Finance blogs are agog with posts about that dilemma: should I overpay my mortgage or invest?
Many say that with today’s low mortgage rates you will build wealth more quickly if you invest in the stock market.
Some even say that there are risks associated with tying all your wealth up in your home equity.
Many more say that the safer option is to overpay your mortgage, while accepting the likelihood that your wealth will grow less than in the stock market. Dave Ramsey’s baby steps prioritise overpaying the mortgage over other investments (with the exception of retirement savings).
For others it’s really a question of following their heart – for them, nothing will feel as good – or motivate them as much – as having a “paid for house”.
That old cliché rings true – that personal finance is personal.
I’ve decided to do both. The idea of chipping away at my mortgage really inspires me but I also want to a be investing in different asset classes and not have all the family’s money in property. But, the question I have struggled to find an answer to is how much to put towards each. How do you decide?
After a lot of thinking and research I have come up with some strategies that have helped me settle on how much to put into the mortgage and how much to invest.
Overpaying based on a specific mortgage term
I overpay my mortgage by at least enough to ensure that I will be mortgage free by 60. I don’t know if that’s when I’ll want to retire, but right now I think I’d like the option then. As this is my number one priority, I set up a regular overpayment to my mortgage account every month. I told the bank that I wanted them to use this to shorten the term, not reduce the monthly payment.
When I was making the highest overpayments that was putting me on course to be mortgage free at 55 but that wasn’t leaving me with any money to invest, so I reduced them.
Overpaying by enough to reach a better loan to value ratio
I also found out the current market value of my house and figured out how much I had to have remaining on the loan to qualify for a 60% loan to value ratio, which will always be where the lowest interest rates are.
In my case this works out as an overpayment of about £250 a month (which, funnily enough, is also the amount I need to overpay to be mortgage free by 60). Once I’ve reached 60% LTV and shortened the mortgage term enough to pay the house off by 60 I will ease off on the overpayments until I am…
Investing enough to use up my ISA allowance
My second priority (after guaranteeing I’ll be mortgage free by 60) is to use up my annual Stocks and Shares ISA. This is £20k a year, which works out as £1667 a month.
This is a huge amount for me and I don’t have this amount available to invest every month.
What I do is set up a monthly transfer to my ISA of £250. This is because I know – based on my budget – that I should always have this amount to spare. The benefit of this regular investment is that it’s free, i.e. there are no investment charges. My ISA with Interactive Investor offers this “free regular investing option” with certain funds. One is a clean energy focussed ETF and the other is a more diversified ethical etf.
I am also charged a monthly fee which allows me to make one additional trade. So, once I have an idea of my variable costs that month I will put my available money into another fund that is not available for regular free investing.
I recently realised that my portfolio was very US and Europe focussed so I am keen on investing more in other regions. There is a global ESG fund that is not available for free regular investing (unlike its non-ESG sibling) so my plan for the near future is to invest in that fund. Depending on my budget for the month I can usually put £1000 to £1250 into the ISA, on top of the regular £250.
We have a rental property and our income from that makes up most of the ISA investments. We have an interest only mortgage and I used to overpay that to bring down the capital so we would have paid it off by the end of the term. I have stopped doing that though as I’m wary of having all our equity in property.
If money grew on trees…
At the moment my regular and variable ISA investments are not enough to use up my personal allowance. If my income were higher though then once I had maxed out my ISA allowance I would put any extra money back into overpaying my mortgage.
I hope that we will be in that position once we are no longer paying childcare, as this will allow us to pull forward our mortgage free date.
If my partner had more of an appetite for investing then rather than overpaying the mortgage I would probably try to use up his allowance before putting extra money on the mortgage.
It’s worth saying that…
…before I started investing and overpaying the mortgage I focussed on saving an emergency fund. Ours covers our full living costs (including savings and investments) for about 3.5 months.
I took a break from overpaying at the start of the pandemic to build up an emergency fund to cover costs associated with our rental property, which has given me a lot of peace of mind.
We also have a sinking fund for holidays – which has not been touched in years as we haven’t been away! Also, because a huge proportion of our household income goes on childcare, we have very little to spend on clothes or things for the house – so our savings and investments also take a nose dive if we have extra to pay for.
I hope this anyone else grappling with the same dilemma. I’d love to hear how you decided what to do. I know some people like to overpay by a certain percentage, or like to overpay by the same amount that they are paying in interest, or in capital…
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