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Should you overpay on your mortgage or invest in an ISA?

03 October 2022

Trustnet asks whether investors would be better off putting their money into property or stocks.

By Jonathan Jones,

Editor, Trustnet

The market reaction to chancellor Kwasi Kwarteng’s mini-Budget and the subsequent emergency intervention from the Bank of England has left many savers unsure of the best way to deal with their finances.

People already had less cash to put away each month thanks to the cost-of-living crisis, caused by higher energy bills brought about by Russia’s war in Ukraine.

It is therefore vital that whatever cash they have left over at the end of the month is squirreled away as effectively as possible.

With expectations that the Bank of England will hike rates in November – and some analysts predicting these could hit 6% by the end of next year – one option that many savers will be considering is overpaying on their mortgage.

These people have been advised to find and lock in the best deal available now, but this is easier said than done, with the mortgage market moving quickly over the past few weeks.

Homeowners that remain fixed for the next year may consider overpaying to bring down the total amount owed, mitigating the impact of future rate rises.

Lena Patel, director at ISJ Financial Planning, said this is the most sensible option. “Interest rates have been historically low over the past 10 years, but with the view of them increasing dramatically in the coming years, I would say look at starting to overpay as much as you can,” she said.

“It all depends on the individual’s circumstances: are they likely to move in future, are they likely to receive any inheritances, gifts or bonuses that could help to reduce debt?”

While a stocks & shares ISA may be appealing, particularly as falling markets may present an interesting buying opportunity, she noted that any returns would need to be higher than the mortgage rate that can reasonably be expected in the future.

“So, if you’ve fixed at 3%, your investments need to achieve above 4 or 5% to make it worth investing and taking the risk that some years the investment values may fluctuate. You may not achieve a rate above your mortgage,” Patel added.

“Investing in an ISA can be beneficial; however, you need to look at the amount of risk you are prepared to take with the funds coupled with the timeframe you are looking at.”

It is important to have a plan and think about your longer-term future, including retirement plans, child costs and whether it is more important to have liquidity in your assets (from savings accounts or ISAs) or peace of mind (overpaying your mortgage).

“So, the short answer is to look at your overall situation and then make a decision that meets your needs. Cashflow planning can help with making an informed decision,” Patel said.

However, Martyn James, independent personal finance expert, said that investors and savers alike should wait and see what will happen, as more actions are expected from the Bank of England and Treasury this winter.

“The short advice at the moment is don't do anything until we have a bit more stability to go on,” he said.

“However, the basic rules of payment still apply: pay off anything with an interest rate that can change, such as a credit card, followed by outstanding forms of fixed debt. Next up, mortgages.

“There are usually fees for overpaying on a mortgage, be it in chunks or a bit at a time. So any payments must be counterbalanced by what you lose by paying early.”

This can be complex, however, so he recommended speaking to your mortgage broker if this is the option that you want to take.

He also suggested that savings accounts and cash ISAs may start to look attractive to savers unwilling to take the risk of the stock market.

Cash ISAs have had “pretty rubbish rates lately”, but the online savings accounts have “stepped into the breach” and savers can get 2% on one with just a month's notice. This rises to 4% if you lock in money for a few years, said James.

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