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Overpay mortgage or National Savings?
4 Answers
I have a spare four figure sum to invest - should i overpay my variable rate repayment mortgage (which i can do) at it's very low intrest rate , or should i invest in a 5year national savings index linked RPI?
Answers
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It depends.
Your mortgage is currently costing you comparatively little and it seems you already have it factored into your monthly expenditure. I would therefore suggest you do not use your lump sum to pay off part of this. The only risk you are taking that, as it is variable and interest rates are forecast to rise you could end up with higher monthly payments.
If you do choose to invest you could do worse than the NS&I Index-linked deal. It will pay RPI plus 0.5% (if you hold them for the full term) but even if you cash them in early you still get at least RPI (currently running at about 5%) provided you hold them for a minimum of 12 months. Additionally the returns are tax free, effectively increasing the return by 25% for a standard rate taxpayer. Of course nobody knows how the RPI will perform over the entire period, but recent figures and events suggest that the current rate of inflation is unlikely to reduce drastically any time soon.
Premium Bonds, by their nature, do not necessarily give a good return. However, as part of a blanced portfolio they can provide a small income which is also tax free. Mine are currently running at a little over the rate I could get on, say, a fixed term bond, but this is by virtue of a biggish win a couple of years ago. If they do pay a little less than you could get from conventional investments you should treat the difference as your “gambling” money.
Your mortgage is currently costing you comparatively little and it seems you already have it factored into your monthly expenditure. I would therefore suggest you do not use your lump sum to pay off part of this. The only risk you are taking that, as it is variable and interest rates are forecast to rise you could end up with higher monthly payments.
If you do choose to invest you could do worse than the NS&I Index-linked deal. It will pay RPI plus 0.5% (if you hold them for the full term) but even if you cash them in early you still get at least RPI (currently running at about 5%) provided you hold them for a minimum of 12 months. Additionally the returns are tax free, effectively increasing the return by 25% for a standard rate taxpayer. Of course nobody knows how the RPI will perform over the entire period, but recent figures and events suggest that the current rate of inflation is unlikely to reduce drastically any time soon.
Premium Bonds, by their nature, do not necessarily give a good return. However, as part of a blanced portfolio they can provide a small income which is also tax free. Mine are currently running at a little over the rate I could get on, say, a fixed term bond, but this is by virtue of a biggish win a couple of years ago. If they do pay a little less than you could get from conventional investments you should treat the difference as your “gambling” money.
Put it where you get the best rate (long term). Usually this means paying off high interest loans, before investing in lower return investments, but mortgages tend to be an exception. They are relatively low as loans go and may be worth keeping. Especially if you think you may need money that's not tied up in the near future. Pay off the mortgage and you may not find it easy to open another one to pay for a holiday, or garden shed :-)
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