Overpay mortgage or invest?

[southeastlady]

Not sure what to do in our situation;

I am 38, husband is 32 and we still have 27 years of mortgage to go so I'll be 65 when its done

We owe £202,000 on a fixed rate of 1.79%

Overpaying £500 a month would clear it in 15 years when I'm 53 (which sounds better than 65!)

Husband is self employed so on the one hand would love the mortgage gone or reduced in case he's ever not got work, but on the other hand if we pay £500 into my S&S ISA the money would be quite easy to get back if ever needed

Of course could spend 10 years investing £500 a month and theres a massive crash and lots gets wiped out and we'd still have a mortgage and investments kaput

Whats the best way to go?

It depends on your risk tolerance. I’m very fortunate that we can save quite a lot each month and I go for 65/45 split in favour of overpaying the mortgage vs the stocks and shares isa.

I could get higher returns investing the whole amount, but the peace of mind of being mortgage free can’t be beaten in my opinion.

However, you should try and treat your investments as ‘untouchable’ similar to if you’d overpaid the mortgage. So make sure before doing either you have a decent emergency fund (we have a few months expenses sat in premium bonds).

I agree it depends on risk tolerance.

Personally I would overpay on the mortgage assuming there are no charges for overpaying and try to get mortgage free in time as that gives a lot of freedom.

However, you could also the view that investing in a S&S ISA is likely to get a better return and could be used to pay off mortgage in future though obviously there is the risk of a crash. I put £20k in a Vanguard isa this April and it went down £400 before now being plus £700 minus charges of around 0.5% per annum but you can get money out quickly to give you an idea of volatility. In general its advised for 5 years plus.

Invest. This video is probably the best explanation I’ve seen of why it is almost always better to invest vs paying off mortgage in the long run (especially in this low interest mortgage environment—their simulations were with paying 4% mortgage so what they are saying will be even more true for you). Obviouslg there are psychological benefits from owning your home outright if that is really important to you, but from an accumulation perspective, investment is usually the better option.

If you have £500 to spare on a consistent monthly basis then as attractive as paying extra on the mortgage and reducing the term sounds I would strongly recommend investing. I say this as someone who has periodically overpaid on my mortgage when funds allowed.

Your mortgage interest rate is low. While there are no guarantees it's reasonably likely that the stock market will outperform that rate. I use Vanguard life strategy 60/80/100. I'm fairly new to this but if you check on performance tables over the last 5+ years you'll see the overall upward trend with the odd fall (eg covid March 2020).

The other recommendation I would make is you could also pump some of that £500 into beefing up your and his pensions. Again the more £££ in earlier years, then the greater the £££ at the end. I recently found out that £10k contributions in my early 20's has turned into £140k over 25 years.

I'm overpaying as much as possible as I want yo be mortgage free early. In one year I have got it down from 30yrs to 26yrs 10m

I split 2/3 overpayment to mortgage, 1/3 s&s isa. I want to get the mortgage down with certainty. I might use some of the Ida growth to pay down further on the mortgage, but I like the certainty of actually overpaying. The isa growth has outperformed the mortgage rate, but I’m not to take the risk of the isa goig down dramatically in a relatively large amount.

I had overpaid the 10% allowance on my mortgage by May this year. For the remaining months, until my allowance resets, l am investing it.

Check what your overpayment allowance is as you might end up doing both!

I’m a similar age and have a little more “spare” each month than you, but we have a whacking great London mortgage!

I spread it it. So pay an extra £250 a month off the mortgage, an extra £125 into my pension and then save a differing amount each month into a stocks and shares ISA and a normal ISA. Some months I save £800 into the ISA’s. Some months it’s more like £200 if for example we have a nice weekend away or something.
I’m sure someone will come along to tell me I’m doing it wrong but doing this should reduce our mortgage term by about 5 years over time, boost my pension and we’ll still have some more accessible savings.

Invest.

We use a wealth manager (much grander than it sounds, we are not what I consider wealthy) and she worked up multiple different scenarios for us in great detail and it was an absolutely no-brainer to keep the mortgage going for as long as possible while interest rates are so low.

Until I saw the charts I thought I was willing to "pay over the odds" as it were and enjoy the peace of mind of being mortgage free, but honestly that peace of mind would come at an opportunity cost of a hundred thousand pounds compared to investment, even with a conservative rate of return.

Could you remortgage to an offset mortgage? It would let you save the money, reduce your monthly payment but have the money available if you need it.

I was overpaying the mortgage but the interest rate is only 1.3% & after researching decided to switch to a S&S ISA. I’m up 4.5% on the ISA so it makes more financial sense than overpaying a one percent mortgage.

We have an offset mortgage for exactly this reason. We can access the savings wherever we need them - in the meantime they are working nicely for us set against our mortgage

Half and half.

I too would do some mortgage and some investment. You don’t have all your eggs in one basket then!

I would be aiming to get the mortgage paid off by the time you are 60. It gives you more freedom at a time when it gets harder to find work and when you want to wind down.

Given that is quite a long way off for you and interest rates are so low I would want to do that mostly by investing. I would therefore invest now and pay off lump sums from the mortgage between fixes but only when interest rates start to go up.

Also make sure you have an emergency fund.

I would split it - some in pension, some in ISA and some off the mortgage.
You should be able to access your pension at 58 (depends if rules change) and can take a 25% tax free lump sum which could be used to pay off the mortgage. If you are a higher rate tax payer this would make a lot more sense than paying off the mortgage.

Absolutely the mortgage. It's a no brainer imo. You want that cleared as soon as you can before you start investing. Especially as over the years I'm sure interest rates will eventually increase so get it down as quick as you can.

Absolutely invest!!

Your interest is so low. If you invest, even on a simple FTSE All share tracker you are likely to get a much better return. If your goal is to pay off your mortgage early then you can withdraw your investment and pay off at some point. It is very likely to be a lot earlier than 53.

Mortgage rates are so low. Invest it elsewhere and then take the profits to pay off the mortgage.

I'm in a similar situation and have a 5 year fixed rate. We're putting the overpayment into a S&S ISA which is up almost 30% in the last 18 months.

It's also better for us to have accessible money than it all being tied up in a mortgage.

In 5 years we'll reassess and decide whether to use the savings to pay off a lump sum on the mortgage and that will depend on interest rates at the time.