Choices: Bigger deposit or make over payment or invest S&S ISA?

maxxpayne

Hi Everyone,

We've just committed to purchase a property and was looking for some options on how we should model the deposit and what pros/cons are associated with the size of the deposit.

Basically, what I'm thinking is if it's worth putting on an extra 35,000 from savings into the new purchase, at the cost of 187/month extra repayment and around 16,000 in extra in interest rate over 26 years.

I'm okay with investing in stocks and shares and have been able to return at least 5% return (if not more) over the last decade, so that means 35k becomes 124k at the end of the term, easily accounting for the extra 16k in interest that would cost.

Also, that we're doing a 49% LTV is probably also worth questioning?

As we could do go down to 60% LTV and still get the best mortgage rate, netting us an extra 60,000 from our property sale that could also go into S&S ISA over coming years?

Finally, the other option is to make 10% overpayments every year as the mortgage term allows us - that way we get to keep more liquidity as needed but still aggressively reduce overall interest?

Thoughts welcome.

For illustration:

Purchase price: 825,000
Mortgage interest: 4.30%
Mortgage term: 26 years
Initial period: 2 years
Proceeds from existing property sale (after fees etc.): 340,000
Available savings (after additional emergency fund): 85,000
Deposit range: 390,000 - 425,000
Savings range: 50,000 - 85,000

In summary:

49% LTV: 390,000

Repayment: 2319/month

52% LTV: 425,000

Repayment: 2132/month

60% LTV: 330,000

Repayment: 2638/month

saajan_12

maxxpayne said:

Basically, what I'm thinking is if it's worth putting on an extra 35,000 from savings into the new purchase, at the cost of 187/month extra repayment and around 16,000 in extra in interest rate over 26 years.

I'm okay with investing in stocks and shares and have been able to return at least 5% return (if not more) over the last decade, so that means 35k becomes 124k at the end of the term, easily accounting for the extra 16k in interest that would cost.

You're comparing £35k capital and £16k interest paid at different times over the next 26 years, vs 124k at the end, so you aren't comparing apples with apples. If you borrow the extra amount, you're not leaving 35k untouched but rather dipping into it gradually over the 26 years. 

Also are you assuming you pay the SVR rate on the mortgage? Given its likely you can remortgage after the fixed term, so also not a fair comparison. 

maxxpayne said:

Finally, the other option is to make 10% overpayments every year as the mortgage term allows us - that way we get to keep more liquidity as needed but still aggressively reduce overall interest?

Purchase price: 825,000
Mortgage interest: 4.30%
Mortgage term: 26 years
Initial period: 2 years

The other way is to compare the interest rate on the 35k just over the initial period.
Reducing the mortgage by 35k saves you 4.3% per year for 2 years. 
Investing 35k gains you x% per year for 2 years. However this is also subject to tax whenever you realise any gains (CGT) and when you collect dividends (Dividend tax). Based on the size of your existing investments, are the allowances relevant to you? Based on your income, what rate would apply to you? I'd reduce X% by those amounts. 

If you're assuming a 5% return, then after tax that's likely pretty close. Given the 5% carries some risk while you'll definitely have to pay back the mortgage. So IMO the investments would only make sense if you reasonably expect a higher return.