Overpay on Mortgage or Invest?

[1940s]

DH and I have recently had promotions and on a 'good' month (not Christmas or annual modest holiday month) we have approx £5k disposable income.

We are both naturally quite frugal and have no debts aside from mortgage (approx 400k with 250k equity)

No large outgoings we can predict (no wedding / no more children)

We have a float savings pot of around 6months bills/mortgage should either of us find ourselves unemployed.

The question is what to do with the £5k per month disposable income. Is it wiser to look at investment isa's / premium bonds or to overpay and aim to clear mortgage down.

DH and I both come from irresponsible financial backgrounds and I am so keen to set us up for long term comfort rather than the panic we watched our parents be in.

We're very 'FIRE lite' on the thread - more interested in financial independence than retirement as such. I like to take inspiration from the movement rather than seeing it as a map. Mindful spending and investing for the future, whatever the end result is. Come and join us if that is interesting.

Would be interested in what you decide to do on the mortgage vs alternatives. I have no idea what I will do!

OP, having received an inheritance a couple of years ago, I can tell you that there is no feeling on earth like paying your mortgage off early and having that millstone gone from round your neck. To know that if anything unexpected happens we at least own our own house and it won't get repossessed or we won't get evicted is superb peace of mind.

I've had relatives who have died earlier than expected, or been seriously ill, and as my DH is the main wage earner, if anything happened to him and we still had mortgage payments to make as well as all our other outgoings then it would have made life much more stressful.

We did have critical illness cover and have life insurance but at least now if either of us have any health problems then we only have the normal bills to worry about - not the roof over our heads.

If you make sure you have a bit of a cash reserve for things like boiler, car or roof repairs then I would put the rest towards my mortgage.

That's what I keep imagining. The freedom of no mortgage would feel incredible!!

OP I hope you do not think I'm rude but what kind of job do you do? My DH and I don't pull in 5k together a month. I would love to be in that position and we are both thinking of retraining.

DH and I both work in the IT industry - software sales / support type roles / account management type roles.

Neither of us have any accreditation or formal training - we started off in junior account management / sales / service delivery / sales assistant type roles and have since progressed.

@Bravegoldie: pensions are not about not paying taxes, they are about DEFERRING TAXES, which is different. Very different.

Today you invest your pre-tax income.
This money grows tax free.
When you retire, you can access 25% of your pension pot tax free, and get taxed on the rest.

This means that the greatest advantage is for those who will realistically have a lower marginal tax rate at retirement.

If your marginal tax rate now is 40% (£50k-150k income range) but will be 20% at retirement, that's great.

If it is 20% now and will be 20% at retirement, after the 25% tax free lump sum it will be 15%. A good saving, but not as great.

As for taxes on capital growth, between ISAs and capital gain allowances, quite a lot of capital can grow tax free even outside a pension.

Note I am not saying not to invest in a pension, absolutely not - I am simply saying you missed out an important piece of the puzzle and risk overestimating the tax advantages of a pension.

PS There are other technicalities, like national insurance savings for salary sacrifice schemes, but let's leave them to one side for now.

OP, the first thing I'd do is understanding if you can increase your pension contributions.

After that, I'd recommend setting up a rainy day fund of liquid, easily accessible money that must be available for any of life's unexpected crises, from a car which breaks down and needs repairing, to unexpected redundancies, etc.

Only after that can, IMHO, the question become: how much to pay off the mortgage vs how much to invest?

Well, of course you don't need to be a Wall Street trader to understand that, if an investment yields more than the interest you are paying on a debt, you are better off investing and not repaying the debt.

Banal example: you have a loan of £1000 at 1%. You can invest £100 at 2%. If you invest, you gain £2 but spend £10 of interest, ie you spend £8. If you repay the loan, you will pay £900 x 1% =£9 of interest.

Of course it's all about risk. You are not going to find a safe investment that guarantees a return > the interest on your loan.

You need to consider riskier investments, like investing in the stock market. Over the medium to long term, it is quite possible that this kind of investments will return more than the cost of the mortgage. Quite possible, but not an ironclad guarantee.

In summary, the shorter the time horizon, the greater the risk that the investment may return less than the cost of the mortgage.

if you are 5 to 6 years away from retirement, I'd say probably repay the mortgage.
If you are >20 years away from retirement, investing in the stock market may be a good idea.

Such brilliant advice thank you. This concept of invenstments / pensions / and saving anywhere beyond an immediate short term goal is very new to me.

Whilst I've always been sensible with money it's always been about short term savings to get on the property ladder / pay for wedding / cover a gap in maternity leave income. I've never really had to think outside of the next 24 months so it feels daunting and quite intangible to throw money for the future.

We definitely have easily accessible money that could cover us for about 6 months in an emergency and it would take both of us being made redundant at the same time to really throw us as we could live on one wage long term (no luxury's not holidays cut back pension sacrifice)

It's just about making the right choices now whilst we are fortunate to be able to. Neither of us can envisage being in these high stress corporate roles up until state retirement age (but hopefully by making wise choices now we can reap the benefit of stressful corporate roles in our 30s and 40s abs change gear early 50s)

As I've mentioned in the thread it's also about the fine line of how much we want to provide for our children vs when we want to retire.

Your max pension contribution p.a. Each is £40k so it depends how much you are already paying in as to the Max top up (you can carry forward allowances for 3 years so that would give extra right now if you're not contributing the max). I'm currently pumping all spare cash into pension as I've recently separated and was semi relying on Dh's pension in retirement which is now not an option (I'm not pursuing a pension sharing order). It is a balance between tying it up now against the tax advantage which is pretty significant. Once I'm happy with my 'pot' I'll look at other savings - I have Stocks and shares isas (cash isa returns are rubbish) and enough rainy day savings so best for me now.

Hi - one way of thinking about it is you should deposit your excess savings in the highest return investment you can. Over a long enough time period (5-10yrs) equities (some kind of tracker) are likely to return 5-10% on average which should comfortably beat a mortgage which may be costing you less than 3% in interest.

Your risk appetite is key - are you happy to take a longer view betting that equities will probably return more than the mortgage is costing over a long enough time horizon? Or would you prefer the certainty of paying your mortgage down?

You can play around with some assumptions here: www.modelu.me which might help.

Jon

Sorry if this has already been mentioned but do you have a LISA ? Where you can put up to 4K a year and the government tops up 25% . You can pay in until you're 50 and it's pays out at 60

Personally I wouldn’t bother seeing an IFA. All he will do is stick it in a fund that invests in FTSE 100 companies. You might as well do that yourself and save on the fee. Either pick a fund with someone like Hargreaves Lansdown, or just buy shares each month through someone like IG. FTSE 100 will always be safe. Normally good dividend pay out which you can buy more shares with.
If you fancy something a little riskier, but in my opinion very safe, then look at buying shares each month in the FANGS.

"Your max pension contribution p.a. Each is £40k"

Yes, but you don't get tax relief on the part of your income on which you don't pay taxes. The UK tax rates are these (slightly different in Scotland)
www.gov.uk/income-tax-rates

The first £12,570 of your income doesn't get taxed. So, if you earn £52,570, by all means, you can contribute up to £40k and get tax relief on £40k

If your income is £45k, you only pay taxes on £45k - £12,570 = £32,430. So you can contribute up to £40k, but you won't get tax relief on the part between £32,430 and £40k. Tax relief is about giving you back tax you have paid (or preventing you from paying it in the first place); if you wouldn't have paid it anyway, there is nothing to give back

Sorry if been mentioned only skim read but look up fire sites, tips on finances independent retire early.

Ideally you want to grow capital to then live off the interest, I'd concentrate on that.

However, with that amount of money I'd do both, pay down mortgage and grow capital!
1000 over payment will make lots of dents in that debt, look at over payment calculator.

Lastly.. Nothing but nothing in this life is secure.. I'd never take anything for granted and over pay mortgage and grow capital protects you both ways.

Op some great advice here... They key 2 questions to me are how risk averse are you and how does your gut feel about mortgage?
Personally I'd be unsettled by that mortgage..what figure would you be happy with left to pay? . So I would pay everything into that for a few years... Or at least 10% overpayment (if stops penalties) and invest rest... To me the security of owning House, as life can throw you kerb balls, would be key even if not best financially.