Home » Forums

[MSE Wendy]

This thread is specifically to discuss the content of the

Should I pay off my mortgage article

To discuss or ask a question about the article: click reply

[Dithering Dad]

Good article, and very useful to link to when the next "Don't pay off your mortgage" Troll turns up.

Personally, it ticked all of my boxes and confirmed that my quest to pay off my mortgage was the right way to go.

I am a high rate tax payer and so would struggle to find a savings product that gave better returns than overpaying my mortgage. I have a flexible mortgage with offset facility with a low-ish rate of 5.3%, and so as well as making overpayments directly onto the mortgage capital I am also able to offset my emergency savings against the mortgage interest.

I already have a significant amount of money invested in the stock market in the form of my pension plan and so I don't wish to put all of my eggs into one basket.

Finally, I like the "feel good" factor of seeing my mortgage drop month-on-month and know that eventually all of the house will belong to me so that however stormy the economy may get, I'll always have a roof over my family's head!

[ailuro2]

At last!

This forum was crying out for this atricle and its calculator- there we all were playing with Excel trying to figure out daily interest, no tax interest rates etc. and still we couldn't agree on a simple answer.

Problem solved, thanks to the MSE team

[Kaz2904]

I need to earn 6.6% interest on savings to beat my 5.29% mortgage but when I run it through the calculators I still wouldn't be able to clear my mortgage at the time it thinks I can. I, like DD find it a good psychological boost to see my mortgage coming down month by month and to that end will continue to overpay. I for one know that I would probably dip into the savings. I do have savings which are there to be used for necessary (and sometimes not!) purchases but they still need to be replaced and I count borrowing from savings as a debt.

I think one thing that Martin has forgotten to point out is that if you have a considerable sum in savings/investments and you lose your job any savings are taken into consideration when your benefits are calculated.

[InMyDreams]

Originally Posted by ailuro2

At last!

This forum was crying out for this atricle and its calculator- there we all were playing with Excel trying to figure out daily interest, no tax interest rates etc. and still we couldn't agree on a simple answer.

Problem solved, thanks to the MSE team

Nooooooooo!!!!!!!!!

Problem is so not solved! All it does is support the 'don't pay off your mortgage' brigade and fails to highlight many of the other issues to be considered. It didn't tell us anything we didn't know on this board. This is NOT what this forum was crying out for.

All this calculator does is work out interest rate multiplied by 1.25 for basic rate and 1.67 for higher. (ie basic rate payers pay 20% tax and higher 40%) I assumed we all took that as read! This is not what we were messing around with excel for. Or at least it wasn't what I was trying to work out. I don't need excel to work out what 80% or 60% of a number is, or vice versa.

The question I thought we were debating, was once you'd figured out what interest you were *actually* receiving (which we don't need Martin's calculator to do) if it works out the same as your mortgage interest, which is it better to do? Save or pay off? Which interest rate should you use to compare to your mortgage interest rate in the first place? The headline APR rate or the actual rate if paid monthly? And more importantly, this is not just a simple numbers game. There are so many other things to take into consideration (eg personality type, effects on benefits, as has been mentioned on this board). Martin's article doesn't address this at all, except the 'what if you loose your job?' consideration.

All this article does is confirm that at the moment I'm right not to be paying off my mortgage. That's not to say that I'm not a MFW. I'm just as much a MFW as anyone with an offset mortgage, it's just that I'm doing the offsetting myself. This way I can get a better rate on my mortgage too because I don't require any flexibility.

I read this board quite regularly and I don't think I've ever seen a "Don't pay off your mortgage" troll. Just a few people suggesting that for *some* people (eg those not using their full ISA entitlements or those with non tax-paying spouses like me) they should think carefully and not assume that piling all their spare cash into their mortgage is automatically the most MSE thing to do. And even then they all say something along the lines of "just based on numbers... but there's other things to consider" which is more than Martin said in his article! He was just playing the numbers game, which is exactly what people are flamed on here for doing.

FWIW, We've not found it hard at all to beat our mortgage rate. We started at the beginning of last year to use a 10% regular saver (the A&L one in my, non-tax paying name). When this matured, we moved the lot into an ISA in hubbies name paying 8.1% (the A&L one which again, admittedly, we had to open a current account for but that's no big deal and I referred him so got £100 on top). We have opened another regular saver (this time only an 8% one but it doesn't mature and rate is 2.5% above BOE till March 09). Another three months and I'll be free to open another A&L regular saver (currently offering 12%) but won't as we don't have enough spare cash to use it unfortunately. Anything extra we'll put into the ISA instead. All our interest is tax free, either in hubbies ISA or because I don't pay tax.

Having said all this, there IS another point to consider that maybe hasn't been mentioned. If you are receiving tax credits, any non-ISA interest over (I think it's £300 per year) must be declared and may effect your reward (to the tune of up to 37p or 39p per pound interest you're earning). We got stung by that this year after doing some stoozing, but will make sure it all gets hidden in ISA's before it reaches that level again. Although actually I don't think we're going to get more than the min £545 this year anyway, so won't make any difference to us.

So all-in-all, rather disappointed with Martin's article I'm afraid. I don't think it has answered any questions that were being asked here, so I'm going to do what it says and continue NOT paying off my mortgage but saving instead.

[Kaz2904]

Now after reading the article and going onto the whats the cost calculator I had decided that I was better off by sticking it all into the mortgage because I was only going to get the level I needed from the savings accounts.
Having read what you say, I had forgotten about the A&L 12% jobby. I have opened up DH an A&L account today with the intention of paying £250 a month into the direct saver account and then using both his and my current accounts to get the high interest rate up to 2.5K and also opening up the other savings account they do for 5+k.
The thing with this is that we will be using the interest earned and money made from opening these accounts to repay savings that have been plundered recently. Once they are back up to a level then any interest earned on these accounts (but not his savings account when it hits 15k) will get shoved straight onto the mortgage.
Ours is a personal choice as we have incredible amounts of work needing doing to our house so need some funds available to us but if we had more we would probably get lazy and get people in to do work that we are qutie capable of doing ourselves.
I also need to keep DH's 15k (plundered) savings pot completely separate from our family financial life as it is to be used jointly with his bro if we ever find a fixer upper property to do between us all. They then have 30k towards costs.
So ours is for complex psychological and not so complex (not understanding interest) reasons!

[JIBEE]

I've 15 months left of a 5yr fixed rate of 4.39%.
I wanted to pay off £20k but have been told that there'll be a charge of six months interest.

Am I better of keeping the £20k in savings until the 5years are up ?

[catowen]

Well, ive just read the article, and it definatly shows that i should be overpaying my mortgage, and not saving. Im lucky to have one of the flexible mortgages, at a, i think, good rate (4.99%) so i can overpay, and then borrow back, so it makes sense to me to throw what i can at my mortgage.

Also, i do get tax credits, and although i hope it wont ever happen again, have had to go on benefits before (got off those as soon as i could) so having savings wouldnt benefit me if a problem like that arose.

[angelavdavis]

Originally Posted by JIBEE

I've 15 months left of a 5yr fixed rate of 4.39%.
I wanted to pay off £20k but have been told that there'll be a charge of six months interest.

Am I better of keeping the £20k in savings until the 5years are up ?

Sounds like it, but shop around and get the best deal you can on your interest rate for your savings. If you are a tax payer, you might want to consider putting into an ISA too to save paying tax on your interest.

[bankersmug]

A question of timing here.

Supposing I had a mortgage of £115000 at a fixed rate of 4.69% til next May (when a higher interest rate kicks in), and had £30000 cash now, should I find a high interest savings account to rest that money in till may, or would it be more prudent to pay it off now? (This mortgage has no overpayment fees incidently)

[tanglewood]

Very interesting and eye opening article. Thanks.

We are in the fortunate position to be able to take the advice in the article to potentially use our savings to repay our £50K mortgage. This would leave us with little savings, but we have no other debts. I am a higher rate tax payer.

However, what if we switched to one of these offset mortgages where the balance of my deposit account is used to offset the mortgage interest?. If I placed my £50K savings in the deposit account used to offset the mortgage, am I naive thinking that the mortgage interest payments would be close to zero, thus saving me the payments but having instant access to the funds in an emergency?. I guess there is a flaw in this theory, but is it worth considering?

[ailuro2]

Our overpayment fund is still accessible to us, we have a Co-op mortgage which is now penalty free for overpayments.

The One account and other offset accounts tend to charge higher interest, but the money in your current account is offset too- so it depnds on your day to day balance too, not just your 'savings'

Currently the one account is at 6.7% interest- see here- http://www.oneaccount.com/onev3/rates/toa-rates.shtml but our Coop tracker mortgage is at 5.99% , so a saving ov 0.71% for us,but we can still access the money if necessary- although in reality we never have- holiday savings go into a higher interest savings account, the current account balance pays around 3% on what's left in there between payments.
Hope this helps

[craigolaman]

Interesting article.

Would it be worth getting a loan of say £10,000 and paying it off a 25 year mortgage of £150,000. Would the money saved on interest payments off the mortgage be higher than the repayments for the £10,000 loan?

[Kaz2904]

I haven't got the faintest idea but think that you would have to run a theoretical scenario through a calculator.

[keeperbear]

The article states that:
>Many people don't think of their mortgage as a debt

Sorry, but I have never met a mortgage holder who doesn't see their mortgage as a debt.

[Dithering Dad]

A lot of people "speculate to accumulate" and so borrow money to make money such as buying a house, doing it up and then selling it at a profit. Alternattively you can borrow money and invest it into a business and again net more money at the end.

Some people see a mortgage not as a debt but as an investment opportunity.

As an aside.. Keeper bear, do you think your one-liner digs at people are helpful in anyway?

[jamesd]

It would have been good to see an example of the UK equity interest sector in the investing section, since that's a moderate risk area.

JIBEE, it's worth asking about the cost of changing the term to one that will increase your monthly payments by 1000. Or more tricky, to one that will increase them by 3000 a month for six months then changing back to the current payments again. Sometimes term changes are possible with lower total cost than the 439 it would cost you at six months of interest. It isn't worth paying six months of interest to pay now. If the money is in a cash ISA, better to keep it there and when it's time to remortgage consider a mortgage that allows offsetting cash ISA money, like the one from Intelligent Finance. That way you can use the money to offset and save mortgage interest without losing the accumulated ISA allowances.

bunkersmug, depends on your tax rate. If you are not a tax payer or your wife or husband isn't, then putting the money in a savings account in their name and registering for gross interest will make you more interest than the mortgage cost, so it'd be better not to pay it off the mortgage. Otherwise as a basic rate tax payer you'd need 5.9% from taxable savings to be better off in savings and that rate is available from IceSave and others, so saving with one of them would beat using it for the mortgage. If you're a higher rate tax payer you would need 7.9% from taxable savings to be better off and to get that you'd have to do something like lending the money in Zopa's C markets.

tanglewood, as higher rate tax payers, your first course should be to use your ISA limits every year. Your theory on the offset mortgage is correct after that. You're in a position where one probably makes sense. The One Account current account mortgage might as well but the interest rate is so high that it's better to use a normal offset mortgage in case you do pay interest.

craigolaman, the loan would only make sense if the loan interest rate was lower than the mortgage interest rate. It's very unlikely that you could find a loan with a lower interest rate than a mortgage so it's unlikely to make sense to do it.

[BLACKHURSTM]

I am about to pay of my interst only morgage in full.
Is there any advantage in leaving a small amount outstand say £500 -£1000,The thought behind it is that I would still have my DEEDS securely locked a the bank for free?
Still leavin the £500-£1ooo in an ISA earning interest although slightly less

[getmore4less]

I had posted on the resurected "Don't" thread but the post could well have been here

http://forums.moneysavingexpert.com/...&postcount=180

The key thing is that paying of the mortgage should be part of the long term stratagy that will probably involve investments and the article really does not cover this.

More attention should be paid to pensions and ISA's and other investment options early so you don't find yourself with excess money that you can't protect from future tax.

[seven-day-weekend]

Our mortgage on our family home was cleared in 1996.

I actually didn't think about much of the stuff in the article (although it is good stuff ) - all I was concerned about was that it was a debt, it had to be cleared as quickly as possible like any other debt - also that once it was cleared no-one could take our home away.

So we just continued paying the 15% payment even after the interest rate had dropped and payed it off in 20 years instead of 25.

I still say pay your mortgage off asap (providing you also have some savings for a rainy day).

We now have two mortgage-free houses; we are in our 50s.