Would you overpay mortgage in this instance or not?

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We have just upsized into what we call our interim home - with a view to buying a larger house in a nicer location in 6-7 years time. Our upsizing has pushed the mortgage up and these are our prime FT nursery/small infant school child wraparound care years so money is tight. We can possibly afford small regular mortgage overpayments - BUT - given that we will aim to sell in 6-7 years is that money best spent in -

1. Mortgage overpayments
2. Investing in our stocks and shares ISA
3. Further modernising this house

If this was a forever home it would make sense to decrease the term. But for a sale in 6-7 years all being well where’s that money best spent oh wise MNers?!

For info - mortgage is a ported one which is 2/3s on a 1.08% rate and 1/3 on a 3% rate….

Surely it's still worth overpaying your mortgage now even if you plan to upgrade. You'll need to borrow less when you move if so. We've aggressively overpaid our mortgage on home number 1 which we are now selling with a plan to buy house 2. Means we don't need as much of a mortgage for new house.

I think if you will need the money again in 6 years the stocks and shares ISA might be a bit of a risk in terms of what the value is then.
I would probably overpay the 3% bit of the mortgage to bring that down with maybe a small amount in the ISA in the hope that it grows.
Modernising the house depends on what state the house is already in and whether you can do much and get your money back/not spend over the ceiling price of the street/house.

2 every time.
Our mortgage rate is laughable (like 2%? S&S isa is making 12-15% pa (our somewhat volatile crypto is averaging around 80%)

In terms of improving value of home
Its also tax free butttt cost of trades and materials is crazy.
As an example a 3 x 3.5 partial extension plus new kitchen will be costing us 100k ish... we will wipe our faces maybe a bit more but that will be due to general increases in house pricing. honestly its not an investment, its to improve our day to day. Wallpaper and paint cost 50-100 plus time and make houses far more saleable.

The house is in a quiet residential cul-de-sac with its own drive and parking for 2 vehicles. We are currently doing a garage conversion (this doesn’t impact the 2 vehicles parking) which is adding a downstairs home-office to the same size dimensions as the 3rd bedroom just above it. This is what numerous neighbours have also done. I wouldn’t say the house “needs” modernising or anything but we needed the 4th bedroom/aka home office for me, and we are currently re decorating throughout and will soon get a patio laid in place of the old decking. In terms of further work - I was pondering a new kitchen or in a couple years a loft conversion.

BUT a good point is how much value this will add.

Fundamentally - the aim would be to make a higher deposit available on the next house. This can be achieved in various ways -1) either paying off capital on the mortgage substantially 2) selling the house in 6-7 years at a higher price 3) savings

I suppose we need to think of which of these routes is most realistic in making the most difference when it comes to having a higher deposit to hand.

I also wonder whether it’s worthwhile going through mortgage affordability calculators with my projected income in 6-7 years and my spouses too - but SANS the eye-watering FT childcare fees we currently have to see how much we might need at that point to afford something we like. Obviously house prices fluctuate lots if say - erm - a pandemic occurs - but perhaps useful to have a notion…

It's all about what will give you the best return in 6-7 years time, isn't it.

If you were to put £100 per month into mortgage overpayments, at an average of 1.72% interest rate, you'd be £9,040 up in 7 years.

If you put the same £100 in S&S and gained 7% pa (normally easily achievable) you'd have around £11,000

Same as above with £250 per month you'd be around £22,500 ahead on the mortgage and £27,500 on the ISA.

Option 1 on the 3% mortgage.

We actively chose not to overpay the mortgage during the childcare years. Just coming out of it and we are hoping to move and will have much better rate but very big mortgage. Will over pay this now that we can. We just needed the cash more previously.

Thanks much. Just done these calculations and you’re quite right if we overpaid £100 a month which is what I was thinking it would be £10k off the mortgage in 6-7 years.

The same into my Hargreaves Lansdowne account is putting away £8400 and then whatever interest it gets.

So I cannot I think see too much of an advantage to overpaying the mortgage given the amount we can afford to overpay and the timeframe in which we plan to further upgrade ….

The most important thing to understand OP is interest rates and yield of your investments.

At the moment interest rates are very low. If you have a mortgage with an interest rate of 2% then you are much better off investing in your ISA. A typical All Share or FTSE 100 investment is yielding close to 6% at the moment. This means that overall, if you invest in an ISA you will be much better off at the end of the year.

This will mean that when you move you will actually have more cash to use towards your deposit. And in the meantime, if interest rates go up when it comes to remortgaging you can always increase your equity then by adding the additional capital.

Based on your figures I would be tempted to overpay a little on the 3% mortgage and invest in your ISA. 6/7 years isn't long term but you can ride it out. My investments took a hit with Covid but I am back at precious levels within 16 months.

Definitely overpay the 3% part

How long are you tied into that rate for?

You also have no idea if the plan to move again to a forever home will actually be what you want by then

You might find after the years of high childcare costs you enjoy the surplus money and don’t want to stretch yourselves again abs decide to put the money into savings, pensions, pay off mortgage early, and have some time doing amazing holidays whilst living in the same house and not having to go through the efforts of moving and paying out all that stamp duty again

Especially if your house has potential for improvement anyway

By that point kids might have made friends at their schools who are local to you and roots have been made that you don’t want to relocate far to make a move worthwhile

(Literally all the thought processes that run though my head when we start discussing moving again )

If you were to put £100 per month into mortgage overpayments, at an average of 1.72% interest rate, you'd be £9,040 up in 7 years.

Add in the increase in property price and difference that would make to the equity and it could be much higher in 7 years

The thing is that kids school and future schools are in the area we aspire to buy in which is literally under 2 miles away. You have all given me much to think about and I am thinking maybe overpaying the 3% bit and saving hard for my Hargreaves Lansdowne portfolio is the way to go.

Overpaying the larger chunk that’s on a 1.8% rate wouldn’t possibly make that much of a difference I assume (?) so perhaps stocks ISA and 3% overpayment is way to go?

Currently FT childcare is £1800 a month despite the bulk of it (nursery) being heavily discounted as workplace nursery and tax free fees, but still £1800 a month bleeds out on the tiny ones and I’m hoping once that ends in a few years there will be at least some difference to what banks deem we can afford than what they deemed now. My income is also going to rise predictably following my last promotion this month (I say this with massive assumptions that neither of us fall ill or die…)

That’s makes sense to aim for moving again then

I would do as you’ve said with the 3% overpayment and some stocks and share isa payments as a balance .

We’ve just remortgaged. We were overpaying by £100 a month and doing some stocks and shares isa, now the overpayment is incorporated into the mortgage as we just reduced the term by 6 years instead.

We know that in 2-4 years we either need to extend or move as we are short on space.

Il continue to put into stocks and shares isa now the whole mortgage is just 1%

@NavigationCentral

Currently FT childcare is £1800 a month despite the bulk of it (nursery) being heavily discounted as workplace nursery and tax free fees, but still £1800 a month bleeds out on the tiny ones and I’m hoping once that ends in a few years there will be at least some difference to what banks deem we can afford than what they deemed now. My income is also going to rise predictably following my last promotion this month (I say this with massive assumptions that neither of us fall ill or die…)

Yes both of those will have a massive difference on affordability

I know the banks don’t see it exactly this way, but £1800 a month is not for off you paying for another mortgage on a potential £500-600k house.

Our salaries have adjusted for promotions over the years and the affordability difference from when we first got our house to now on that alone is a big jump in my opinion

Assuming your 3% mortgage is fixed- usually you can overpay up to 10% of the mortgage without penalty.

So in your situation I would maximise the overpayments on the 3% mortgage, and put the rest in a S&S isa or a LISA if you have one (though this isn’t liquid). I wouldn’t overpay the 1.08%, that’s a tiny interest rate.

If and when you upgrade the house you can liquidate the S&S isa and put this towards a deposit. If you have the flexibility to time the market you can hopefully avoid any falls.

Thanks all. Current house bought at £500k which is what we could afford with £1800 nursery fees prior to my promotion this month.

The next one would need to be at a higher price but I’m not sure what difference the departure of nursery fees will make to lenders (or not)

@Couldhavebeenme3

If you were to put £100 per month into mortgage overpayments, at an average of 1.72% interest rate, you'd be £9,040 up in 7 years.

Add in the increase in property price and difference that would make to the equity and it could be much higher in 7 years

I'm not sure I follow?

The increase in property prices will happen regardless of where the OP puts the £100/mth and the mortgage won't reduce by anything other than the £9k if it goes into overpayments.

If the money is in an ISA instead of in overpayments, the OP has the ISA money to decrease the next mortgage.

How risk averse are you? Overpaying your mortgage guarantees you will have less debt in 6-7 years time. Putting it into stocks and shred ISA may be financially beneficial but the outcome is not guaranteed

@SofiaMichelle

It's all about what will give you the best return in 6-7 years time, isn't it.

If you were to put £100 per month into mortgage overpayments, at an average of 1.72% interest rate, you'd be £9,040 up in 7 years.

If you put the same £100 in S&S and gained 7% pa (normally easily achievable) you'd have around £11,000

Same as above with £250 per month you'd be around £22,500 ahead on the mortgage and £27,500 on the ISA.

This

A S&S ISA is going to give a better return than the mortgage with such a low rate.

Boring as it sounds, I've been listening to the Meaningful Money podcast and it's really good at explaining this sort of 'home finance' logic.

Build up a short term Emergency Fund
Pay off ask debts that are not the mortgage
Invest in S&S ISA and pensions
Have life and critical illness insurance and possibly income protection

In this stock market it’s very easy to make 20%+ so a SS ISA is an absolute no brainer. Mortgage rates are at their lowest. Invest and you will have far more money to put towards your next home

Our mortgage is about 2% and our share ISA makes over 10% on average.
We put money we could use to overpay the mortgage in the ISAs, we will probably have enough to pay the whole mortgage off in less than 10 years

Overpaying the mortgage is a psychological thing for many people, but a S&S ISA is likely to be better financially. Our mortgage rate is 1.3% but our ISA is up by over 10% so far this year.

Super helpful advice thanks so much everyone - really useful.

Can you manually make an over-payment as and when you feel able to? Our mortgage allowed us to pay overpay up to a certain limit each month - I can't remember what the limit was - a few £100 I think. Sometimes we could and sometimes we couldn't or wanted to do something else with cash we had spare.

Our aim in life was always to pay the mortgage off as soon as we could and I'm happy we did - all paid off at 50 and extra money (~£300 pcm) went in to pension AVC's for one thing.