Ask us anything: Should you overpay your mortgage?

0:01You know what I love, Damo? Things that save me time. You don't have YouTube Premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.

0:34After your trial, you'll save an extra five pound a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that.

0:50Welcome to our mini episodes where we answer your biggest questions about money. We've got some great ones today. Genuinely much better than I could come up with. I mean, we should probably just consider replacing you at this point too. You should consider replacing your barber at this point, Damien. You're not bad. First candidate for replacing Tomei is called Oli, and he asks a question that's on a lot of people's minds right now. Oli says, is overpaying your mortgage a good investment compared to other things like a pension or an ISA? Okay. Well, I can't overpay my mortgage because I don't have a mortgage.

1:24Oh, you're just jumping straight in, are you? Thank you for your advice. It's always good to overpay your mortgage, but yeah, I wouldn't be the one for this. I think Damien, take us away. Thanks, mate. So it's a big question and it depends on personal circumstances. And I'll give you some rules of thumb because I can't answer it for a specific individual. There's no like one best answer. From a pure, is it better than a pension or investing in a stocks and shares ISA? what you're saying is, is the return on paying off my mortgage better than the one that I'll get from investing in one of those vehicles?

2:03So in the past, this was a really easy decision because mortgage rates were so low that let's say your mortgage is 2%, you overpay your mortgage, you're getting a 2 % return by saving that in interest. Whereas the stock market on average would return say 8-9%. So it always made more sense to invest instead because the return on the stock market, the expected return was higher. That question's got a little bit more tricky to answer now because let's say you're getting a mortgage right now, you might be on 6-7 % and that is, if you overpay that, that's a guaranteed return. Every overpayment that you make to that, you're guaranteed to save that amount.

2:43There is no guarantees with the stock market and with investing. The one thing I will say is though, if we look at a pension, you also get tax rebates and things like this with pensions. So there's an additional layer of benefit there. A higher rate taxpayer paying into a pension might get a 40 % tax break. So they need to factor that in as well on top of the potential returns. And then another thing to consider is with a mortgage, the amount that you owe stays the same. Let's say you never pay it. If you borrow£100 ,000 20 years ago and you're on interest only, you'll have£100 ,000 today. but the value of the home might have increased two, threefold, or at the very least, inflation will have eaten away the value of that debt in real terms.

3:28Whereas with investing, they tend to outpace inflation. So a lot of people rush to pay off their mortgages, but they don't really consider the fact that inflation is actually eating away the real value of that debt over time. The one thing you can't accommodate for though, is the feel good factor of being completely debt free. And that's something that I can't quantify in figures. I say to you, if you would sleep easier at night not having a mortgage, then that's probably the answer. But there's math and there's psychology. It's the same with all finance, really. Does that make any sense to you?

4:05To be honest, I was following you. I got lost a bit, then I came back. So yeah, definitely, definitely makes sense. Where did you go? You sat in a room? Where did you go lost a bit? Not physically lost. Slid in some DMs. When you start talking percentages. But no, honestly, it makes sense. I think it depends on your situation. And like you said, when you brought the psychology into it, it made a lot of sense because the peace of mind of not having any debt and being able to live in your house and you own your whole house, it might be more important to some people than others. So I guess, yeah, it's very subjective.

4:38Yeah. For me personally, mortgage rates would need to be relatively significant for me to focus on overpaying my mortgage. There's another point to consider as well, which I didn't. The conversation we just had there is like, if you've got the benefit of choice between paying your mortgage or investing, there's another section of the population at the minute that are like, I can't afford to pay my mortgage, or I'm worried that I won't be able to pay my mortgage. So then it's like, do I overpay my mortgage and stop saving elsewhere so I can survive? What I would say in those situations is, I think this came up in one of the podcast episodes we did actually, it might be more beneficial for you to save the cash because your ability to pay the mortgage on a monthly basis is what you're concerned about.

5:22And if let's say you have a 400 grand mortgage, I just pulled that figure out out of thin air, and you pay 30k off it in overpayments, it's not actually going to affect the monthly payment that much. You might shave like 100 quid off or something, which isn't going to save you. But if you had that 40 grand in cash, you can maintain the payments on that mortgage for another year or two with those savings. So again, this is what I mean about circumstance. If you're a person that's looking at your house thinking, I can't afford this mortgage if it goes to 6%, 7%, well then the conversation is, should you be saving in cash so that you can afford to pay it, so that you have that ability to survive the two-year fix or whatever.

6:05Next up, we have Rachel. Rachel wrote to us saying, many thanks for sharing your knowledge and understanding of finance and investing. It's definitely helping me to manage my own finances more confidently and plan for a more secure future. It's lovely, Rachel. Thank you very much. My question is about transferring my ISA. I've been using my full ISA allowance for the past 10 years through a managed stocks and shares portfolio with a large UK wealth management company. I am more informed and confident now and feel that whilst I can't control the ups and downs of the stock market, I can control the fees I pay.

6:40I am currently paying almost 1.5 % in fees for this managed portfolio, but feel that the same performance is available in some Vanguard funds for much lower fees. Is there a risk in transferring out to a new fund and what are the procedures to do so? Yeah, so risks. The risks are a few. I mean, risks is a weird word to say, but there's some things to consider. So there might be penalties with your current provider. What I mean by that is a lot of these managed portfolios or managed providers, they might have like tie-in periods or periods where they say that if you take the money out within a certain period of time, we're going to charge you fees for that.

7:19They have to be very upfront about it. So you just give them a call and say, if I move my money out, what happens? If it's a robo-advisor, it's unlikely and you probably won't be able to speak to anyone. I'm more talking about financial advisors here. I know, for example, St. James's Place have certain fees that they apply if you move the funds out. I think it's within two or three years and they can be quite significant to the point where it's actually worth just staying with them potentially through that period so they don't lop off a load. Again, just call them up and ask them. The next thing that you need to consider is the risk of underperformance.

8:01So you've rightly identified there that fees are the only thing that you can control. You can't control the market and I think you're spot on with your kind of approach and thinking around this in my personal opinion. But there does need to be a conversation of, there's a risk that you could move into another fund that could be cheaper, and that could underperform your previous fund. You know, that's a risk you need to take essentially. Go on T. Do you reckon that they could kind of have the best of both worlds, just keep the existing ISA that they've had for 10 years with the wealth management company, and then just open a new ISA in the next financial year?

8:35Yeah, yeah, they could, yeah. But you know, that will still be incurring a 1.5 % fee. So there's like an opportunity cost there, Hello, it's Future Demo here. So just listening back to this, I want to clarify this fee point a bit for you. Although it might sound small, a 1 % fee can make a massive difference to the value of your portfolio over the lifetime of investing. So let's say you invest£500 a month for 30 years and you get a rate of return of around 6.5%. At the end of the 30-year period, you'd have about £550 ,000. But if you have a 1 % fee applied to that, then your effective rate of return is 5.5%, which is 1 % lower than the 6.5 we used before.

9:15After 30 years, 500 quid a month again, you're going to have£450 ,000. That's the difference of£100 ,000 or around 20 % based on a 1 % fee. So you can see how what looks like a small fee actually has a massive impact.

9:33Like Rachel's identified, fees are the one thing that we can control and I personally think a 1.5 % fee is high. You know, even my global index fund, which isn't the cheapest on the market, is like 0.22. And that's coming in, you know, significantly lower in terms of fees. And I dare say when she's saying I can get the performance elsewhere, she's looked at something like a global index or an S &P 500 and seen the returns are pretty similar. 1.5%, the way I liken it with fees is you run in the same race, you're just starting it further back. And she's starting it 1.5 % further back every single time.

10:11So whoever's managing her money needs 1.5 % more than the market just to justify their existence and get her to the same level as the market. So to outperform, to justify their fees, they might need to beat the market by 3 % or something. and you know not many people do that on a consistent basis yeah definitely I mean I think in 2023 I mean the whole benefit of us growing up in our time is that we have access to technology we can pretty much do everything ourselves yeah like 20 30 years ago you had to use brokers you had to have people managing your money and now we have the freedom so I guess the best thing to do is to look at any penalties that you could have for moving across and then figure out if it's worth it I also think that last point though is the final risk, which is you are a risk to your own funds.

10:58The one benefit of a money manager is they're managing your money. Once you move into you managing your money, just ask yourself, Rachel, can I stomach a 20 % drop? Would that change my behavior towards my portfolio? If I have the keys to the city, am I going to go crazy? You know, so there's a certain people out there that benefit from handholding, active management from a professional who isn't emotionally linked to their portfolio. I mean, by that is the financial advisor isn't going to wake up and see your portfolio down 20 percent and panic. I mean, they might panic that you're about to call them and have a go, but then they're not going to panic in the same way that you would.

11:37If you feel that you might panic and that might make you tinker, then maybe that's something to consider. For me personally, I'm long enough in the tooth of the investing game to know that that doesn't concern me. Diamond hands over here. Well, if you see a 20 % drop in a personal portfolio, a low cost index, you're going to be seeing a 20 % drop in a managed portfolio as well. So you're still going to have that. It's just that they're going to be charging you. And what they're going to do is when you call them and go, oh, my God, it's all going wrong. They're going to be like, don't worry, don't panic.

12:08That's what you're paying the fee for. they're just a counsellor more than anything. And the final point, Rachel, you said, you know, what is the actual process there? So ISA transfers are pretty easy to do and most platforms will allow you to do it. There's specific rules with each platform, but Vanguard, as an example, will let you transfer an ISA over from another provider. And it really doesn't, it's like a couple of button presses. It's like transferring bank accounts. Again, though, different platforms have different rules. And what you'll find is the investments that you're in over with your managed service, it's unlikely that they'll be able to carry all of those over to the new broker.

12:47So they might convert them into cash and then you exit those funds and then they get transferred to a cash balance on your new one. Other providers as well, I think trading 212 at the minute only transfer cash. There's other providers that don't allow ISA transfers, but it's quite easy to do if there's that transfer feature. The other option is, unfortunately, if you're with a platform or you want to use a platform that doesn't allow you to transfer the ISA, you have to sell everything, move it out of the ISA and then put it back in. The problem with this is you're then using an ISA allowance through that movement.

13:21So, you know, if you've got over 20k, you're using a whole year's ISA allowance doing that. So just consider that. Most platforms in the UK now have some form of ISA transfer that doesn't use up the ISA allowance though.

13:38What kind of topics do you want us to cover in season two of Making Money? And are there any guests you'd just love for us to have on? Let us know at makingmoneyatkindling.media or message us on Instagram. This isn't advice. Whilst we discuss individual examples, we can't give you personal financial advice. What we can do is offer a perspective and discuss the issues. See you next week.

14:03praises N bore