£100,000 Mortgage overpayment or invest

ExpedLdr

I have a £435,000 repayment mortgage, fixed rate over the next 10 years of +5%.

I have £100,000 that i could pay myself as a dividend from my company (self employed Ltd Co, no employees). My income stream looks pretty sound for the next 6 months (approx £98k).

I am good at my job and the business is therefore being successful but i do not have much experience of investments etc.

Now don't laugh, but i listend to the book Rich Dad, Poor Dad last night while driving down to London and it struck me that paying the £100k against the mortgage might not be the best thing to do as that money would not be working for me; albeit it would decrease my outgoings on a monthly basis in terms of servicing the mortgage debt.

I would really appreciate your thoughts on what you would do.

dunstonh

it struck me that paying the £100k against the mortgage might not be the best thing to do

It may or may not be. It is one of those things that only time will tell.

It may be that the best option is a bit of both. It may be that you do or dont have the risk profile to make it sensible. It may be that you are looking to do it yourself and dont have the skills to DIY.

Using the annual maxi isa allowance would be common sense. The more you can put into tax free areas the better. Especially over the long term as the ISA allowance is a use it or lose it allowance. 10 years of putting £7k (or 14k if married/partner) can take £100-£200k out of a taxable environment. That can be extremely beneficial if you are looking at retirement or are a higher rate taxpayer (or both).

Footsie_2

Investing is a risky business, you could potentially lose some of your core capital. If you pay off part of your mortgage you will be guaranteed to lower your monthly outgoings.

ExpedLdr

dunstonh wrote: »

It may be that you are looking to do it yourself and dont have the skills to DIY.

Dunstonh, thanks for the reply, I have read many of your replies in other posts and place a lot of wieght by what you have to say.

Your reply to me is obviously sensible as i haven't told you anything about myself other than the post's question.

The only bit of your reply that i didn't understand is the bit that i have quoted above. Do what myself?

I appreciate that this is what you do for a living and i don't want to abuse that but all advice gratefully recieved.

ExpedLdr

Footsie wrote: »

Investing is a risky business, you could potentially lose some of your core capital. If you pay off part of your mortgage you will be guaranteed to lower your monthly outgoings.

Thanks Footsie, i know that i while i am not earning interest on any money that i overpay i am reducing both interest that i would have to pay and reducing my monthly outgoings but my question is what would you guys do?

Mike

dunstonh

The only bit of your reply that i didn't understand is the bit that i have quoted above. Do what myself?

Its a bit like anything. Do you get someone to do it for you or do you go DIY? Will it be a DIY disaster or will you end up with a good job at the end?

It doesnt matter if its decorating, servicing your own car or investing money. Can you do the job better than a professional in that area? Some will say yes, some will say no.

If you were just going to look at say a FTSE tracker then I would say its not worth the level of risk you are taking against the potential reward. If you are less than medium risk for investing then again, I wouldnt bother as cautious could beat it but the chances are it will come out around 5-8% p.a. average. About the same as the mortgage so why take the risk.

If you were looking at a medium risk spread of investments with periodic rebalancing then it could well be worth it. You will get poor years (like 2007 was in general) and you will get good years (like the 5 years before that). You can get awful years like 2001/2. If you accept that, then it could be worth it for you. You would be aiming for double digit p.a. average returns with that. It doenst mean you will get it as there are no guarantees. I started investing in 1995 and I am averaging 18.7% p.a. That is mainly due to a medium/high risk approach and rebalancing. So, its possible but you will only find out if it was the right decision or not in 10 years time.

purch

what would you guys do?

Pay down the mortgage (if it was my £100k I'd buy myself an Aston Martin....but as it's yours.....)

P.S. Everything duns say's is perfectly true and correct........but he's looking at it logically............in cases like these I would always go for the 'freedom' and 'peace of mind' of no or a smaller debt

Jonbvn

In your position, I would aim to pay-off some of the mortgage and save and/or invest some.

Given your income you must be a high rate tax-payer. Therefore, it is essential that any savings/investments are done tax efficiently. Some tax-free suggestions which you should consider.

1. ISA's - stocks & shares and/or cash.
2. NS&I Index Linked Saving Certificates.
3. VCT's - Venture Capital Trusts.

BTW, since you have a fixed rate mortgage, there are very likely to be Early Redemption Charges (ERC's). These may preclude you from paying down the mtg, and mean investing/saving is the only way.

ExpedLdr

Jonbvn wrote: »

1. ISA's - stocks & shares and/or cash.
2. NS&I Index Linked Saving Certificates.
3. VCT's - Venture Capital Trusts.

Thanks Jon, I know what 1 is can work out what 2 is but never heard of 3.

Looks like there is a lot more reading to do!

But this is really good advice thanks as it gives me something to look into.

Mike

ExpedLdr

purch wrote: »

Pay down the mortgage (if it was my £100k I'd buy myself an Aston Martin....but as it's yours.....)

P.S. Everything duns say's is perfectly true and correct........but he's looking at it logically............in cases like these I would always go for the 'freedom' and 'peace of mind' of no or a smaller debt

Funny that, i discussed this briefly with my partner but left the room when she moved towards the knife block!

Rafter

Realistically you aren't going to earn 5%+ after tax on any low risk investment.

I'd turn it on its head and ask would you be prepared to extend your current mortgage to speculate on stocks or other investments right now?

Unless there is some compelling tax reason to do something else (pensions spring to mind) I'd repay the mortgage.

I'm guessing you are in a long term fix so an offset is not an option? At least that way you can still access your money if your income circumstances change or you do spot an investment opportunity - Aston Martin or otherwise!

R.