Advice needed for whether to overpay mortgage or save money in ISA

Wanderingchook

Good Morning Everyone

I would really appreciate some help, I am not sure I have chosen the right category sorry.

My partner and I bought a property at the start of the year. We were lucky to lock in a good interest rate of 3.42% for 5 years. The current mortgage amount is around £146600 and have 34 years left on the mortgage. I have recently been promoted at work and now have some disposable income that I need to make a decision on how to invest it. I currently keep my spare savings in an account earning 3%. The amount I have saved for a long time and am happy to invest is around £20,000. I have recently opened a 1 year fixed ISA which can earn 5.85%, higher than my easy access savings account but it will be locked away for a year. I know I can only invest the £20000 into the ISA in the tax year, but I am not sure whether to use some of this money to instead overpay my mortgage. I can only pay off 10% of the outstanding mortgage, so around £14,000 for this year.

I have read over and used the MSE mortgage overpayment calculator, but the issue I'm having is whether to invest the money into an ISA for a year on the higher interest rate (5.85%) or over pay the mortgage as we will then not be paying interest on the amount we overpay. To me, even though the interest on the mortgage is lower, does it not make sense to overpay it because we have a long time left on the mortgage  (34 years) and not a lot of principal in the property yet.


This is my first time posting on here, so not sure if I am doing it correctly, but would really appreciate your input/advice. If you need any more information please feel free to ask.

thanks 

W.

LadyWithAPlan

Do you have more than the £20k you could put in the  isa which is tax free? As I  am unsure why you would need to pay interest on your savings ? Is it 40% at HR. ? 

If so it probably makes things more equal 
 

My questions are 
do you have an emergency fund separate as having access to cash is always sensible even if you lost interest on withdrawing a fixed isa?

if you are a HR tax payer it’s best to put extra into pension or start a SIPP as well -tax advantages are huge - vanguard do a great lowest fee one but you can only invest in their funds but those are great anyway 
Some on here do that and plan to use the lump sum to pay off mortgage but depends on your age 

there is also the idea of peace of having a lower LTV as well as being able to get a better rate in 5 years  which is also worth a lot - and gives you security and freedom 
Plus using your 14k balance this year without extra charges is v helpful 

Personally I would split the money into OP, part isa and also bump up pension - maybe lump sum now into mortgage to see the effect which would also motivate you to monthly budget to get it down eg say £10k then split remaining to fixed isa and extra pension 
Then also have a standard OP each month as a round up to your monthly DD so you still can see the mortgage come down to that 14k limit this year 

if you are not married then please decide now in signed paperwork on if you split up who is getting what including if one person is paying more OP than the other - Watty on here had a nightmare with this as she OP loads rather than adding to her pension  and got really messed over .. 

final thought - Dave Ramsey suggests once one is debt free to have a 3-6 month Enerhency fund then 15% of your joint income into retirement (excluding any company contributions) and then the major focus on paying done the mortgage as the big goal with excess cash - alongside doing some investing for kids 
of course here in UK college isn’t as expensive and I don’t think they have such a good pension tax break as we do 
it’s not a bad guideline though 

main great thing is you are focused on this and paying attention 
I do think having a monthly budget and a goal to be OP the mortgage every month (even if you have more saved than the each year in a separate pot so as soon as each year starts anew with your reduced limit you can then pay it off in one slug and get the maximum benefits from your OP 

Wanderingchook

Hi there LadyWithAPlan

Thank you for your response I really appreciate it.

Sorry if that first part of my question was a bit confusing, I am earning 3.03% on my savings currently. Also Currently living in Scotland and paying the HR tax of 42%

Yes I do have an emergency fund which I have access to if needed. The funds that I am looking at investing is purely savings that I have built up.

The pension/SIPP is the part I am a bit new to as I have only been a HR tax payer for about a year now. The company I am working for currently matches pension contributions up to 6%, I am putting this 6% in to gain the most out of the employer contributions. Should I be considering putting in higher than 6%? 

Yes to me I feel comfortable putting a lump sum of 10k onto the mortgage, then can decide to make up the rest later on if needed.

Any advice on the above points would be much appreciated

LadyWithAPlan

I always put whatever I earn over the BR tax into pension -  even though I am saving for a house deposit - for me a sipp but the tax advantages are huge for HR tax payer - single best thing you can do tax wise.... So I also would suggest at the mid point of March each year  you look at your annual earnings and either  put any extra  through your company or set up a sipp (Vanguard)  -   and get that annual earning down to BR level by adding the difference to a pension. If you do set up a SIPP you will have to claim the extra cash back from hmrc in a self assessment filing - its not difficult. Or add to your work pension - get them to do a calculation for you as it reduces your take home pay by relatively little whilst your pension starts building v nicely

Definitely hit the match .. but if you hitting 15% great or whatever everything over your 50k earnings  is the minimum for me if your household can take it. 

My query was if you are paying tax on your savings over £500 (I assume as HR)  .. it's fine in a S&S isa  as tax free  but outside that in England at least you pay your tax rate on interest income (over £1k bR, £500 HR tax)  - so  it swerves the calculations. 

I think the lump £8-10k sum as an OP and then regular monthly OP's will keep you focused.
Increase your pension contrib as above
Plus the rest I'd split..or put all into your isa ..

£10k @ 3.42 = £342 vs isa savings for a year £585  so there is a  £243 diff over year  so £20 a month .. on £20k its double that .. so I would only put 10k in OP max - splitting the difference - 
You can then each month add to your sipp/op/savings at a % that works for you ..  

well done on saving the extra !