March 2022

We have all been through unusual times lately, with COVID-19 since 2020, rising inflation and now conflict in Ukraine. These – and other – events are having knock-on effects onto the wider economy and markets. Under “normal” times, the “invest vs overpay mortgage” debate is an interesting one – but has this new landscape changed things? Below, we address this question in light of recent trends and developments.

Putting excess cash to work

Interest rates on cash savings accounts have been at historic lows for some time now. It is hard to beat 1% on easy-access, for instance. Those with spare cash, therefore, typically have two other options: repay debts or invest. The first is almost always worth prioritising if the debt has a high interest rate, such as personal loans and credit cards. However, with a mortgage, it is not always clear whether the savings you’d make from overpaying would beat the returns you could get from investing. Here, you need to factor in the prevailing economic environment.

Overpaying vs. investing in 2022

The main incentive to overpaying your mortgage is that you repay the debt faster, meaning that you can own your home outright, faster. If this is your primary goal (rather than building wealth), then this is understandable. For those whose main objective is to grow their wealth, however, the question of overpaying vs investing relies heavily on interest rates and inflation.

In recent years, mortgage rates have been historically very low. In fact, in 2021 some lenders were even offering sub-1% deals to certain customers. This means less interest for borrowers to repay over the mortgage lifetime. Overpaying on such a deal would likely be far less optimal compared to investing, where annual average real returns of 5% – or more – should be realistic.

Lately however, mortgage deals have been getting more expensive. This is mainly due to the Bank of England (BoE) raising its base rate, twice (from 0.10% to 0.25% in late 2021, then up to 0.5% in early 2022 and more recently up to 0.75%). Since lenders set their rates above the base rate, this has already led to several deals getting pulled from the market. 

The average 2-year fixed loan now sits at 2.65%. For a 5-year deal, the interest sits closer to 2.88%. For many investors, it may now be more of a toss-up between overpaying the mortgage and investing – especially for those with a more cautious risk appetite (leading to a preference for assets with a relatively safe, but low, level of return – like bonds).

Wider questions to consider

Here, it is important to remember that you do not necessarily have to choose between investing and overpaying a mortgage. It is often possible to do both. Yet it helps to ask yourself: “Why do I want to invest?”, and “Why should I overpay my mortgage?” This can help you shed light on the right course for your financial plan.

First of all, check whether you can overpay your mortgage. Some lenders may not let you, and most put a cap (e.g. 10%) on how much you can overpay. Those on a standard variable rate (SVR) can usually overpay as much as they like, but SVRs are usually more costly than fixed rate deals. Secondly, consider the horizon in front of you. How long do you have to invest until you might need the money (e.g. during retirement)? How many years until your mortgage is paid without making extra payments?

For instance, if you are near your mortgage end, then the advantages of overpaying usually go down. This is because interest forms a lower proportion of your monthly repayments. As a rule, therefore, it is usually better to overpay a mortgage earlier in its lifetime. Moreover, if you only have, say, 5 years to invest, then you may need to focus on lower-risk assets which offer lower potential returns. 

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This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Recent events in Ukraine have brought widespread shock – including in the markets, which initially dipped after hearing about the Russian invasion. The 24/7 media coverage often focuses on the increased short term volatility, of companies, stocks, bonds or commodities, which is the result of new information arising which impacts prices, until ‘new’ news brings about further adjustment. At times like this, we strongly encourage you to stick with your long-term financial planning strategy, and trust markets to work on your behalf. Avoid making short-term investment decisions, as volatility is always in the markets.

As a form of context, below we look at some historical examples of how markets react to war, and whether this affects the longer term growth trend.

What is happening in Ukraine?

Events are moving quickly in the region. At the time of writing, Russia had invaded Ukraine 13 days prior – receiving widespread international condemnation. At least 2m refugees have fled so far, and Ukrainian forces have put up fierce resistance despite being hugely outnumbered. 

The US, UK and EU have responded with heavy sanctions on Russia, which has refused to open its stock market. Both US and UK imports of Russian oil have now been banned, leading to further global rises in energy prices as supply struggles to meet demand. 

So far, the invasion has not sparked a sustained dip in global stock markets – although it is adding to existing inflationary pressures in the Western World.

Historical precedence

The impact of war on stock markets is not universal. It is complex and varies depending on the players, motives and actions concerned. The Swiss Finance Institute, for instance, published research on the US stock market since WWII and found that stock markets tend to fall in the “pre-war” phase (when uncertainty about the conflict prevails), but usually rise once war breaks out. The explanation is unclear, but perhaps partly this is because war typically creates the new, defining narrative for a nation, its markets and investors. 

Wars can bring short-term “shocks” to markets. The S&P 500 fell -3.8% in one day after the Pearl Harbor attack in 1941, and the North Korean invasion of the South in 1950 led to a -5.4% one-day fall. However, most of these shocks tend to recover well within a year.

The Russo-Ukraine conflict and your financial plan

Russia is the world’s 3rd biggest exporter of oil and the 2nd biggest supplier of natural gas. Any sanctions, therefore, are likely to drive up global energy prices. Already, in the UK we are facing higher inflation, so this plausibly means higher fuel and utility bills in 2022. Moreover, Russia provides 35% of the world’s palladium and 9% of its platinum. These precious metals are used in cars for catalytic converters. So, sectors such as the automotive industry (where we have already seen high inflation) could see further price increases for customers due to more limited supply. 

With all this said, be careful not to try and “time” commodity markets or build your investment strategy around conflicts (since their effects on markets are typically short-lived). Consider, for instance, that during the US War in Afghanistan (2001-2021) markets were volatile but those who committed to an S&P 500 index fund may have seen returns as high as 300% in that time (averaging 15% gains per year).  

Currently, oil and gold prices are soaring and many investors are tempted to take advantage. However, prices are moving constantly and things may take a sharp turn at any moment. Be vigilant to stick to your long-term strategy agreed with your financial planner, rather than taking needless risks with your investments. Remember, frequent active buying and selling in your portfolio can ramp up fees and has not been proven to increase returns compared to focusing on a “buy and hold” strategy.

The current conflict in Ukraine is coming at a humanitarian cost. It is also having big repercussions for the global economy. We all hope for a swift and peaceful resolution and it has been truly inspiring to see the efforts of every day people, charities and aid organisations.

Markets have been through many conflict-related events in the past such as the Cuban Missile Crisis, the 2003 Iraq War and the Arab Spring (2011). In the long term, growth is the long term trend. There is no reason to suggest the current conflict – although deeply distressing – in terms of the markets, is any different. 

This content is for information purposes only. It should not be taken as financial or investment advice.