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  • FIRST POST
    • mameha
    • By mameha 12th Sep 18, 11:10 AM
    • 64Posts
    • 14Thanks
    mameha
    Overpayments vs S&S ISA (20 year period)
    • #1
    • 12th Sep 18, 11:10 AM
    Overpayments vs S&S ISA (20 year period) 12th Sep 18 at 11:10 AM
    I want to check my maths/logic is correct regarding investing in a stocks and shares ISA rather than doing overpayments.

    CURRENT STRATEGY
    I am paying 780/month mortgage (repayment, 31 years left).
    In addition, I pay 220/month as overpayment.
    The overpayments save me 1.6% interest (currently), over the term would save 16000 in interest in total. In 21 years the mortgage would be paid off.

    NEW PLAN

    Instead of putting that 220/month into overpayments, I put it into a Stocks and Shares ISA (e.g. FTSE 100 index tracker), for the next 21 years.

    RATIONALE

    Average growth of FTSE 100 = 5%
    Average growth of S&P 500 = 9.8%
    These are far better returns than the 1.6% mortgage interest saved.

    According to a compound interest calculator this results in a better return by 32235 after 21 years:
    - S&S ISA = 98162 (55440 paid + 42722 interest at 5%)
    - Overpayments = 65927 (55440 paid + 10487 interest at 1.6%)
    - 98162 - 65927 = 32235

    I then realised this is why people get an 'interest only' mortgage, as the return would be even greater.

    Am I missing something here? Is my maths wrong?
    I know that you get some bad years where the index drops 30%, but over time it always works out as growth. The only problem I can see with this plan is that there might be some colossal disaster and markets are down double digits for ten years or so, but this has never happened before.
    Last edited by mameha; 12-09-2018 at 11:24 AM.
Page 1
    • Linton
    • By Linton 12th Sep 18, 1:15 PM
    • 9,730 Posts
    • 9,979 Thanks
    Linton
    • #2
    • 12th Sep 18, 1:15 PM
    • #2
    • 12th Sep 18, 1:15 PM
    I have not checked your maths but your general approach is fine - as long as your investment return exceeds your mortgage interest rate you gain by investing rather than overpaying. The problem is risk. Is your interest rate guaranteed for 21 years? At the moment interest rates are about at their lowest rate ever. Supposing it went up to say 15%? What happens if the colossal disaster happens in year 19? At some point it is likely that your investments will drop by 40% - would you have the courage to stay invested for the rebound rather than sell everything and crystalise your losses?



    So I would hate to take that risk with an interest only mortgage. However the decision to invest rather than overpay a repayment mortgage makes a lot more sense. Note that this is sometimes discussed and the same conclusion reached on the Savings and Investment board.
    • mameha
    • By mameha 12th Sep 18, 1:34 PM
    • 64 Posts
    • 14 Thanks
    mameha
    • #3
    • 12th Sep 18, 1:34 PM
    • #3
    • 12th Sep 18, 1:34 PM
    Thanks, yes I have considered the interest rate, rises thing. That's the scenario where I could lose, if rates go up to say 5% and at the same time the markets are flat or negative, there would be pressure to bank the losses and start paying the mortgage. If that happens 10 years down the line it would be fine (I could simply close the ISA and move all the money into the mortgage), but if this happens in short term I would make a loss. But thats the risk taken for a potential (and probable) return of 30K at the end of the term.

    Also if things are looking good around year 15 one can always change the investments to something more stable, or reduce/close the investment, to avoid any last minute market crash.

    As I am not on interest only mortgage worst case scenario is I lose 100% of the 220/month investments and just finish off the mortgage in 31 years instead of 26. (To lose 100% would probably mean armegeddeon its not a realistic scenario, something like a 30% loss would be incredibly unlucky but a realistic worse case)
    Last edited by mameha; 12-09-2018 at 1:37 PM.
    • TrickyDicky101
    • By TrickyDicky101 12th Sep 18, 1:36 PM
    • 3,128 Posts
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    TrickyDicky101
    • #4
    • 12th Sep 18, 1:36 PM
    • #4
    • 12th Sep 18, 1:36 PM
    Congratulations! You've just built yourself an effective low cost endowment product (without the life insurance)!

    Overpayments = return guaranteed.

    S&S ISA = return not guaranteed (but potentially much larger).

    It's an investment decision you need to make.
    • dunstonh
    • By dunstonh 12th Sep 18, 3:06 PM
    • 94,525 Posts
    • 62,470 Thanks
    dunstonh
    • #5
    • 12th Sep 18, 3:06 PM
    • #5
    • 12th Sep 18, 3:06 PM
    RATIONALE

    Average growth of FTSE 100 = 5%
    Average growth of S&P 500 = 9.8%
    These are far better returns than the 1.6% mortgage interest saved.
    S&P500 has performed much higher than typical in this growth cycle. However, it underperformed global markets in the previous cycle. FTSE100 is a dire index that is costly bottom or near bottom of comparable western markets.

    The sterling decline has impacted on US equity returns in sterling.

    I know that you get some bad years where the index drops 30%
    About 45% potential on the UK equity (twice in the last 20 years it fell by 43%. The US equity is just over 50%. So, you are being a bit short on your downside.

    I can see with this plan is that there might be some colossal disaster and markets are down double digits for ten years or so, but this has never happened before.
    Yes it has. Just look at Japan. Or look at the FTSE100 which is not far off where it was back in 1999 or 2007.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • mameha
    • By mameha 12th Sep 18, 3:49 PM
    • 64 Posts
    • 14 Thanks
    mameha
    • #6
    • 12th Sep 18, 3:49 PM
    • #6
    • 12th Sep 18, 3:49 PM
    Yes that would hurt if theres 20 years of no growth and at same time interest rates creep up.

    Is there any similar alternative idea? For example until now I have been using 'regular saver' accounts at high street bank to put away 250/month in return for fixed interest 3%. That 'wins' vs overpayments but not by much. If there was a way to get a 5% guaranteed or very low risk that would be a sure winner. I see these mutual funds that invest in bonds etc and claim to be low risk but looking at the history they seem to experience losses from time to time too.
    • sal_III
    • By sal_III 12th Sep 18, 3:59 PM
    • 644 Posts
    • 658 Thanks
    sal_III
    • #7
    • 12th Sep 18, 3:59 PM
    • #7
    • 12th Sep 18, 3:59 PM
    This boils down to a choice between no risk (mortgage over-payment) and some risk (S&S ISA) investments. The returns are somewhat indicative of the risk. It's up to you to decide what your appetite for risk is.

    Your mortgage is essentially a low return / low risk investment in you, by your lender. Ask yourself the question why don't they put all their capital in stocks&shares if the return is so good.
    • MallyGirl
    • By MallyGirl 12th Sep 18, 4:01 PM
    • 2,957 Posts
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    MallyGirl
    • #8
    • 12th Sep 18, 4:01 PM
    • #8
    • 12th Sep 18, 4:01 PM
    there are several RS that pay 5%
    • MallyGirl
    • By MallyGirl 12th Sep 18, 4:08 PM
    • 2,957 Posts
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    MallyGirl
    • #9
    • 12th Sep 18, 4:08 PM
    • #9
    • 12th Sep 18, 4:08 PM
    I am choosing to invest in S&S ISA rather than pay off the mortgage - in fact the flexible offset mortgage is actually increasing a bit at the moment as a result of aggressive pension and ISA contributions (making up for lack of attention to retirement in earlier years).

    I expect to reach a peak balance in around 3 or 4 years once DD hits Uni at which point I will switch to a fixed rate deal for the last 5 or so years to retirement.
    This is a safe enough plan for me as:
    - I can stop paying in to ISA at any point if I want to bring the balance down again
    - I am at 12% LTV on a 1m house
    • mameha
    • By mameha 12th Sep 18, 4:12 PM
    • 64 Posts
    • 14 Thanks
    mameha
    What is an RS?
    • Linton
    • By Linton 12th Sep 18, 4:16 PM
    • 9,730 Posts
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    Linton
    What is an RS?
    Originally posted by mameha

    Regular Saver account - high interest bank account with requirements/limitations provided by banks as a loss leader to attract customers.
    • poppy10
    • By poppy10 12th Sep 18, 7:12 PM
    • 5,996 Posts
    • 7,243 Thanks
    poppy10
    Regular Saver account - high interest bank account with requirements/limitations provided by banks as a loss leader to attract customers.
    Originally posted by Linton
    Most of them have very low limits. HSBC only let you put in 250 a month for their 5% regular saver account. So you end up with just 3000 at the end of the year, and the effective interest rate is just half the headline rate as you only have the full 3000 amount invested for the final month. So 75 for a year. Hardly a substitute for a sotcks and shares ISA
    • Peelerfart
    • By Peelerfart 12th Sep 18, 8:54 PM
    • 1,931 Posts
    • 1,680 Thanks
    Peelerfart
    Have you posted the same question on the mortgage free wannabe board? Just for some balance.
    Space available for rent
    • AnotherJoe
    • By AnotherJoe 12th Sep 18, 9:25 PM
    • 10,611 Posts
    • 12,146 Thanks
    AnotherJoe
    Why not a pension ? Especially if you are a high rate taxpayer that beats an ISA hands down.
    • Spangled
    • By Spangled 13th Sep 18, 10:49 AM
    • 189 Posts
    • 80 Thanks
    Spangled
    Could you split your 220pm overpayment thus: 110pm remains as monthly mortgage overpayment plus 110pm into a stocks and shares ISA. In other words, don't put all your eggs in one basket.
    • mameha
    • By mameha 14th Sep 18, 1:49 PM
    • 64 Posts
    • 14 Thanks
    mameha
    To answers Qs above:

    I have a pension separately which I contribute maximum I can (employer matched).
    We have some money we use as emergency cash, this is currently tied up in savings with low interest hence the idea to put in an S&S ISA to get better return and be able to use towards the mortgage or as emergency money. Pension would not allow me to withdraw without penalty.

    My mortgage is already repayment, not interest only, so I am already paying off the loan but it is now a 31 year term rather than 25 which I would prefer. (220/m overpayment will reduce term to 25 yrs).

    I am now trying to get my head around Bonds and Gilts as these seem to be less volatile and ideally I want 6% ish returns with less risk attached. I see many funds related to gilts/bonds but I cant understand why the fund price goes up and down and whether the yield is included in the annual return - if the fund is up "2%" over 12 months, does this include the 4% yield (ie -2% return + 4% yield = 2%) or not (ie. 2% return + 4% yield = 6%).
    • Tarambor
    • By Tarambor 14th Sep 18, 2:30 PM
    • 3,556 Posts
    • 2,626 Thanks
    Tarambor

    I then realised this is why people get an 'interest only' mortgage, as the return would be even greater.
    Originally posted by mameha
    Whilst that should be the case the reality is that really they don't. They get them because they can't afford a repayment mortgage and don't actually put anything into an investment because the money isn't due for another 25 years which is ages away and its something they'll get around to in the future. Very few people actually invest in something that'll repay the capital at the end of the mortgage.
    • MallyGirl
    • By MallyGirl 14th Sep 18, 3:45 PM
    • 2,957 Posts
    • 7,958 Thanks
    MallyGirl

    I am now trying to get my head around Bonds and Gilts as these seem to be less volatile and ideally I want 6% ish returns with less risk attached. I see many funds related to gilts/bonds but I cant understand why the fund price goes up and down and whether the yield is included in the annual return - if the fund is up "2%" over 12 months, does this include the 4% yield (ie -2% return + 4% yield = 2%) or not (ie. 2% return + 4% yield = 6%).
    Originally posted by mameha
    This paragraph rings alarm bells. 6% is quite ambitious for low risk investment. If you want a lower risk option, as an inexperienced investor, I'd go for a low cost multi asset fund with a relatively low equity percentage. Several get mentioned on the savings and Investment board - Vanguard Lifestrategy 40 or 60, HSBC Global Strategy Balanced, there are others. That way you don't particularly need to understand things like bonds and gilts.
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