Author Topic: Invest More or Mortgage Overpay?  (Read 3181 times)

Zola.

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Invest More or Mortgage Overpay?
« on: November 20, 2017, 04:52:30 AM »
I am 31. What do you reckon my strategy should be? Here is what I do currently:

Outstanding mortgage debt: £120,000 - 22 years to run on a 25 year mortgage. (if I pay only £626 a month).  Interest rate is 3.09%, fixed for another two years.

Vanguard Funds ISA - £5,200 (£250 going to this fund every month). Also have a personal pension, I put in 15% of pay each month into a separate fund (about £20,000 in this currently).

Mortgage Overpayments - £400 per month. This finishes the mortgage 10 years early, saving over £22,000 in interest.


Just interested in the general opinion of what you would do in my position.


boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #1 on: November 20, 2017, 06:10:17 AM »
You're not US based with a long term fixed interest rate - but a few points

1. calculating what youre saving in interest is half that equation - you should look at what its going to cost you if you invested it in which at 3.09% fixed rate you come out behind.
2. what do you expect your interest rate to do in 2 years - how much can it move up etc. knowing this will allow you to better understand if investing the difference makes sense. 
3. Slowly paying a mortgage down over time vs lump sum paying it off puts you at higher risk of failure if you lose your source of income sometime in your life.

what i'd do - funnel everything into the market - if your interest rates go up then re-evaluate and possible change your plan

Why i'd do it b/c of number 1 and 3 above.  If you have a cap to your rate as to how high it can go then number 2 would play a role and you wouldnt have to re-evaluate.

Its a common misconception that the paying down of debt over time is "safer" - its typically not.

My first point is also a common poor way to evaluate you return on your green soldiers. - Opportunity cost needs to come into play.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #2 on: November 20, 2017, 11:24:41 AM »
Yeah its a bit tricky!

In a couple years time I should be able to negotiate a much better interest rate on the mortgage, until then I may keep overpaying and try to bump up the investments a little more.

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #3 on: November 20, 2017, 11:45:21 AM »
You should not be overpaying at all then. If you think your rate will go lower. Your current rate is sub inflation.

Dicey

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Re: Invest More or Mortgage Overpay?
« Reply #4 on: November 20, 2017, 11:51:40 AM »
You should listen to b42!! If there is ANYthing you don't understand, ask him to clarify.  He knows this stuff cold, but sometimes he explains things even better if given specific questions. Drill down until you are absolutely convinced, because he's absolutely correct.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #5 on: November 21, 2017, 01:52:22 AM »
I am not sure I fully understand B42's first post entirely.

Wouldn't it be wise to oveypay on the mortgage debt when the rate is high (3.09%), and then invest more heavily if I get a much reduced mortgage % rate? 

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #6 on: November 21, 2017, 03:49:33 AM »
3.09% is not high it's incredibly low. It's less than inflation. The market returns on avg over 30 years 10-11%. Which is what you could assume for your 25 year loan. There is no reason to pay down such cheap debt. It's a gift.  You should be investing the money. 

Also paying down a mortgage slowly over time increases your risk of total financial failure if you lose your income stream.  If the money is invested it allows for you to have more liquidable capital to keep paying your bills if this were to happen.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #7 on: November 21, 2017, 04:17:52 AM »
Thanks for your reply, keen to learn more...

3.09% in the UK is considered high by todays economic situation, I know people on 1% deals. I am stuck in the mindset that with my mortgage,  every £1 that I borrow, I am paying back £1.60 in the long run..

Paying off a little quicker saves this interest.

I totally get what you are saying with investing heavily as a buffer in case of emergencies later on, but there is always the risk of an equities crash, where your funds could be halved overnight!

ShoulderThingThatGoesUp

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Re: Invest More or Mortgage Overpay?
« Reply #8 on: November 21, 2017, 04:24:08 AM »
Can you refinance in the middle of your term to that 1-ish percent, then invest?

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #9 on: November 21, 2017, 04:28:53 AM »
Thanks for your reply, keen to learn more...

3.09% in the UK is considered high by todays economic situation, I know people on 1% deals. I am stuck in the mindset that with my mortgage,  every £1 that I borrow, I am paying back £1.60 in the long run..

Paying off a little quicker saves this interest.

I totally get what you are saying with investing heavily as a buffer in case of emergencies later on, but there is always the risk of an equities crash, where your funds could be halved overnight!

Even if they temporarily crash you have a 25 year note in all 25 year periods investing beat 3.09%. You're only doing half the equation looking at interest saved. Money is fungible. It can do multiple things. 3.09% is many times less than a compounded 10% or to be conservative 7%.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #10 on: November 21, 2017, 04:32:28 AM »
Regarding refinancing: nope not until another 2 years, I am locked into a 5 year fixed contract. Leaving early incurs penalties.


This is the only fund I invest in:

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-80-equity-accumulation

It covers a wide base, but even still, part of me is wary of a crash when I would need the money most, its part of the 'gamble' (not really a gamble!) I suppose. Thats why the amount I have invested each money is always not an amount that is massive ($350), and I do this typically via drip feeding.


boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #11 on: November 21, 2017, 04:35:14 AM »
Regarding refinancing: nope not until another 2 years, I am locked into a 5 year fixed contract. Leaving early incurs penalties.


This is the only fund I invest in:

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-80-equity-accumulation

It covers a wide base, but even still, part of me is wary of a crash when I would need the money most, its part of the 'gamble' (not really a gamble!) I suppose. Thats why the amount I have invested each money is always not an amount that is massive ($350), and I do this typically via drip feeding.

You really need to educate yourself until you are comfortable with the market. It will crash. It will crash when you're FIREd it will likely crash before you're FIREd. But it stastically goes up over time at a rate of 10% or more. 

Go read jlcollins stock series

I assume you plan to live off your investments when you retire and expect them to support you. Investing vs paying down is the same concept.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #12 on: November 21, 2017, 04:40:56 AM »
I am comfortable investing, but I would be surprised if that fund I am in truly goes up 10% on average every year!

I had forecasted an average of 4/5 % with crashes and the climb back taken into consideration.

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #13 on: November 21, 2017, 05:35:05 AM »
your equity part of that 80% will perform at around 11%
your bond part will perform around 4-5% historically on 20%

so .8*11+.2*4 = 9.6% ROI on average even if the bonds performed at 0% your ROI would still be 8.8% based on historical averages

on a completely different note that funds expenses are insane.  i would be looking for different funds - maybe some from the UK can chime in if there is a better option available. 

stocks average 11% including crashes. 

but even using your extremely conservative 4-5% number that still way better than your 3.09% mortgage that is fixed. and remember your mortgage doesnt index with inflation so you need to use nominal returns to compares so if your 4-5% is after inflation you really should be using 7-8%

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #14 on: November 21, 2017, 05:44:36 AM »
I was thinking about going direct to Vanguard to cut out HL's platform fee (0.4%). Just need to get that sorted!

I know I gotta invest more, I already have an emergency cash fund setup etc... so I will have to adjust my monthly debit.

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #15 on: November 21, 2017, 05:51:22 AM »
I was thinking about going direct to Vanguard to cut out HL's platform fee (0.4%). Just need to get that sorted!

I know I gotta invest more, I already have an emergency cash fund setup etc... so I will have to adjust my monthly debit.

come join the dont pay off your mortgage club - and plan with some people who truly understand the value in a low cost mortgage.

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/400/?topicseen

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #16 on: November 21, 2017, 06:06:39 AM »
I will take a little read at that!

I have adjusted my direct debit for Vanguard funds now to £300 a month  ($400 or so). My pension contribution is still around 15%, I may up that also at the end of the month, more money in the stock market.

I will probably still overpay on the mortgage in small amounts to bring it down slowly. Long term gains are definitely what I am after, but what a psychological boost to have the mortgage paid off. I do want it paid off in 10 years or less I have to say. Then I can go on a nice big holiday and smoke a cuban cigar!

« Last Edit: November 21, 2017, 06:10:16 AM by Zola. »

kpd905

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Re: Invest More or Mortgage Overpay?
« Reply #17 on: November 21, 2017, 06:25:05 AM »
I am stuck in the mindset that with my mortgage,  every £1 that I borrow, I am paying back £1.60 in the long run..

If you invest that dollar instead, and get just a 6% return over the 22 years, you will end up with about $3.67.

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #18 on: November 21, 2017, 06:56:06 AM »
I will take a little read at that!

I have adjusted my direct debit for Vanguard funds now to £300 a month  ($400 or so). My pension contribution is still around 15%, I may up that also at the end of the month, more money in the stock market.

I will probably still overpay on the mortgage in small amounts to bring it down slowly. Long term gains are definitely what I am after, but what a psychological boost to have the mortgage paid off. I do want it paid off in 10 years or less I have to say. Then I can go on a nice big holiday and smoke a cuban cigar!

just know this is counter productive to your goals. you can go on a longer holiday sooner and smoke more cuban cigars by investing instead of paying it down in 10 years. 

This really is not a small thing - paying down a mortgage in 10 years instead of 25 could cost you tens to hundreds of thousands of dollars.  Plus adds risk since you're doing it slowly over time.  Interestingly enough thats the very risk you're talking about mitigating.

UKstache

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Re: Invest More or Mortgage Overpay?
« Reply #19 on: November 21, 2017, 08:40:17 AM »
IMO 0.22% for the lifestrategy fund is close to as good as it gets in the UK, you could maybe beat it you'll need to buy more different funds and rebalance yourself. It's just not as cheap here as the US. Platform fees are worth checking though.

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arob54600

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Re: Invest More or Mortgage Overpay?
« Reply #20 on: November 21, 2017, 09:22:48 AM »


Dang, B42. You've convinced me and this isn't even about me.

I am going to apply what you are saying to my overall strategy. We just hit 40% savings rate, which is no small feat considering mine and my husband's humble salaries. And since we just bought a home with a brand new mortgage, it's really hit me that this is a 30 YEAR commitment. My first instinct  is to rip the mortgage Band-Aid off as quickly as possible. But now I defiantly see and understand and agree with the wisdom of funneling money in to investments for greater stability later. I was on the fence, now I am not. Thank you, hopefully you have saved me thousands of dollars as well.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #21 on: November 21, 2017, 09:36:57 AM »
I will take a little read at that!

I have adjusted my direct debit for Vanguard funds now to £300 a month  ($400 or so). My pension contribution is still around 15%, I may up that also at the end of the month, more money in the stock market.

I will probably still overpay on the mortgage in small amounts to bring it down slowly. Long term gains are definitely what I am after, but what a psychological boost to have the mortgage paid off. I do want it paid off in 10 years or less I have to say. Then I can go on a nice big holiday and smoke a cuban cigar!

just know this is counter productive to your goals. you can go on a longer holiday sooner and smoke more cuban cigars by investing instead of paying it down in 10 years. 

This really is not a small thing - paying down a mortgage in 10 years instead of 25 could cost you tens to hundreds of thousands of dollars.  Plus adds risk since you're doing it slowly over time.  Interestingly enough thats the very risk you're talking about mitigating.

It is a good point, just a shift in mindset that I need to consider! You are probably right though.. having extra cash in stocks would come in handy when needed down the line.


IMO 0.22% for the lifestrategy fund is close to as good as it gets in the UK, you could maybe beat it you'll need to buy more different funds and rebalance yourself. It's just not as cheap here as the US. Platform fees are worth checking though.

Sent from my HTC Desire 510 using Tapatalk

The 0.22% is cheap yeah, the platform fee with HL isnt the cheapest around, but they are a good company.

boarder42

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Re: Invest More or Mortgage Overpay?
« Reply #22 on: November 21, 2017, 10:24:58 AM »


Dang, B42. You've convinced me and this isn't even about me.

I am going to apply what you are saying to my overall strategy. We just hit 40% savings rate, which is no small feat considering mine and my husband's humble salaries. And since we just bought a home with a brand new mortgage, it's really hit me that this is a 30 YEAR commitment. My first instinct  is to rip the mortgage Band-Aid off as quickly as possible. But now I defiantly see and understand and agree with the wisdom of funneling money in to investments for greater stability later. I was on the fence, now I am not. Thank you, hopefully you have saved me thousands of dollars as well.

glad i convinced you another life saved - come join the Club!

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Re: Invest More or Mortgage Overpay?
« Reply #23 on: November 21, 2017, 11:12:47 AM »
I was a mortgage overpayer. Itís probably worth reading both the ďpay off your mortgageĒ and donít pay off your mortgageĒ threads. They both give good information. Iím in the UK as well and we donít have the 30 year fixes here. With that sort of certainty around payments I would have certainly overpaid less (or nothing) and invested more instead. However knowing that itís possible for interest rates to have increased when you come out of a 2, 3 or 5 year fix is difficult to deal with if youíre more cautious.

Knowing what I know now and completely with the benefit of hindsight if I could go back I would have invested half my mortgage over payment when my mortgage was above 4% and invested all of it when below 4%.

If you sleep better overpaying a bit on the mortgage then do it. This is worth a lot too just not in monetary terms. Iím assuming some of the returns quoted in here are US based. Earning US dollars and investing mainly in the US stock market is different to earning pounds and investing globally I guess. Iím no expert here.

If you are investing in Vanguard funds then I would do this directly to save on the platform fee.

Zola.

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Re: Invest More or Mortgage Overpay?
« Reply #24 on: November 21, 2017, 02:52:48 PM »
Thanks for the replies, food for thought!