Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Over the past month, every visit I’ve made to the supermarket has helped pay off my mortgage a little bit faster. How? I’ve been trying out a free app called Sprive that offers homeowners cashback on their shopping. With the power of Open Banking, the savings are directly applied to your mortgage.
What a great idea, I thought. And it turns out, three of the stars of the BBC show Dragons’ Den agreed. On this week’s show, Deborah Meaden, Peter Jones and Touker Suleyman agreed jointly to invest £50,000 in return for a 5 per cent stake in the business, following a successful pitch from Sprive’s founder and chief executive Jinesh Vohra.
With the motto of “Shop away your mortgage”, Sprive’s now 100,000 active users get cashback on digital gift cards, which they use online or at the till to pay. The supermarkets were the first to sign up. Why? Homeowners spend more money, and they want our custom. Ocado, Aldi and Lidl are not on Sprive, but all the others are, and reckon that 2.5 per cent cashback (or 4 per cent at M&S) could tempt us to switch.
Sprive gets a small commission from its cashback partners, which include retailers, restaurants, coffee chains and holiday operators, and also makes money when people remortgage through the app. It knows precisely when users’ mortgage deals will expire, and nearly 2mn homeowners are set to remortgage this year.
With a background in fintech, Vohra has already raised £4mn from social impact VC firms and angel investors who are betting the British obsession with becoming mortgage free will power the app’s success.
The three Dragons have been brought on board for their marketing expertise, more than their money. But should we buy into the overpayment hype, or try to invest our way to a mortgage-free future?
The right answer to this question will be different for every person who reads this article, but the key factors are your age, your income level; and your mortgage terms. “Ultimately, the best decision comes down to balancing tax efficiency, time horizons and personal financial goals,” says Claire Walsh, a chartered financial planner at Midsummer Wealth.
As someone who recently moved house and mortgaged up myself, I long to feel more in control of my biggest monthly outgoing. With the Bank of England holding rates this week, the best five-year mortgage fixes hover just under the 4 per cent mark. Volatile markets and another Big Tech sell off make the guaranteed return of repaying debt more appealing. But while my heart may be saying overpay the mortgage, my head knows investing this money could still be a better strategy.
Why? For starters, I’d hope to get a better annualised return from investing in stocks. You can use online mortgage overpayment calculators and compound interest calculators to compare the potential interest savings versus investment gains over different scenarios and time horizons (many will aim to get their mortgage paid off by their target retirement date).
For higher and additional rate taxpayers, investing this money into a pension provides an immediate additional boost from tax relief, yet Walsh says a surprising number of people overlook this. Early responses to the FT’s bonus survey show many readers aim to take full advantage of salary sacrifice and invest their bonus directly into their pension free of tax and national insurance before restrictions bite in 2029.
Pensions have the advantage of tax-free investment growth and allow the ability to take 25 per cent tax-free cash in later life, which is how many dream of eventually clearing their mortgage. But the obvious caveat here is future changes to pension rules. The younger you are, the greater this risk will be.
Walsh notes that younger borrowers in their 20s and 30s who are more likely to only get basic rate tax relief on any extra pension contributions may find it more compelling to reduce their mortgage balance, especially if their interest rate is relatively high. As 40-year mortgage terms become increasingly common, the interest savings could be considerable. Plus, building more equity could bring down a borrower’s loan-to-value ratio and enable them to access cheaper rates when they remortgage. That said, building emergency savings and paying down expensive credit card debts should be a greater financial priority than overpaying.
I was surprised to find that 55 per cent of my Instagram followers said they would rather invest any spare cash into their stocks-and-shares Isa, but there was a simple reason for this — flexibility. Lock that money up in your pension or mortgage, and you can’t get your hands on it in a hurry.
Still want to overpay? Be aware that most lenders cap this at 10 per cent of your outstanding balance per year, and also check how your overpayments will be applied. The default is often to reduce your level of monthly repayments going forwards, but this won’t reduce your mortgage term.
Finally, the danger with all cashback and credit card points promotions is that psychologically, they incentivise you into spending more. Will I feel less guilty about buying a £28 bottle of Margaux in M&S if I’m getting 4 per cent cashback to help pay off my mortgage? If I was really serious about clearing it, I’d be shopping in Aldi! But as an additional “something for nothing”, using Sprive scratches the psychological itch to overpay my home loan while I pile into my pension.
Claer Barrett is the FT’s consumer editor; [email protected] Instagram @ClaerB
Read the full article here