Overpay or invest for a short 4 year goal?

[SpouseHelp]

We are hoping to move home in 4 to 4.5 years time to upsize and improve the area we are in. The specific timeline is tied to school places etc.

in these 4 years our main hopes are to 1) save as much as possible 2) hope to sell our current home for as good a price as possible to enable deposit on next move 3) get a salary re grade for me and a higher paying job for spouse to further household income.

also - in about a years time - our second DC nursery fees will come down by £400 a month and entirely go away generating £900 a month the term after.

should this amount be put into overpaying a 2.8% rate mortgage? Or should this amount be invested? Since the time period is short - 4 to 4.5 years I’m not entirely sure what the approach should be. Most overpayments I know are to reduce the term and most investments aim for long periods of time.

because Our goal for the moment is basically to have as much deposits available for the mega move we are aiming to make in 4 years or so for as high a property price as we can afford in the desired area what should our strategy be?

We’ve already reduced numerous outgoings - for eg neither of us have any credit card debt at all, and neither of us have loans. Cars owned outright etc so no other debts or monthly commitments (except nursery as above).

grateful for any advice!

We’ve always chosen the clear the mortgage route. Check no penalties for repaying first. Have a a small lump sum in case of emergency ( I was always told two months salary). Then either overpay mortgage each month or save, say, £5k and pay that off. We went in to the bank once to do this and one of their sales investment guys tried his best to say pay in to this scheme instead, but we were having none of it; we wished to repay our mortgage and we did, one of the best feelings in the world.

We are currently overpaying and totally get that. But because the aim here is not a reduction of term/being mortgage free but to have as much money available for a deposit in 4 years for a “big” move - where reduction of mortgage term is not a factor at all just plain amount of ££ is - that’s where my doubt arises. Which of the routes will lead to more ££ by 2026?!

There's a really good video by mamafurfur for people in your situation who have an appetite for investing but also wish to pay off their mortgage.

It basically works on the basis you invest in an ETF which tracks an index like the S&P500, for a period 5 years then at year 6 you take the interest and pay off a %age of the mortgage, then wait until year 7 for ut to regenerate then use year 7 interest to pay mortgage down again and keep going until it is paid off. The crucial thing is that the index acquires a high rate of return than your mortgage. Usually 6% or so vs mortgages these days which are around 2%.

It takes time, it will require you to ride out highs and lows in the market, but the S&P500 is one of the most reliable indexes in the world.

Mmmm that's tricky seeing as your move window is so small. I think that's they key challenge with investment as you cannot wait until it recovers.

You could realistically have built up a lovely chunk over 3.5 years, find the house of your dreams and then either a global pandemic, war or other unforeseen even wipes 50% of the value just before you need to take it out!

Due to this I'd be far more risk averse and look to pay down the mortgage unless you can find any fixed rate investments higher than the rate (doubt it)

Thanks very useful. That’s what my concern really is re investing. What if 3.75 years into the wait window a world event occurs and we don’t have the time to let it recover as we ordinarily might? The timeline is fairly specific as I said for school reasons… I think we will need to veer towards splitting the difference between largely overpaying and partly some cash to save in whatever savings account we find.

Given the short time frame paying off the mortgage is the best option. If your mortgage rate is 2.8% you will be hard pressed to find a better ROI rate without significant risk.

What you have to remember is each overpayment directly reduces the original loan but then reduces the amount of interest when next calculated. So your next monthly payment will see more goes into capital repayment than interest. So there is a double payoff.

Monthly repayments are based on lump sum + 25 years interest at 2.8%. divided by 25 and then divided by 12 to get a monthly repayment. Initially the majority of the monthly payment is interest but over time as the amount borrowed reduces and so less of the monthly payment is interest and more capital repayment.

I hope that makes sense.

Or just use the calculator on MSE!

Thank you - thats all really helpful and we can clearly see the mortgage is the safest and best returns given the short term nature of the goal. thanks again!

Are you in a fixed product and do you have limits on overpayments that you're likely to come up against so you can't overpay as much as you can afford to? If you're in a fix, when does it end? What's your current LTV?

2.8% sounds quite high for a mortgage interest rate, so I'd first be looking to see if I can do anything to reduce that so I pay less interest in the next 4 years or so.

You're right about the investment risk, that's a tricky one. You could look for very low risk products for some of the money, eg if you have money left over after you overpay to the limits and hope for the best. Or you could just decide that you'll stick with cash savings. Some fixed term accounts might nearly cover the interest that your mortgage costs anyway. But it's also worth considering what if you need to spend 'big' money in the next 4/5 years. What if you need to replace a car? Are you planning to spend money on your current home when you come to sell it with a view to maximising the sale price?

You say you've also reduced your outgoings, does that mean you're living frugally? It depends how much extra money you need to save, what your priorities are with lifestyle vs this mortgage plan and what you're currently spending now, but if you're currently spending more than the minimum on grocery shopping (£100 pw in Asda/Aldi or £200 pw in Waitrose?), food outside the house (packed lunch, a flask and a water bottle at every opportunity or bought lunches and coffees regularly?), holidays (A couple of SC UK breaks a year in cheaper parts of the country or a cottage in Cornwall with lots of eating out in nice pubs, or a luxury over seas AI?) and things like tech/mobile phones (SIM only and a basic Android for about £10-20 pm or the latest Samsung or iphone for £50+ pm?) etc, you could have hundreds of pounds a month extra spending with scope to significantly reduce. Are your cars cheap to run? That's another area where the road tax, insurance and petrol can vary enormously between models.

Our current rates runs out this autumn and taking a look at FRs it’s likely to be between 2.35 to 2.85. So my projections are working with the higher end of that.

i do invest - anything being saved currently gets divided into 3 directions - mortgage overpayments, easy access savings and investments. Lucky to be able to do this despite cost of living, power bills, a generous pension plan and 1 DC still with eye watering nursery costs for FT nursery.

DC activities and our annual holiday are a priority and we’ve cut back everywhere else and v happy with the results. Our weekly Lidl shop (partly thanks to my love for cooking as stress release!) is very frugal (even compared to the mythical MN chicken!) and we’ve managed to get any credit cards and car finance and loans down to zero for us both and keeping it that way. The mortgage is currently the one and only debt and has been for a while.

I think this is really the best route for now - given the short 4 year time frame. Overpay what’s possible, invest an equal amount, and save rest for easy access cash savings. The kids also get a generous birthday gift from my parents halfway across the world which we don’t touch and is directly invested in an ISA in my name (not a junior Isa) and which we won’t/don’t touch or factor into anything like moves. It’s between the kids and my parents and we don’t look at that at all.

it’s a very lucky position to be in I absolutely understand and very conscious that anything like a major life event (illness etc) could change plans. Thankfully our life insurances and particularly pension plans with generous employer contributions and illness/death in service benefits provides some reassurance

If your rate runs out this autumn I would speak to a mortgage broker tomorrow, definitely before Thursday, this could potentially save you much more money than all your other ideas.
When you make additional repayments to your mortgage, ask them to reduce the capital rather than shorten the term, that way you will have the additional equity as deposit for your new home.

Aren’t overpayments always contributed to the capital? I thought they went to the capital and wasn’t aware it specifically needed to be mentioned to them that it’s not to reduce the term. That’s something new to me and I’ll speak to the bank tomorrow.

op
i remember our thread from ye et west asking for career help for your dh because he was so unhappy in current role, bored, exhausted, 4 hour commute

perhaps short term financial plan would be to address this, whatever that may involve?

I would overpay at this rate. Remember you put tax on interest you earn if you invest unless you use ISAs and stick to the limits.

My mortgage is 1.7% and I've worked out shoving what I have in fixed term bonds for 12 months at a time is best, but it's lump sums as opposed to amounts each month.

*pay tax

Yes of course - my other half’s reskilling/looking for a more hybrid/WFH friendly option as opposed to the daily commute isn’t something that isn’t being done or can’t be done in parallel to our ongoing overpayments. Both of these are our joint goals for the forseeable few years - absolutely.

Back to PP’s point around the difference between overpayments and the reduction in term - we’ve been overpaying from the start and we haven’t increased the monthly payments to shorten term. We make overpayments each month to the capital. I suppose then this is doing what we think and getting contributed to the capital? Will still call NatWest to check tomorrow though!

Oh and I think someone asked if the current rate allows overpayments (?) and yes it does to 10% and the new rate we are eyeing up when this one expires also allows an up to 10% overpay.