Overpay a very long mortgage vs investments

[Cascade360]

Last year I bought my first house and took out a 40 year long mortgage (90% LTV). The reason for the long term was we always intended to overpay and a long mortgage gave flexibility - it seemed a no brainer. We have been making overpayments to take the term down to around 20 years. However, I was just looking at my pension (which i've been funneling loads of money into for the tax advantages) and noticed my rate of return over the last year was 26% ( ). Obviously past performance is no indicator of future performance etc. etc. etc., but it got me thinking that I am only making 1.89% on my mortgage and am not utilising my S&S ISA allowance (or for that matter my partners). So is it a no brainer to redirect the overpayments into a S&S ISA?

The cons seem to be mainly psychological, though there is the perhaps side risk that if our house value drops we might find it difficult to remortgage at the end of our fixed term if we no longer have 90% LTV (though at that point we could always liquidate investments to make an overpayment).

We could always do a bit of mortgage a bit of S&S ISA but I almost feel that if the latter is better than the former we should just do that.

Thoughts?

[sociopath]

You're really asking if you should take the guaranteed savings by overpaying, against the potential earnings of your investments.

If it was me, I'd go for the guaranteed at least until you get to a healthy LTV, and then reconsider.

What would you do if the market crashed, or you lost your job, and you couldn't service your mortgage?

[Mr Pointy]

It's a commonly held view that a mortgage is cheap money at the moment & whilst being mortgage free is nice there may be better uses for any excess funds, albeit with more risk.

If you put the money into a S&S ISA then you can always pull it out & use it to overpay the mortgage; it's not locked away, it's just sat there (hopefully) increasing in value tax free.

[FWIW]

sociopath said:

You're really asking if you should take the guaranteed savings by overpaying, against the potential earnings of your investments.

If it was me, I'd go for the guaranteed at least until you get to a healthy LTV, and then reconsider.

What would you do if the market crashed, or you lost your job, and you couldn't service your mortgage?

Crashed market ALWAYS recovers.

I’d be (am) using as much ISA allowance as possible and spreading around various index trackers.

Less than 2% interest = free money

[Cascade360]

I suppose if the market crashed, we would hope to ride it out until it rose again; the bet being that capitalism will not fail and markets will, over the long term, always go up.

Losing our jobs would hurt us either way (though we could service the mortgage from either of our salaries alone which reduces the risk) - whether we have LTV of 50% or 90% we still need to make our monthly payments! If anything the flexibility of having money in the S&S ISA that we could liquidate might be a bonus ...

[ramblo93]

This is an age old question and the answer comes down to risk appetite.

Personally over the last 6-10 years i've tended to split any surplus cash three ways:
- Mortgage overpayments for the immediate satisfaction of seeing your remaining term come down. Working in a job that isn't a secure industry means it's nice knowing the future mortgage payments are lower should i lose my job
- S&S ISA: I like knowing that any future gains/income are 100% tax sheltered.
- Pension Contributions: I like gaining the immediate tax breaks pension contributions offer...it's free money and boosts your initial investment.

If i had a secure government job i'd likely not overpay the mortgage and focus on investments. As i said it all comes down to your risk appetite and your circumstances. The above works for me but might not for you.

[hotchy]

Iv got the same and on track to pay it off within the first 5 year fix. Well I'm max overpayment and the rest into what your doing, all in should then let me pay it off penalty free after the fix. I have a relatively small mortgage though hence the ability to do that. Think it saves me roughly 35k in interest over the 40 years but I get to use the mortgage payment to pay for my dream car and I'm not waiting 40 years for that. So 3 more years until I join the cool car club.

I based this on having a very safe job for roughly 4 more years then it gets iffy..

Edited by hotchy on Wednesday 5th May 09:35

[Cascade360]

hotchy said:

Iv got the same and on track to pay it off within the first 5 year fix. Well I'm max overpayment and the rest into what your doing, all in should then let me pay it off penalty free after the fix. I have a relatively small mortgage though hence the ability to do that. Think it saves me roughly 35k in interest over the 40 years but I get to use the mortgage payment to pay for my dream car and I'm not waiting 40 years for that. So 3 more years until I join the cool car club.

I bought my cool car already, definitely wasn't willing to wait twenty years till I had paid off the mortgage ...

The bigger problem is my partner would rather I had spent the money on a kitchen and an engagement ring ...

[hotchy]

Cascade360 said:

hotchy said:

Iv got the same and on track to pay it off within the first 5 year fix. Well I'm max overpayment and the rest into what your doing, all in should then let me pay it off penalty free after the fix. I have a relatively small mortgage though hence the ability to do that. Think it saves me roughly 35k in interest over the 40 years but I get to use the mortgage payment to pay for my dream car and I'm not waiting 40 years for that. So 3 more years until I join the cool car club.

I bought my cool car already, definitely wasn't willing to wait twenty years till I had paid off the mortgage ...

The bigger problem is my partner would rather I had spent the money on a kitchen and an engagement ring ...

Lucky. She got the kitchen..

[okgo]

At 90% LTV I'm amazed you got that rate, and it might well be that without a significant reduction in that LTV that when you remortgage things might look somewhat different... 90% today gets you mostly a rate nearly double yours... I'd be working to get that LTV down first.

[Jules Sunley]

As others have said, it's a comparison of a guaranteed small return versus a non guaranteed potentially higher (or sometimes negative) return, but time generally reduces risk (i.e. over the medium to longer term then equity investments tend to even out more).

I should say I'm an IFA so I have this conversation all the time.

Personally, with a lifetime tracker mortgage of 1.24% + Bank of England Base Rate (taken out when I moved here c12 years ago) I pay interest only on the mortgage (you were allowed to back then) and fund into my Equity ISA as the return on the ISA has far exceeded the mortgage interest rate and my intention is that once the ISA monies equal the mortgage outstanding then I will encash them and pay it off (at a time of my choosing when market levels look good rather than a fixed end date which could be a good or bad time to do this).

If you have a mortgage rate of say 2% then you need to make more than 2% (net of costs) from any alternative savings/investment course to be 'in pocket' but of course if that other source is equity linked then you are not comparing like with like from a risk perspective. With cash deposit interest rates very low then clearly overpaying on a mortgage is much better than just sitting on spare cash in a savings account (as long as you retain enough cash for emergency needs as a buffer) but if your risk profile fits using equity investments then you have the potential to outperform by diverting money you would otherwise use to 'overpay' there.

A key with any equities is for you to be in charge of when you encash them rather than circumstance. Anyone who had to encash equities say last March would have seen a big fall in values from previously due to Covid reaction but if they held off until now then (for a balanced portfolio) they should be back up to where they were pre-Covid (and indeed many portfolios are now well ahead).

As ever, it's all a question with risk comfort or to put it another way your 'tolerance to loss' even if this is a paper one for short interim periods.

[Jules Sunley]

okgo said:

At 90% LTV I'm amazed you got that rate, and it might well be that without a significant reduction in that LTV that when you remortgage things might look somewhat different... 90% today gets you mostly a rate nearly double yours... I'd be working to get that LTV down first.

This is a good point - a lower LTV generally accesses lower rates so working on this first and then reverting to longer term considerations seems sensible.

[troika]

If / when things you wobbly, you could easily be in negative equity on your house and investments. If you lost your job, things could unravel very quickly. I really don’t understand why people don’t seem to want to build some resilience against events. Do people think the govt / forbearance will bail everyone out forever?

Edited by troika on Wednesday 5th May 09:57

[okgo]

troika said:

If / when things you wobbly, you could easily be in negative equity on your house and investments. If you lost your job, things could unravel very quickly. I really don’t understand why people don’t seem to want to build some resilience against events. Do you just think the govt / forbearance will bail everyone out forever?

Be pretty unusual though wouldn't it, even the fairly middle of the road LS Vanguard stuff hasn't really ever lost more than a few percent in a year over the last decade, and this last 12 months have been fairly 'wobbly' I'd say. If he lost his job presumably he can cash in the savings in the space of about a week and all is OK (assuming a decent amount there for such events)?

I personally do have maybe half a years expenses in instant access, but I don't think it's an utter disaster if I need to get cash out of an isa either, it doesn't seem to take long.

Re the mortgage, even on a small mortgage of say 200k, losing your current rate and going to what looks like a half reasonable deal with take your payment from just under 600 a month to just under 800 a month.

Edited by okgo on Wednesday 5th May 10:01

[Cascade360]

Jules Sunley said:

okgo said:

At 90% LTV I'm amazed you got that rate, and it might well be that without a significant reduction in that LTV that when you remortgage things might look somewhat different... 90% today gets you mostly a rate nearly double yours... I'd be working to get that LTV down first.

This is a good point - a lower LTV generally accesses lower rates so working on this first and then reverting to longer term considerations seems sensible.

This is understood, and you appear to be a correct - a precursory look at comparison sites suggest I'll be looking at around 2.9% on remortgage at 90% LTV. Though it also appears that at 80% LTV I'd only be about 0.5% cheaper (and I won't be there by the time my remortgage comes around in a year). Is that really enough to move the decision making dial?

troika said:

If / when things you wobbly, you could easily be in negative equity on your house and investments. If you lost your job, things could unravel very quickly. I really don’t understand why people don’t seem to want to build some resilience against events. Do you just think the govt / forbearance will bail everyone out forever?

We could afford our essential expenses on either one of our salaries, which reduces the risk somewhat. I am not sure it is entirely fair to say we think we will be bailed out forever, we are talking about whether to invest or overpay, not whether to PCP a 911 or overpay. (Though, yes, I think the government has shown it is willing to bail people out in a crisis ...).

As noted above, overpaying the mortgage brings down our LTV but we still need to meet the monthly payments so I don't see it as the safer choice. At least with investments they can be liquidated if required (albeit as noted above if you can't choose when they are liquidated that is not ideal).

okgo said:

troika said:

If / when things you wobbly, you could easily be in negative equity on your house and investments. If you lost your job, things could unravel very quickly. I really don’t understand why people don’t seem to want to build some resilience against events. Do you just think the govt / forbearance will bail everyone out forever?

Be pretty unusual though wouldn't it, even the fairly middle of the road LS Vanguard stuff hasn't really ever lost more than a few percent in a year over the last decade, and this last 12 months have been fairly 'wobbly' I'd say. If he lost his job presumably he can cash in the savings in the space of about a week and all is OK (assuming a decent amount there for such events)?

I personally do have maybe half a years expenses in instant access, but I don't think it's an utter disaster if I need to get cash out of an isa either, it doesn't seem to take long.

From looking at Vanguard last night, I would put everything into one of their passive funds, probably Global All Cap (maybe ESG). As you say, the risk should be relatively low.

okgo said:

Re the mortgage, even on a small mortgage of say 200k, losing your current rate and going to what looks like a half reasonable deal with take your payment from just under 600 a month to just under 800 a month.

Edited by okgo on Wednesday 5th May 10:01

This is noted, but looks like it will happen anyway. Our repayment now is around £1230 a month (1.89% on a 40y 414k mortgage). If that goes up to 2.89% it will be £1,456 (which appears an average 90% LTV rate now). If that goes up to 2.39% it will be £1,340 a month (which appears an average 80% LTV rate now). Unless our house gets revalued (which may be right, the house across from us which is pretty similar went up for 40k more than we paid for ours this month!), we won't be anywhere near 80% LTV when we remortgage in a year in any event.

Edited by Cascade360 on Wednesday 5th May 10:04

[anonymous-user]

This is easy for me. Your money is better in your bank than in someone else's!

I have a large mortgage. I can pay more if needs be. I choose not to pay more but I save money. So I am in the fortunate position where I could not work for at least two years and not have to worry. In reality, that could be longer as I imagine I would stop spending buckets of cash on unnecessary things.

Now I could give all that money to Barclays. Excellent I have a smaller mortgage, yay me. Oh wait, I've just lost my job and I've got no cash, the housing market has crashed and I'm forced to sell to get rid of my liability. bugger.

Two years isn't long if you have a crisis but it is a dam site better than 2 months, or 2 weeks. 2 years and growing buys time, time to make choices.

My two pence worth, put your money in your bank and build the pile up. Then make decisions as to how much you want to give to the bank at remortgage time. Yes you might pay more in interest, yes it might be a lot more, but having time to make decisions helps.

[sociopath]

okgo said:

troika said:

If / when things you wobbly, you could easily be in negative equity on your house and investments. If you lost your job, things could unravel very quickly. I really don’t understand why people don’t seem to want to build some resilience against events. Do you just think the govt / forbearance will bail everyone out forever?

Be pretty unusual though wouldn't it, even the fairly middle of the road LS Vanguard stuff hasn't really ever lost more than a few percent in a year over the last decade, and this last 12 months have been fairly 'wobbly' I'd say. If he lost his job presumably he can cash in the savings in the space of about a week and all is OK (assuming a decent amount there for such events)?

I personally do have maybe half a years expenses in instant access, but I don't think it's an utter disaster if I need to get cash out of an isa either, it doesn't seem to take long.

During the covid "crash" my portfolio lost significantly, if I'd had to take cash out then I'd have been in an unpleasant place.
That's all people are saying, make sure you aren't at the mercy of the markets, and having a 90%ltv, the OP could be, so maybe better to have a larger contingency than those who don't have a large debt to service

[troika]

Cascade360 said:

We could afford our essential expenses on either one of our salaries, which reduces the risk somewhat. I am not sure it is entirely fair to say we think we will be bailed out forever, we are talking about whether to invest or overpay, not whether to PCP a 911 or overpay. (Though, yes, I think the government has shown it is willing to bail people out in a crisis ...).

As noted above, overpaying the mortgage brings down our LTV but we still need to meet the monthly payments so I don't see it as the safer choice. At least with investments they can be liquidated if required (albeit as noted above if you can't choose when they are liquidated that is not ideal).

My observations are not aimed at you personally, but more generally. Look at the jitters yesterday afternoon on the slightest comment around IR increases. Consider an offset mortgage. You can overpay but maintain liquidity.

[Cascade360]

sociopath said:

During the covid "crash" my portfolio lost significantly, if I'd had to take cash out then I'd have been in an unpleasant place.
That's all people are saying, make sure you aren't at the mercy of the markets, and having a 90%ltv, the OP could be, so maybe better to have a larger contingency than those who don't have a large debt to service

This seems to be a suggestion to save a big cash buffer rather than S&S ISA or overpayment?

[okgo]

sociopath said:

During the covid "crash" my portfolio lost significantly, if I'd had to take cash out then I'd have been in an unpleasant place.
That's all people are saying, make sure you aren't at the mercy of the markets, and having a 90%ltv, the OP could be, so maybe better to have a larger contingency than those who don't have a large debt to service

Yes, but I bet you still gained 'in-year'? Obviously the problem is that often an event as large as that also puts the odds of losing your job at the same time up considerably, as happened to myself and my wife in the space of 3 days

I guess a lot of this depends on the mortgage amount too, on a large mortgage a couple of percent could easily be 4 figures. On 150k its a night out.