Invest or overpay mortgage?

[littlematchstickgirl]

Hello, I'm looking for some advice please on what possibilities are available - I'm not well versed in finance....

Have a mortgage, 15 years left overall, with 4 years left of fixed rate at 1.39%. I can overpay up to 10% of outstanding amount each year.

I have read people stating it may be better to invest money elsewhere, rather than overpay. What type of investments would he best?

I understand investing is a risk, so would be looking for lower risk investment so I could pay lump sum towards mortgage at a later date, rather than high risk and potentially lose it.

What is the best way to learn what to do? It's such a minefield! Advice would be much appreciated, thank you!

[anniegun]

It all depends on your wider individual circumstances. However that is a very cheap mortgage and you can beat that rate with savings at the moment. So saving would seem a better way forward. Apart from the rate comparison, that money is available for other things, which could come in handy if something unexpected comes up

[Shakeitshakeitbaby]

Mortgage rates will almost certainly be higher in 4 years , meaning although you may gain a little on savings just now you will likely be paying a higher rate for the 11 years after your fixed finishes. I would overpay as much as I could, but I am risk averse when it comes to money.

[MintyIguana]

This was shared in a similar thread mamafurfur.com/blog/how-to-pay-off-your-mortgage-in-5-10-years/amp/

[littlematchstickgirl]

Thank you for replies so far - very helpful!

I need to investigate more and possibly go for a bit of both approaches? I see now how compound interest works, but there is also risk of investing may lose money overall.

I've read about Vanguard Life strategies where you choose a % stocks and funds, so you can choose lower / higher risks, dependent on the risks you are willing to take.

The comment about interest rates rising after the remaining 4 years of my fix have ended - very true snd that was the reason for me wanting to overpay, so I could reduce outstanding amount as much as possible prior to finding another mortgage deal at that point.

That video was really informative, I have bookmarked that lady and will watch more if her videos when I have some child-free time!

Any other advice appreciated, thank you so much :-)

[Alcibiade]

The best investment you can make over the long term is always going to be common stock in a good company. You might have bumps along the way, but thirty years down the line, it will always provide you with a good return.

[BigSkies22]

Jason Butler is good on personal finance and there is a pyramid strategy commonly used among personal finance advisors, setting out how you should approach prioritising your money. Off the top of my head it goes something like:

1. sort out your budget - ideally about 50:30:20 ratio for essentials/discretionary/saving and/or investing. Include things like adequate insurance, whatever that means to you. Work out your cash flow and make sure you are setting aside for lumpy expenditure.
   
2. get a cash buffer for emergencies. Some set aside 12 months bills, but I count it a good year if I can manage to set aside 3 months bills. This is not a good year! I'm struggling to find spare cash and living month to month right now, cash wise. But I've got a lot of the other stuff sorted, so I'm less bothered about this right now. It'll come good eventually.
   
3. pay off non-secured debt
   
4. sort out pensions (investment might be involved in this) and pay in more if you are not doing enough to secure your retirement
   
5. invest for the longer term - and yes, Vanguard's LIfe Strategy, inside an ISA wrapper, comes up a lot, because it's a low-cost tracker fund and over time, active funds rarely beat the market. Your risk profile is down to you, but lots do 60/40 equities and bonds.
   
6. overpay mortgage
   
7. give to charity
   
   

[AnotherTroyforHertoBurn]

I would overpay the mortgage, whilst making sure I had a slush fund for emergencies etc.,

We have a fixed rate mortgage than I can not pay off before next year or we will incur charges of £600 we owe £50.

So I have overpaid and over paid (FD) and our mortgage repayments for the next year are £2.16 a month, having had a mortgage for twenty eight years this gives me inordinate pleasure.

I am very risk averse as is DH, so we have always worked on the principle of if the brown stuff hit the fan, we could always downsize.

Also we took this mortgage or variations of out in 2000, the house has increased in value to the tune of 215% not sure the markets have performed to that degree.

[OnceUponAThread]

Since the interest rate on your mortgage is so low and can be easily beaten in savings, you're better off putting the money into savings for the four years until your fix ends, and then paying in the saved money plus interest earned at that stage.

Your mortgage rate is 1.39%. This fix from Shawbrook (there may even be better out there) pays 2.60% (almost double). By saving for the four years, your money will grow in excess of the interest on the mortgage, so you'll be better off.

At that point, depending on what interest rates are doing and what fixes are available to remortgage, you could either funnel all the cash into mortgage overpayments (fee-free as fix has ended) OR decide to do the same thing again if you can find a savings account that pays more than your mortgage interest.



[OnceUponAThread]

Sorry tried to attach a Shawbrook picture but the app isn't working. Three year bond here: www.shawbrook.co.uk/direct/savings/personal-savings/fixed-rate-bonds/

[Sparkle123r]

It's not as clear cut as saying a savings account has a higher interest rate so will be better. If you overpay the mortgage, it's reduces the amount you pay interest on from day of payment.

Since you don't give figures this is based on £100k owing now over the next 15 years.

If you saved £100 a month at 2.6% in 4 years you'd have gained 264 in interest.

If you over paid at £100 a month at 1.39% for 4 years you would save £920 in interest, knocking potentially 9months off your mortgage based on £100k.

I would overpay your mortgage

[MintyIguana]

I've also just discovered Pete Matthew's podcast and YouTube videos. He has one on investing vs mortgage overpayment. It's called meaningful money

[anibendod]

@littlematchstickgirl what is your current LTV (loan to value)?

Getting yourself into a lower LTV bracket by the tie your fix runs out and you are ready to remortgage can save a lot of money

[littlematchstickgirl]

Thank you all for the advice - very much appreciated!

I'll take a look at the links, etc once I'm back home. I'm torn between saving some money for a few years and overpaying! I understand that overpaying can have a positive effect on overall interest on the mortgage, so possibly favouring that. But I know I'm not fully financially savvy, so trying not to make a non-optimum decision!

My LTV is quite low, about 35% now, so that's something good! However, I am now on my own (have 3 DC shared with soon to be exH), so don't have the disposable income I had previously, so I want to make sure I do the right thing with the money I do have.

Thank you

[littlematchstickgirl]

Re figures, there is about £150K outstanding on mortgage. 4 years left at 1.39%.

Have to make a minimum overpayment of £500 to reduce the term, so I've done that a couple of times, once I've had that amount. Maybe that can be lowered so I could overlay £100-200 a month? I'd have to call them to ask.

[Sparkle123r]

So our mortgage company (nationwide) only reduce the term when you overpay by £500 lump sum. However I make smaller payment and it comes off the balance straight away, it just means that we will owe less when we come to remortgage so can reduce the term then instead. Check your terms however most allow 10% overpayments.

However for you, it may not be wise to overpay. You indicate you are getting divorced. Is the house in your sole name already? Does your soon to be ex husband have a finial right to the home. I would sort that out, before you overpay. If you have to split the equity, you are giving him more money than he would be entitled to from the date of split. You need to seek financial advise as part of your divorce

[littlematchstickgirl]

Thanks again for further advice! Yes, getting divorced, awaiting consent order being granted (hopefully). I bought him out of our marital home, he bought his new place - each g he ave similar mortgages and properties worth similar amounts.

Need to have a think and get saving, either way - thanks all!