DC ( defined Contribution ) pension, is really just like other investment accounts, except there are tax benefits.
This is mainly that you receive tax relief on contributions. The downside is that the money can not be accessed until your late Fifties. If you have an employer they have to offer a workplace pension and also contribute to it themselves, so this is free money. So normally a pension is the best way to save for retirement/later life for most people.

Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

jimjames

B3AR said:

Also; with regards to your comment about the 40% drop, has that ever happened? If we are talking about investing over 20 years surely we must have to listen to the math and take the average? 

Yes it has happened many times including in 2020. Long term things should rise but there is no guarantee. The Japanese stock market still hasn't regained the highs from the late 1980s.

Doctor_Who

jimjames said:

B3AR said:

Also; with regards to your comment about the 40% drop, has that ever happened? If we are talking about investing over 20 years surely we must have to listen to the math and take the average? 

Yes it has happened many times including in 2020. Long term things should rise but there is no guarantee. The Japanese stock market still hasn't regained the highs from the late 1980s.

Significant drops have happened several times this century. Never pleasant when your investments drop 30-50% in value! That is why during the accumulation phase you just ignore it (or add to your investments) and during the drawdown phase you should have several years of cash reserves so you don't need to sell investments. Remember that you only crystallise the loss if you sell, otherwise it's a 'paper' loss that will likely recover.

dunstonh

Am I right in saying that if I invest the money into a pension that the 'fund' is invested much like it would be in something like an S&P 500 index but isn't accessible should other opportunities present themselves? 

Pensions and ISAs share the same access to circa 30,000 different types of investments.

Also; with regards to your comment about the 40% drop, has that ever happened? If we are talking about investing over 20 years surely we must have to listen to the math and take the average? 

2000-2002 drop of around 43%. 
2008 drop of around 45%.
2020 drop of around 35%.

The historical growth is ~8% per year

Average over the long term including a period when the US was closer to being an emerging market rather than a mature market.  Plus, you are not factoring exchange rate into it.

For example, UK investors investing in 2000 were in a negative position 10 years later.