The maths behind aiming for mortgage-free

Rob71

Hi Stuart,

To be honest, I don't have any kind of income/mortgage payment protection...

But as someone who's been made redundant recently (thankfully walked out of one job straight into another), I realise that I don't necessarily want to have a millstone around my neck for the next 20 years so will attempt to clear the mortgage asap - I needed to work through the numbers in order to convince myself I was doing the right thing: the millstone is more important to me than the numbers, and I will make my savings up when I've paid off by ploughing what should have been my mortgage payment into something that pays a decent rate. Simply paying off the mortgage doesn't put any cash in your pocket.

We need to have savings and overpay whilst we can - getting the balance right between those two is tricky, which was why I tried out a few scenarios. It's not good to bury all of your savings in the mortgage just to bring the MF date forward by a couple of years, because you never know what's around the corner.

I'd like to think that most of MFW aren't just sinking every last penny into clearing the mortgage, and I know through reading your MFW diary you've been very sensible about how you've gone about things.

At the end of the day, we wouldn't be here if we didn't want to be MF!

StuartGMC

Rob
We have redundancy cover but not permanent income protection, and thanks for having read my thread.

Like you, having gone through redundancy, it means much less pressure if the house cannot be taken away. As you know, balancing the MF wish with savings for short-term requirements, saving for loner-term security then later in life chance to invest should ideally be in balance.

Best wishes on your journey.

ScoobyLoot

Rob71 wrote: »

Hey ScoobyLoot... I've just revisited my spreadsheets to make sure I wasn't completely barking mad!

Here's what I came up - feel free to point out the error of my ways!

Hi Rob. I'm all refueled with lunch, so here goes. Working on the basis of a £100,000 mortgage drawn down on 29th October 2009, with the first payment on 28th November 2009 and scheduled for the 28th of every month thereafter, for 20 years at 4%. Your monthly payments would be £606.05 (with HSBC).

Your options:
1) Don't overpay. Save £250pcm at 1% for 20 years. You mortgage completes in November 2029.
Compounded monthly at 1%/12, this will bag you £66,695.64 after the 240 months.

2) Overpay the mortgage by £250pcm.
You complete your mortgage in March 2022. 7 years and 8 months ahead of the normal mortgage term. Until March 2022, you aren't saving the £250pcm because you're using it to overpay.
However, from March 2022 you can save the £606.05 + £250 each month. So you save £856.05pcm, for (7x12+7 = 91 ) months until your normal mortgage end date of November 2029, which bags you £81,818.85.

So if you overpay, you're better off by £15,123.21 if you save the equivalent of the mortgage payments plus your £250, until the original date of November 2029.

This £15,123.21 is over 91 months, so if you were to spend on average any more than £166.19pcm (19.4% of your overpayment total) extra after your mortgage is cleared in March 2022, your final pot would be no better than if you'd just paid the mortgage as-was. £166 might be a small proportion of your salary in 20 years time, and not actually that much to splash out pcm when you think of inflation... an extra £60 in today's money. So there are tight margin between gaining and not gaining anything by overpaying!

I don't know what inflation is like where you are, but here, at around 5%, that £15,123.21 will be the equivalent of £5421.46 in today's loot. Saved over 8y7m IF your health is good enough. Think about how long £5K will last you today if you had no mortgage, and just bills and living expenses.

(Note that the difference in interest paid to the bank is £17,046.97 BUT you're NOT better off by this much, and you are ONLY better off by the £15K IF you are in a position down the line to save it and recoup it and even then you can't hit £17K! This is where MSEs get it wrong - they imply that by saving X in interest payments that you're magically better off by X without lifting a finger. Whether you pay the mortgage early or not, you need to lock your finances in for the original term of the mortgage to make any gain. Spend just a bit more, and you're no better off.)

Stuart rightly points out about health, BUT, if you are reliant on recouping your pot after your mortgage is cleared, then you equally might not be in a position to earn enough to squirrel away that £856.05 a month to recoup your pot, so if your health fails then you're basically f***ed because you will have saved nothing. BUT you'll have the asset of a house to sell. Up to you which you prefer to do, of course!

So you see, overpaying your mortgage is just as much as a gamble as not doing so. You need to make a call on your own most likely outcome for sustainable income and find the right balance point.

Rob71 wrote:

We need to have savings and overpay whilst we can - getting the balance right between those two is tricky, which was why I tried out a few scenarios. It's not good to bury all of your savings in the mortgage just to bring the MF date forward by a couple of years, because you never know what's around the corner.

Exactomundo! Out of interest, I'll run your £100K again, but with splitting the £250 50/50 between the mortgage and savings, and see what comes out...

So here's option 3:
3) You overpay by £125, and squirrel away £125pcm.
You complete your mortgage in January 2025. 4 years and 10 months ahead of the normal mortgage term. Until Jan2025, you aren't saving £125pcm because you're using it to overpay.
However, from Jan 2025 you can save the £606.05 + £125 each month. So you save £531.05pcm, for (4x12+10 = 58) months until your normal mortgage end date of November 2029, which bags you £44,191.00.
Now, you've also been squirrelling away £125pcm for the 240 months, so that adds another £33,347.82, bagging you a total of £77,538.82. £10,843.18 better off in November 2029, IF you save the £531.05 for those remaining 4y10m. That's gotta be easier than saving £856.05pcm for 7y8m! It also gives you leighway of £186.95pcm to spend before you go below the pot you'd have just from paying the mortgage at £606.05.

Note that splitting 50/50 doesn't lead to an end result that is directly in the middle of the other two. It'll follow a curve which flattens out the more you put in.

There's a balance to be struck then, between overpaying to be mortgage-free, the risks involved with that, versus the benefits it gains, and the pot you can have by just paying the mortgage. You can have more later, but it's potentially risky if your health fails, so you need to find the sweet spot of saving and overpaying to find what works best for you based on what you project your health to be like.

** NOTE: Any other money you've got squirreled away and plan to put away, will obviously be in addition to the above figures!
Hope that lot all helps......... :beer:

Jonesy_Bonesy

ailuro2 wrote: »

I am looking forward to my holiday in Orlando this Christmas, and to the many more things we'll be able to do now the mortgage is gone..... surely this increased quality of life will add years to my life expectancy thereby netting me more money from my pension , so making me better off in the long run?

Some things you can't do arithmetic for, and peace of mind is one thing you didn't calculate for.;)

This is the reason I have been striving for MF status - less stress and no longer being a wage slave. I have only been MF for one month and already feel like a weight has been lifted.

My sensible ways with money will now be with me for life, and I am now looking towards ISA's / shares / and increased pension contributions for the spare cash I will now have every month.

Bonesy

StuartGMC

ScoobyLoot wrote: »

Stuart rightly points out about health, BUT, if you are reliant on recouping your pot after your mortgage is cleared, then you equally might not be in a position to earn enough to squirrel away that £856.05 a month to recoup your pot, so if your health fails then you're basically f***ed because you will have saved nothing. BUT you'll have the asset of a house to sell. Up to you which you prefer to do, of course!

Not necessarily correct; you can get state support potentially if ill but it will not be sufficient to pay a mortgage from (typically). Far better to be able to stay in your own home in such circumstances than have to move with associated stress.

Also you should not be entirely putting money into the mortgage alone; you need to have the pension in place and should be saving too. By way of example for us (remembering we're nearing the the MFD):
1) Mortgage payment required per month £239 (rate is 3.75% but we're 100% offset)
2) Our usual OP per month £211
3) Our additional OP we've made in past year £200
4) Pension (final salary company scheme) is 10% gross salary per month deducted

Mortgage payments total per month £650
Monthly investments in Funds ISAs £300 (across ISA for me and OH)
Monthly targeted savings requirements for annual costs (hols, insurance) plus car etc on longer term replacement needs £912
In addition once MF we'll have some £42 per month not going out on insurance which I will likely switch to permanent income protection insurance but the amount of cover needed with be low (well relatively, I do have the Jaguar to run!)

In other words only 1/3 is mortgage, the other 2/3 is saving and investing.
Once MF, we will be aiming to save and invest 50% of net income, but some of that will be scheduled for spend (it'll just be earning good interest meanwhile).

Our Funds have grown significantly (see my thread) and whilst pound-cost-averaging avoids timing peaks and troughs, we've seen 8.90% growth on those funds we started in January - far better than any savings rate, and all tax -free if we chose to cash in. We've seen much greater growth since October overall but, we had taken a massive hit just ahead of then.

Such returns from the market will significantly alter your calculations and you need to also put the pure mathematical items alongside the additional options opened up when MF such as downshifting job to reduce stress and increase time with family; work-part time so allowing you to do more voluntary work in your community; possibility of going into consultancy work without concern for cash-flow issues initially; deciding to open your own business..... many of these are only possible if your minimum income requirements are lowered. Life isn't solely about cash... or in my case, just having the Jaguar XF that I will get to replace the S-Type once MF

ScoobyLoot

Rob71 wrote: »

Now, like I say, at the moment I can save 250 pcm at 8% (before tax) with a regular saver. If I put that in to the mortgage at the end of the year, I end up better off, but not before.

A quick note on HSBC's 8% Regular Saver... It caught my interest when I first heard of it. But taking the example on their web site:

For example: If you invest £250 per month, a total of £3,000 will be paid into your account during the 12 month term. At 8% interest, you will earn approximately £130 interest (gross).

That's all well and good, but it's 8% on a modest amount, that's limited, and the amount you earn is offset by the amount that you have to pay for the HSBC Plus account in the first place. Currently that's £6.47 for 3 months, plus £12.95 thereafter. So in 12 months it costs you £135.96. You're down £5.96 if you take out a fresh Plus account. If you've already got one, you're screwed because then you're paying £155.40 a year for the Plus Account, to earn £130 on your Regular Saver. OOPS. Of course, it depends whether the other benefits of the Plus account are worth anything to you, but if you're paying for a Plus account just to get 8%, you're wasting your time, at least in the first year anyway.

Rob71

ScoobyLoot/Stuart...

Thx ever so much for the constructive feedback - it's very much appreciated!

I'll be honest and say that I have historically been utterly useless with cash - I know how to work out interest payments because I write financial software for a living, but I've been useless at managing my own finances up until about a year ago.

That was when I was made redundant and the lightbulb moment occurred!

Since that time I have cleared about 28K in debt (thanks to getting 10K for being made redundant) and have built up about 10K in savings - I still have 1500 in debt, but at least that's 0%.

I now have a cash ISA for the first time in my 38yrs...

As for the HSBC Plus account - I like the family travel insurance and roadside recovery (and the nice black debit card!), so the interest rate thing is just a plus in my book. I'm sure I could hunt around for a better deal on the two, but truthfully the savings probably wouldn't be worth the effort... Whereas I saved £248 per year by changing my buildings+contents away from Aviva/Norwich Union this morning (dumb loyalty of being close to Norwich!) - Get the Aviva deal my @rse!

The mortgage statement should be with me in the next week or so, so I shall start the whole MFW journey when I have some more up to date numbers to play with. And I'll be looking at regular/decent savings/investments as part of that...

Thx again for all of the feedback!

Rob

Queen-Bee_2

Hello Rob,

I agree, there's nothing quite like redundancy to focus the mind, is there? (It happened to me this June)

However, one point in particular struck me from your last mail..

Rob71 wrote: »

I saved £248 per year by changing my buildings+contents away from Aviva/Norwich Union this morning (dumb loyalty of being close to Norwich!) - Get the Aviva deal my @rse!

... I buy my building+contents from my BS at the moment and I'm sure I ought to be able to get a better deal. Can I ask who you used?

Best wishes
QB

ScoobyLoot

No problemo, Rob Yeah if the other benefits of the Plus account are of use to you then you can take a view on their value and whether the 8% is making a good return for you. They wouldn't be worthwhile for me, so the account is a loss-maker for me.

Stuart, I agree about other issues to consider surrounding being mortgage-free. I make no recommendation as to whether someone should try and reduce their mortgage period, as everyone needs to find their own best choice. I'd be interested in your strategy with the markets as I've always considered them too risky but you seem to know what you're doing to some degree, or at least how to reasonably spread your risk. I'll have to spend some time reading the salient points of the 46 pages of your thread!

Life isn't solely about cash, true, but I'm naturally averse to being poor when I'm old. I'd love to get a new car but the computer says no. Though if I could beef up the returns I could perhaps limit the damage.

StuartGMC

Rob71 wrote: »

That was when I was made redundant and the lightbulb moment occurred!

Since that time I have cleared about 28K in debt (thanks to getting 10K for being made redundant) and have built up about 10K in savings - I still have 1500 in debt, but at least that's 0%.

I now have a cash ISA for the first time in my 38yrs...

The mortgage statement should be with me in the next week or so, so I shall start the whole MFW journey when I have some more up to date numbers to play with. And I'll be looking at regular/decent savings/investments as part of that...

Thx again for all of the feedback!

Rob

Rob
Well done on paying off the previous debts. My situation improved in terms of money control once I got the detail together in a spreadsheet. It grew over time and I have sent a "simple" version to people here to look at to use or extract ideas from (it averages real inputs on car costs, groceries etc). PM me with your e-mail address if you want me to e-mail it to you.

ScoobyLoot wrote: »

Stuart, I agree about other issues to consider surrounding being mortgage-free. I make no recommendation as to whether someone should try and reduce their mortgage period, as everyone needs to find their own best choice. I'd be interested in your strategy with the markets as I've always considered them too risky but you seem to know what you're doing to some degree, or at least how to reasonably spread your risk. I'll have to spend some time reading the salient points of the 46 pages of your thread!

Life isn't solely about cash, true, but I'm naturally averse to being poor when I'm old. I'd love to get a new car but the computer says no. Though if I could beef up the returns I could perhaps limit the damage.

We only had the funds each month to start in the markets from June 2006 (just when we switched to the offset - the bank too thought we had plenty of cash, but we selected our own funds!). We are focused upon growth, these funds augment our savings and pensions (i.e. they will top up not be essential and thus can be left to be moved to income generation from say 8yrs hence (we'll be 52) over a 3-5yr period. However, as these aren't our pension we can keep some in growth to help in retirement also.
Edit: As per my thread, I'm still learning and read Money Observer to help in my education on investing - afterall once MF I'll need something financial to focus upon!

My spreadsheet (see above) includes expectation of car replacements (me and OH) needing to put aside £4500 per year; computer will say yes (I'll make it do so) in Feb 2011 to the Jaguar XF 3.0 Diesel S (42mpg combined cycle, 178g/km CO2 - both better than the 3.0 S-Type SE petrol I have now; how can OH argue against that????)

Queen-Bee wrote: »

Hello Rob,

I agree, there's nothing quite like redundancy to focus the mind, is there? (It happened to me this June)

However, one point in particular struck me from your last mail..


... I buy my building+contents from my BS at the moment and I'm sure I ought to be able to get a better deal. Can I ask who you used?

Best wishes
QB

QB, try Direct Line - but based on my experience this month, check on their renewal offer thereafter! Do read the PDFs for the policies of any you are looking at as they vary significantly in cover.