For some time now, I’ve been pondering whether it’s more beneficial to overpay our mortgage or instead invest that money into a Stocks and Shares ISA (DISCLAIMER).
While digging around the internet, I came across a couple of YouTube videos. The first one made me realise that every year we pay £12,700 to our lender, but only about £3,600 goes towards the actual loan. This means £9,100 is spent purely on interest!
The second video offered a different perspective on the matter. I highly recommend watching both.
After running some calculations and discussing with my wife, we concluded that overpaying the mortgage makes sense. However, I didn’t want to stop investing in our Stocks and Shares ISA altogether. So, I came up with a little mental hack: since we’re already renting out our flat in Poland, we’ll use the rental income to make overpayments on the mortgage.
At the time of writing this (November 2024), our mortgage has an interest rate of 5.29%, with 22 years remaining and a balance of £164,537.33. Our monthly payment is £1,058.27.
I quickly threw together a spreadsheet and discovered that, if we were to invest all our spare cash in the stock market instead of overpaying the mortgage (assuming an average real return of 7% annually), we’d come out about £12,000 better off compared to our current plan. However, investing in the stock market comes with risks, whereas paying off the mortgage gives us a guaranteed outcome: owning our home outright. I think I can live with the £12,000 “loss.” Who knows? The stock market might perform well and make up for that difference anyway. Time will tell.
If we overpay £200 a month, we could shave roughly six years off the mortgage term, meaning we’d finish paying it off when I’m 61. That’s not ideal for me, though. My plan is to achieve financial freedom by 55, so I’ll need to find a way to trim another six years off the mortgage term.
I think I’ve got an idea. First, I’ve automated the overpayments, setting up a weekly transfer of £57.70, which totals £3,000 a year. This money will come from the rental income in Poland, cashback from the mobile app I use for shopping, and savings we’re making by me cycling to work. Hopefully, we’ll still manage to stick to our monthly budget. I’ll report back monthly on our progress.
Unfortunately, even £250 in monthly overpayments will only reduce the mortgage term by 9 years and 6 months. That sounds much better, but I’ve got a couple of aces up my sleeve. The first is that when our current fixed-rate mortgage ends in three years, I’m hoping we can switch to a new rate of around 4%, based on a significantly smaller remaining balance—hopefully reduced by at least 3 x £3,000 = £9,000.
My second ace is that I’m counting on both my wife and me getting pay rises in the next three years. Assuming a 4% interest rate on the new mortgage and keeping our current monthly payment of £1,058.27, we should be able to pay off the house right on time for my 55th birthday.
Feeling optimistic, I’ve already made an extra payment towards the mortgage from our savings. So, after our first automated transfer, our remaining balance as of today stands at £164,404.63.
Wish us luck!
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