What to do with £500 - invest, save, overpay mortgage or something else?

Lilly_Tam

Hello. I'm currently overpaying my mortgage by £500 per month. Mortgage itself is low interest - 1.66% fixed for 10 years with 7 years remaining (a rare deal from 2022). I have 64% equity and mortgage balance is about £170k.

I have maxed out my ISA allowance for the current year, all of which I put into my Stocks & Shares ISA. I have also maxed out my additional income-based allowance for tax free savings. I also overpay into my pension although there is room to add more there tax free, but I prefer not to for now as I feel that I am already putting enough into my pension.

After all is accounted for, I have about £500 per month that I want to save or invest in some way but I am not sure what I should do, so for now I am just using it all towards overpaying my mortgage. My mortgage is a good deal but I still want to pay it off as soon as possible so I can retire early. 

I also have a sufficient emergency fund, about half of which I keep in Premium Bonds for tax reasons (other half is in a fixed saver). I could put the £500 into Premium Bonds but it wouldn't do anything as the fund isn't large enough to win significant prizes so would be 'wasted'. I have enough put away to max out my S&S ISA for 2026/7 too so don't need to save it for that either. 

So question is, given that I've maxed out most of my tax free options, is using the entire £500 to overpay my mortgage the right thing? Are there any other better options? Am I missing any tricks?

Thank you

QrizB

Overpayments into your mortgage are broadly equivalent to putting the £500 a month into a 7-year fixed interest account that pays 1.66% after tax. I expect you can do better than that in lots of different ways.

7-year gilts held to redemption are yielding 4.3% before tax, for example.

El_Torro

With 7 years to go on 1.66% I wouldn't touch the mortgage. Assuming you're happy to make a lump sum payment in 7 years time. 

You're right in saying that £500 in Premium Bonds will probably net you no prizes. However if you pay in £500 every month this will build up and the likelihood of winning something increases every month. 

Also there's nothing wrong with paying some tax on savings accounts, assuming your net return is still better than what you are paying on your mortgage. Interest rates are on the way down but you should be able to get better than 1.66% after tax for some time to come. 

Stocks & Shares ISAs are great, though if you are planning to use this money to pay into the mortgage I would be careful about how much you invest and where you invest it. Stocks and shares are for long term investments. 

kempiejon

Well done for getting to the position that you fill your ISA each year and have enough money going into your pension. When I was working the goal was financial independance. In those days the tax on unsheltered investments was fairly benign. I think differently now.  You may as well fill the premium bonds.
Depending on how early you want to retire a pension might be better that your mortgage at these rates.
If your mortgage is fixed at 1.66% a BR tax payer could better after 20% tax on savings. Puttng £500 per month to work in a global tracker, it'd be a while before you knock at the door of the currant capital gains limit of £3k so unsheltered you could sell every few years and switch investments to reset the liability.

HedgehogRulez

pension is the right answer

aroominyork

QrizB said:

Overpayments into your mortgage are broadly equivalent to putting the £500 a month into a 7-year fixed interest account that pays 1.66% after tax. I expect you can do better than that in lots of different ways.

7-year gilts held to redemption are yielding 4.3% before tax, for example.

Agree - given your tax situation a low coupon gilt is a good option. But if you are investing each month take fees into account, since I don't know a platform where you can buy gilts with no fee. On Interactive Investor I pay £3.99 a pop (unless using a monthly free trade), which is 0.8% of your monthly £500.

Mark_d

As @QrizB said, overpaying your mortgage is the equivalent of earning 1.66% net interest on the amount of that overpayment.  This a very poor return.

If I were you (not wanting to put more into pension) then that money would go in to Premium Bonds.  It's a tax free investment that balances out the risk in my S&S ISA portfolio.
In my view the next best option would be S&S investments outside an ISA. 

dunstonh

 I also overpay into my pension although there is room to add more there tax free, but I prefer not to for now as I feel that I am already putting enough into my pension.

As you probably know, the pension wrapper beats the ISA wrapper as long as the money is needed in your retirement years.

So, whilst you are maximising your ISA but not your pension, it would appear that pension is the option you should be looking at more.

Am I missing any tricks?

Your post is heavy on solutions but light on objectives.   What are you trying to achieve with this money?
It looks like you are letting the tax tail wag the dog at the moment and missing a trick with pensions but without knowing objectives, we cannot really say.

t0rt0ise

Spend it!!

Lilly_Tam

Thank you so much everyone. Your replies have been very helpful. I will think over all the options over the coming weekend and make a decision hopefully.

Also, I should have added in my original post that this is a temporary 'problem' I will have until April 2026 - after that I will have a place for the £500 so it's just something I need to figure out until then. I should have made that clearer but I forgot.

Thanks again all.

stuhse

Your age is a factor that would help people see the fuller picture. Given you mention retiring early its highly likely that paying into your pension and the tax relief it leads to would take a bit of beating.  An option might be to draw the 25% or a portion of it at to pay off your mortgage when it ends(if you are above 55 at that point).