Should i make overpayments on my mortgage or invest the money

Discussion in 'Investing and Retirement Saving' started by XenMoney, May 14, 2014.

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  1. XenMoney

    XenMoney Newbie

    I'm having trouble deciding whether to make overpayments on my residential property or investing the money somewhere else.

    At the moment my mortgage is approximately £136k and I'm paying interest only of £460 per month. I save between £500 to £1000 per month depending on my income. The interest rate on my mortgage is 4.64% last time I looked. This rate is fixed until December 2016.

    Any suggestions.
    Miles, hamza, Shobir and 1 other person like this.
  2. Sadia

    Sadia Administrator

    Every time you make an overpayment the capital amount reduces so your payments are lower the next month. The way I see it is if you can find an investment which returns greater than 4.64% there's no point in investing the money. I would be inclined to make overpayments to my mortgage which would eventually reduce the capital amount I have to repay. This of the reduction in monthly payments as a form of passive income your are receiving. If by making £500 overpayments you reduce your monthly payments by £1 it is worth it.
    Miles, hamza and Shobir like this.
  3. Shobir

    Shobir Administrator Staff Member

    Admin Post
    This really depends on your circumstances. Do you have an emergency fund? Do you have savings? If you don't have an emergency fund I would continue saving the money until you have about 6 months earnings in your current account just in case you were to lose your job. Are you saving for retirement? you should contribute to your retirement account before you make any overpayments.

    If you have money left over after your emergency fund and retirement savings the I would put the excess money into paying off the mortgage quicker. Bearing in mind you have an interest only mortgage you will need a repayment vehicle to pay the balance off once the term expires.
    XenMoney, Miles and hamza like this.
  4. Shobir

    Shobir Administrator Staff Member

    Admin Post
    It is sort of like working out the Price Earnings of Stock. The total amount is £136000 and £5500 is paid yearly. This amounts to a PE ratio of 22. The lower the PE ratio the better.
    XenMoney, Miles and hamza like this.
  5. hamza

    hamza Newbie

    @XenMoney 4.64% seems very high for a mortgage in the UK. Bearing in mind the Bank of England rates are at an all time low perhaps you could find a better rate. As you've fixed the rate there may be exit charges but sometimes the savings you can make switching the mortgage to a cheaper product provider may be worth it. I have seen mortgages for as little as 1.99% (HSBC) so you could slash your mortgage payments in half providing you have good credit history. Might be worth considering.

    Also I would follow the advice given here. Always have plenty of money in your emergency fund, maximise your retirement account, save a little for the small luxuries in life and put the remainder towards paying off your mortgage aggressively.

    There are investment vehicles where you get more than 4.64% but you have to put your capital at risk. You might consider P2P lending or the stock market. The stock market is at record highs at the moment so it's probably not the best time to invest. Hope this helps and good luck paying off the debt.
    XenMoney and Miles like this.
  6. hamza

    hamza Newbie

    Cool example. So if a payment of £11,000 was made the PE would be 11. Bearing in mind PE ratios of 10 or less are desirable when buying stock this could be quite relevant in paying off this mortgage quicker.
    XenMoney and Miles like this.
  7. Miles

    Miles Newbie

    If the mortgage is interest only you need to get started on your repayment vehicle. After the end of the term you will have to pay the £136k to the bank. After retirement and emergency fund this should be your priority. I don't think there are any safe investment strategies which pay more than 4.64% so you're better off making overpayments.

    Definitely agree about finding a cheaper mortgage! 4.64% seems high. Shop around, look at comparison sites and improve your credit score. Reducing your mortgage from 4.64% to 1.99% would reduce your monthly mortgage by £230!
    XenMoney likes this.
  8. XenMoney

    XenMoney Newbie

    I see the analogy you are trying to make. I should be more concerned about lowering my debt compared to increasing my savings. Thanks.
  9. XenMoney

    XenMoney Newbie

    I do have an emergency fund and I am fully contributed into my retirement plan. I the overwhelming majority of people in this forum believe it is better to make overpayments. I will now be giving this some serious thought. Thanks
  10. XenMoney

    XenMoney Newbie

    I am with Santander at the moment and their mortgage rates are bloody high. I will shop around. I've been lazy but after seeing the savings I could make I need to do some calculations in terms of exit fees and money saved to make a decision. Thanks for the heads up.
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