Invest or Make Mortgage Overpayment?

jetman_2

I could possibly have £5000 each year due to a new bonus scheme at work. I would like to get my mortgage of £52000 paid off early and was wondering should I:

1) Make a £5000 overpayment each year into my tracker mortgage at 4.69% apr.
2) Invest the £5000 into some sort of fund that would hopefully increase in value by approximately 8% per year.

I would have thought option 2 would have been the answer, but maybe I am missing something here? Thanks in advance for any advice!

Ian_W

Would have thought you answered yourself by using the word "hopefully" in option 2).
1) is a cert to pay off your mortgage earlier.
2) contains an element of risk which may, or may not, be more beneficial than option 1.

Depends on your attitude to risk, I would have thought.

Joe_Bloggs

There is no guarantee that you will get your bonus. There is no guarantee that interest rates will stay the same. I bet that the tracker you are on is not for the life of the mortgage but will expire and move to SVR at some time. Try not to overpay too much and be left on SVR with less than £25000 to £30000 owing. You will have trouble getting a new mortgage at a good rate.
Many lenders permit one off payments many also only permit monthly overpayments to a certain limit. It is all down to the terms and conditions.
Some are very sneaky.

The safest form of investment is interest from a bank/savings account. You have to pay tax on interest earned according to how much you earn. The rates for the earning bands are 0%,20%,and 40%. By paying off your mortgage you are moving capital which could build up taxable interest to a loan that you pay interest on. These payments (if allowed at no cost) reduce the capital and hence the interest paid.

Eg 5K in an account at 5% (Taxed at 20%) = 5000*0.05*(1-0.2)= 200
5K in an account at 5% (Taxed at 40%) = 5000*0.05*(1-0.4)= 150
Interest offset by overpaying 5000 on a mortgage at 4.75%
=5000*0.0475 = 237.5
You get more for your money if you pay off your mortgage as you are not taxed on the interest you could have received from a savings account.
J_B.

meanmachine_2

But there's also the psychological benefit of becoming mortgage free much sooner.

Basically, if you're on a higher tax rate, pay off the mortgage, provided you can make overpayments - normally 10% of the total amount owed.

Thefunkygibbons

My preference has always been to pay down the mortgage

It is risk free and as a higher rate tax payer, it is a great rate of return

However, first you should have a rainy day fund of 6-12 months outgoings in cash somewhere

Preferably, in a cash ISA

jetman_2

Thanks a lot for all your advice - very interesting. I am moving to a new Alliance and Leicester mortgage which allows for unimited overpayments. The psychological benefit of seeing my mortgage shrink every few months, and my quality of life improve at the same time motivates me, so I think will go for the overpayment option!