Overpay house or invest?

[Linguaphile]

Hello, question about what is likely to yield better benefits in the long run for our extra cash. We are specifically trying to decide if, after savings and maxing out our pension contribution, we should be overpaying on our house or just investing that money.

So as not to drip feed, our mortgage rate is very low and fixed (1.5% for a 25 year fix) so there aren’t massive negative incentives to ‘get out’ of our mortgage sooner rather than later, aside from the obvious ‘financial freedom’ argument. However, as a perk of my husband’s job (which gets him a preferential mortgage deal), we also don’t have any early repayment penalties, so paying off early would be easy.

I guess what I’m wondering if we should just be putting that money in investments instead of overpaying and just pay off big lump sums when we feel like it after the cash has earned a bit? I suppose I worry that if there’s a major crash, we’ll have lost the money that would have been safely building equity otherwise, though presumably house values would also fall in a crash. I’m just thinking that pretty much anything is going to earn more than 1.5% interest if it’s invested well, which makes me think it would be better to invest. But we’d need a low to medium risk sort of portfolio that would yield decent dividends within 10-15 years I think.

Thoughts? Is it worth it to pay down the mortgage directly in this situation or just invest elsewhere and pay off the house early with lump sums from those accounts?

1.5% fixed for 25 years I'm very jealous! I think the first thing you need to consider is whether or not you think you're likely to move to a more expensive house in the next X years (5, 10, whatever is a reasonable time scale). If so, would you need to guarantee that your money was available to help fund the move? If the money wasn't available would you stay put? If you'd absolutely need the money (especially in 5 years or less) then I'd stick with overpaying the mortgage as it's a guaranteed money saver.

Is your mortgage a repayment one (rather than interest only)? And can you comfortably afford the repayments? If so, then worst case scenario, if the stock markets crashed so badly your investments were close to worthless, t hen you'll still have paid off your mortgage in 25 years time.

That said, long term (especially over the 25 years of your mortgage term), investments will almost certainly return more than 1.5%. Personally, we have opted for a 35 year mortgage, fixed at 2.09% for five years and are putting all our money into investments instead of over payments. We can comfortably afford the mortgage repayments and intend to stay in the house long term. We'll have a LTV of less than 60% when we remortgage in 5 years time (below this doesn't seem to help in terms of better interest rates). Investing the "overpayments" should, over the long term, result in us having a higher net worth than overpaying the mortgage. I am comfortable with taking this long term view, and the knowledge that investments can (and do) go down as well as up but only you can decide your own comfort level. Overpaying the mortgage is a guaranteed win, and would feel great psychologically, and is hardly a "bad" choice. Always remember "action is better than inaction" - do SOMETHING with the money to ensure you benefit from it later in life!

Buying a house is more important because you need to have a roof over your head. Your family’s stability is dependant on the house you own. Renting is an option, but it is not always reliable. This is why people strive and struggle to own a house.

Historically the stock market has done significantly better than 1.5% in the long term but you need to consider whether you may need to access the money. We have been in a similar situation and have done a bit of both because there's always a risk of something like redundancy coinciding with a stock market crash. We also have a fair bit of cash. It's probably 60% stock market, 30% mortgage and 10% cash.

That's a fantastic mortgage deal. Unless you've got very high LTV in which case it would be safer to reduce it, I'd invest - you almost certainly will end up better off. Surely this must be a thread where even MN has to drop its weird obsession with being mortgage free

Thanks for the responses, and sorry for not getting back sooner, I didn’t realize there had been other replies!

Yes, the deal is really good, it’s a preferential rate we get because of DH’s job. The LTV at the moment is about 70%, so not super high but not low either. We have maybe 400k in equity. We definitely don’t have plans to upgrade; if anything, for our next house I think we’d like to downsize and use the equity to buy somewhere outright in a cheaper location. The property market here is hot (we’re in a European city, not the UK) so at the moment the equity gains are vastly outstripping any modest gains we’d make from the monthly payments if that makes sense, so we’ll likely stay put for at least the next 5ish years to benefit from further projected market gains and then will re-evaluate our position. We also have young children in school so are not wanting to move them from our area until they’re finished with primary.

It sounds from the replies that long term investments would be the better option to eventually overpay? I suppose there is the added bonus that, should we have unforeseen financial problems at some point in the future, investments are a bit easier to liquidate than the family home.