Is mortgage overpayment the best use of our money?

prepperpig · 17 April 2015 at 2:57PM

I am struggling to decide what is the best thing to do with our money in terms of mortgage overpayment. Ive also posted this on the savings board. Not sure of the etiquette of double posting but wasn't sure where to put it!

Both DH and I are self employed. His income is regular (partner in a large firm) and he gets a fixed amount of drawings each year. I have set up a small one person company so my income is very far from regular. Both higher rate tax payers.

We have a short term (ten year) interest only mortgage at 1.99% which we have been overpaying to roughly the equivalent of a repayment mortgage. We have six years left to run and the mortgage is now £278,000. We pay about £3600 a month (combined interest element and overpayment). In six years at the end of the mortgage term we'll have about £20k outstanding at our current rate of overpayment.

We have £60k in cash isas and 20k of other rainy day savings. Rate on the isas isn't wonderful, I think about 2.5%

Would you use the money in the isas to pay a further chunk off the mortgage? I read one article that says yes pay it off asap and then another that says not much point since a mortgage is the cheapest borrowing you'll ever do. Clearly the interest on the isas is higher than the mortgage interest rate ( but not by a great deal). Is it as simple as ISA rate is higher so leave it in the isas?

Psychologically we will feel better once the mortgage has gone (and will have an extra £3600 a month!)

Thanks for your views!

JimmyTheWig · 17 April 2015 at 3:13PM

prepperpig wrote: »

Would you use the money in the isas to pay a further chunk off the mortgage? I read one article that says yes pay it off asap and then another that says not much point since a mortgage is the cheapest borrowing you'll ever do. Clearly the interest on the isas is higher than the mortgage interest rate ( but not by a great deal). Is it as simple as ISA rate is higher so leave it in the isas?

Yes, it's as simple as that. If the (after tax) interest rate on the savings is more than the interest rate on the mortgage then keep the savings.
But 2.5% for an ISA is pretty high, so probably worth checking that you really are getting that.

Psychologically we will feel better once the mortgage has gone

If it were me than I'd feel just as happy with a £100k mortgage and £100k savings as I would with no mortgage and no savings.
In fact I'd be happier with the first scenario if the savings were earning more interest than I was paying on the mortgage. Plus it gives a buffer if things go wrong with your self employment.

But if physically clearing your mortgage is a psychological priority then why not keep the savings until they match the mortgage and then pay it off?
You can then use your £3600 a month to replenish your savings.

NorthernMonkey1 · 17 April 2015 at 3:15PM

If your ISA is 2.5% and the mortgage is 1.99%, then the money is better in the isa than being used to pay off the mortgage.

0.5% of £60,000 is £300 a year

prepperpig · 17 April 2015 at 3:16PM

Thank goodness you said that! OK I've checked and it isn't paying 2.5 percent at all it's paying 1.6 percent which changes things completely.

Blimey. I only joined today and I'll be banned on day one for financial stupidity!!

NorthernMonkey1 · 17 April 2015 at 3:18PM

Double checking your assumptions and calculating the best option for you is the exact opposite of stupid

prepperpig · 17 April 2015 at 3:23PM

Right, I need to reset my thinking now! So now its better to overpay our mortgage (whilst leaving some in a rain day account)?

I think part of my hesitation is that we're high earners and I'm loath to lose the tax free protection of the isas (because once the mortgage is gone in 5-6 years' time we'll in theory have a lot more disposable income which will be heavily taxed)

Luckyinlife · 17 April 2015 at 3:30PM

your incomes will be taxed in any saving accounts bar an isa best thing to do is max your 15k each a year and have 2 premium bond accounts 40k each so each year you could save 110k without any tax being taken from the interest/prize you earn :]

if it was me id smash the mortgage either way you pay intrest or you pay tax both sucks

good luck :]

JimmyTheWig · 17 April 2015 at 4:30PM

prepperpig wrote: »

Right, I need to reset my thinking now! So now its better to overpay our mortgage (whilst leaving some in a rain day account)?

I think part of my hesitation is that we're high earners and I'm loath to lose the tax free protection of the isas (because once the mortgage is gone in 5-6 years' time we'll in theory have a lot more disposable income which will be heavily taxed)

A difficult one.
Have a look at
http://www.moneysavingexpert.com/savings/is-the-cash-ISA-dead
It's about using ISAs vs savings accounts rather than ISAs vs paying off mortgage, but it's the same thing.
See your mortgage as a savings account that pays 1.99% after tax.

jamesd · 17 April 2015 at 9:32PM

Since it may be more generally useful I've made a new topic Options: 10% tax free, 7% tax free, 11% taxable, 6% taxable that may be of interest.

prepperpig wrote: »

We have a short term (ten year) interest only mortgage at 1.99% which we have been overpaying to roughly the equivalent of a repayment mortgage. We have six years left to run and the mortgage is now £278,000. We pay about £3600 a month (combined interest element and overpayment). In six years at the end of the mortgage term we'll have about £20k outstanding at our current rate of overpayment.

It's a waste of money to overpay such a mortgage when you can get around 10% tax free interest a year and 30% of your money back with investments. Or 11% taxable. Or 7% tax free. Or many other things.

prepperpig wrote: »

We have £60k in cash isas... Rate on the isas isn't wonderful, I think about 2.5%

Yet you can get 7% from a bond fund inside a S&S ISA, so why would you accept only 2.5% if not just you not knowing much about investing yet?

prepperpig wrote: »

Would you use the money in the isas to pay a further chunk off the mortgage? I read one article that says yes pay it off asap and then another that says not much point since a mortgage is the cheapest borrowing you'll ever do. Clearly the interest on the isas is higher than the mortgage interest rate ( but not by a great deal). Is it as simple as ISA rate is higher so leave it in the isas?

Of course I wouldn't because I can easily get more than the mortgage cost in interest, so overpaying would just make me poorer. In one way it is as simple as just comparing interest rates, though you do need to be fairly sure that the money is available when you want it and that will impose some limits on investment choices.

prepperpig wrote: »

Psychologically we will feel better once the mortgage has gone (and will have an extra £3600 a month!)

And nothing to live on if both jobs vanish. Your problem isn't just the mortgage, it's arranging to have a suitable income to cover the bills.

I'll reply more over in your topic in the savings an investments section.

prepperpig · 17 April 2015 at 11:01PM

I know absolutely nothing about investing and TBH it scares me to death thinking about putting my money into something I don't understand. Lots to think about there! I'd only managed to get as far as "I have a large debt and I don't like that" We've not even ventured into stocks and shares isas…...

Firegirl · 17 April 2015 at 11:43PM

It's a hard decision, without thinking about the realistic money view. Also think about what makes you comfortable and happy.

My mortgage is like yours low interest, but it's very high and that freaks me out. I overpay mortgage rather than put in stocks and shares even though my savings in stocks and shares ISA have made a much much higher profit than what I have saved by paying to the mortgage.

Also depends on you lifestyle and self control. Eg if you pay your mortgage off would you just spend that extra money each month. If the answers yes, you'd be better keeping the mortgage ticking over and then you would still have your pot of savings.

Good Luck:0)

Is mortgage overpayment the best use of our money?

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