To overpay mortgage or not...(24 Posts)
DH and I are in the fortunate position of relatively well paid, secure jobs, and we're saving between 1k and 1.5k a month. 1k comes off in a direct debit at the start of the month, and then any left at the end goes in too. If it's a tight month (car/roof repairs) we dip in. We also use this money for holidays etc.
Our mortgage fixed rate ended a few years ago, and through apathy, we went onto the standard base rate + 1%, which went in our favour very quickly - we now only pay £500 per month.
We have about 20k in savings now, earning about 2% interest. I would like to pay off a chunk of the mortgage (about 100k outstanding) but feel that while it earns marginally more interest than we're paying out, that it's not the best use of money.
I would like the freedom of having no mortgage, though.
Firstly, I am not qualified to give investment advice. You should consider seeking help from an independent financial advisor (IFA) who will assess your needs and advise you accordingly.
Due to the length of a mortgage, you pay an enormous amount of interest, even though the rate can be quite low.
If you are considering overpaying, first you must check if your mortgage allows you to do this. Some allow this but have maximum amounts (mine is 10%) or may only accept them at certain times (my last deal was only overpayments in January)
In addition, if you set all your savings against your mortgage you won't have a cushion in the event of any problems.
Perhaps an offset mortgage would suit you? You'd pay less interest as the net difference between the mortgage and savings is what you are charged interest on, but the savings are available for you to use should you wish to.
Even if you decide an offset mortgage sounds good, your lender may not offer these or it may require you to change where you hold your current accounts.
Thank you for answering. I have spoken to the mortgage company, and we can overpay, but only one lump sum annually. An offset mortgage would be ideal, but our mortgage provider doesn't offer them, and we'd not get such a good rate if we moved. Otherwise, that would have been perfect.
We've been meaning to get independent advice for at least 12 months - classic cash rich, time poor. I will make a point of doing it before I go on holiday in July though. If we don't do something concrete, there's a danger that DH will start looking at mid-life-crisis-type cars!
What is your mortgage rate currently?
Not financially qualified at all but this is what i'd do....Unless your mortgage rate is 5% or more I'd stick the £20k in stocks and shares ISA's with FTSE100 companies. That way its sort of locked away, should earn a reasonable return, you wont pay tax on the earnings and if needs be you can trade in and pay as a lump sum against the mortgage.
We're currently paying 2.9% mortgage and last year it worked out around 8% on our ISA (i'm learning). So it makes more sense to invest than lump oayoff. However there is talk of stocks being at an all time high and investments can fall as well as rise etc etc.
If you get the chance take a look at martin lewis's site for investment ideas.
Mortgage rate is an unbelievably low 1.5%! Will look at MSE site. Good idea - thanks.
A while ago I decided to overpay monthly (at the point my mortgage went from fixed rate to variable) by keeping the payment the same as it was when it was fixed rate - hope that makes sense.
The ISA I was paying into came to the end of it's bonus rate, so dropped below the interest rate of the mortgage, so I transferred the ISA amount off my mortgage balance - I can lump sum as often as I like. This month I cashed in some premium bonds (I was not winning much) and paid lump sum off mortgage.
Now I am left with savings which are more than my mortgage amount, so I could pay off the mortgage in full but then my cushion would be small. So for now keeping going with savings/investments and overpaying mortgage monthly. If mortgage rates rise, then I will pay off in full.
For me, given my attitude to risk, I have split things into low and higher risk. I am gambling that mortgage rates will remain low for a while, that company bonds I have will not default, and that I may get a payout from premium bonds. I have a fixed rate ISA that I consider is my low risk savings vehicle.
So yes, I would say overpay your mortgage however keep options open. Once you have given money to the mortgage company there is no getting it back, so you need to have other funds for rainy day expenditure, house repairs, running car etc.
How easy is it to change the monthly amount you pay the mortgage company? If that can be changed easily, you could start with a figure then see how it goes and increase/decrease as you feel appropriate.
I too in my uneducation opinion would say invest in tax exempt ISA's what you can, perhaps use 50% of your mortgage?
There's a calculator on MSE that can work out how much you'd save over the term of your mortgage if you over pay. Even with a very low rate it can be a shocking amount of money - have a look and see what you could save, and if you could realistically make a similar amount by saving rather than overpaying.
This is a classic attitude to risk question. Only you know how you would feel if your capital fell in value over night - stocks and shares do this frequently. If you could sit tight and not cash in (in a 'help I don't want to lose my money' panic), then the SS option could be for you.
There is no right and wrong. The money can certainly 'work' harder outside of your home. You could invest in high risk funds and see 43% returns some years (that figure could be anything), you have to decide what is right for you.
If a big drop would leave you tempted to 'rescue' your money then I'd be cautious.
SS average above inflation returns - mostly - and the cost of this is the risk that you expose your money to.
Paying down your mortgage is the safe bet. No bells and whistles, no real excitement, no real downside.
One thing to consider is not the current interest rate (you may not be paying this over the entire period of your mortgage), but the average rate as this is what you are saving. This would be closer to 5%. Also gross up the rate (not strictly correct as ISA's etc distort the picture somewhat). You are saving the taxable savings rate - your 2% savings is taxed at 40% (20 at source, 20 self assessment assuming HR payers) and so the interest that you have saved could be regarded as the pre tax rate - 8.33% (slight smoke and mirrors, but should be thought about)
Getting rid of debt is never a bad thing and if you have limited assets (sorry but 20k against a £100k debt is not asset heavy), then you have to be honest about the risk you are willing to expose your capital to.
A combination of course is easily achieved, the degree to which you balance this between ISA and mortgage again is to do with your attitude to risk. I would suggest a session with an adviser could help you find the right solution for you and could recommend a decent asset allocated portfolio that can help mitigate some of the risk (if that seems right for you).
In all the above I am assuming investment in collectives (UT or OEIC's, even investment trusts) not single company shares. Risks with single company shares are MUCH greater and require expert advice and lots more money unless you can tolerate risk at the top of the score board!
As a rule, paying off your mortgage is one of the best investment decisions you can make. The odds are rather low that you can out-perform it with any other investment, certainly not with many investments with a comparable level of low risk.
I know loads of people who paid off their mortgages fully, typically below the age of 40 (under 30 even), and not one of us has regretted it.
The odds are rather low that you can out-perform it with any other investment, certainly not with many investments with a comparable level of low risk
I would go as far as to suggest you will NEVER out-perform repaying your mortgage with the same level of risk!
I was in a similar situation to you. I paid off my mortgage about a year ago, and am now debt free.
Each month I put an amount equal to a mortgage payment into an investment account, and so far this year have earned a 14% return. But - and this is a big BUT - imo, you must spend time educating yourself before you begin investing. While it is great to earn/appreciate through savvy investment choices, it is easy to lose money if you don't know what you are doing.
We paid off our mortgage as a priority - we had borrowed £60k - and rates fell to 0.86% above base rate - so we paid down as often as we could as much as we could - we paid off 10 years early and saved thousands.
And of course, now we have all that money "spare" each month, and we invest probably 75% of it - and are enjoying it very much being mortgage free in our early 40s...... a mortgage is such a long term investment that paying it early can save loads....
I tend to think that, too, Notmade, and am always surprised when folk talk eagerly about alternatives. . Seems like a non-brainer to me. That said, DH's boss gambled by investing everything in his company instead and it payed off wonderfully (for him). But that was high risk, inherently. He had non-working partner & small children, too. Braver man than me!
What MadeOfSD said is good, do the low risk investment and any savings plow that into something higher risk, that is what I have done.
I would keep a prudent reserve (a reasonable amount of savings) and pay the mortgage off sooner.
Yes you absolutely should pay off mortgage whilst interest rates are low
But keep a buffer of cash for emergencies equivalent to 6 months living costs
It's a no brainier to me in current market
You can always remortgage if needs must
Just a small point Bound although I think you are right in what you are generally saying.
. It is not easy to remortgage at the moment to release money. Our own mortgage is a lifetime tracker on a very good rate, but if we were to try and remortgage we would get nowhere near the amount of the mortgage we currently have. They would probably lend us about half. Nothing much has changed in our own circumstances, but lending has tightened up considerably. We are pretty much stuck living here (not that we want to move anyway but if we did...) unless we wanted to downsize and cut the mortgage in half.
Think it depends on credit rating and equity in house so very much down to personal circumstance but yes I agree.
Didn't realise this thread was still going on! Will come back later and update you all
Assuming that your income/outgoings etc are likely to stay about the same for the foreseeable future (or even go up a bit), I'd say it makes sense to pay off the mortgage, which you could presumably do between you for the next few years, and then once you've done that start thinking about other savings/investments. Interesting dilemma though, and there must be a lot of people in a similar situation at the moment.
I paid mine off No regrets here.
Maybe I could have weighed up percentage points of percentage points to see what was more advantageous. Meh.
Not much beats that feeling of walking into a building society with a big, fat, fuck-off cheque.
Our mortgage allows us to overpay and then reclaim our overpayments back if we need to - worth checking the small print of yours?
We're going to be in a similar position reasonably soon as dp starts a new, much better paid job next week. Our plan is to save every penny over what he has been earning for a year and then pay off as much as we can off the mortgage while leaving ourselves with a reasonable buffer (which we haven't really had for the past few years). We're not very happy with risk, we're not very happy with the thought of losing our home if one of us loses a job (we'd be ok if dp lost his but up shit creek if I lost mine), so paying off the mortgage seems like the best thing for us to do.
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