The maths behind aiming for mortgage-free

Jonbvn

ScoobyLoot wrote: »

Your sarcasm is unnecessary.....

Maybe my maths is wrong but experience tells me that that's unlikely and that most people quickly glaze over or at worst become hostile when confronted with anything beyond their complexity level.

You call me sarcastic, then come up with this?:rotfl:

BTW, given that I am a chartered structural engineer, I do not think that what you propose is beyond my complexity level. Simply put, your calculations are based on erroneous assumptions. QED.

getmore4less

Simply put, your calculations are based on erroneous assumptions

and potentialy misleading

take the first set from post one and use some numbers closeish to the OPs.

A £100k loan and £1k to apply to mortgage/savings with a £10k starting pot for the savings. savings at 2.5% and mortgage at 4% and a 20y term.

If I don't overpay at all, my mortgage still finishes at its original completion date. In my case, current savings compounded, plus £400pcm compounded, plus the saving in interest from the lower rate, gives a final pot of £162,000 if I just pay the amounts asked.

£100k at 4% over 20y is £605.98 pm
£10k + £394.02pm over 20y at 2.5% a pot of £139,042.96

This is where things get interesting. If I dump £10K into the mortgage now before changing rates, the pot becomes £166,000. i.e. I pay £10K in and get £4K back over 20 years time.

Not quite right
Rather than £10k in and £4k back it should say £10k in £14k back

£90k at 4% over 20y is £545.38pm
£454.62 over 20y at 2.5% is £141,408.14 so £2k extra with these Nos

So not only has this saved £2k(ish) it has also paid the £10k back as well.

Not a good return! Letting £10K compound at 2.5% will bag over £6K in interest, not a LOSS of £6K

This implies a £12k difference which is just wrong or at the least is very missleading since there is not a loss of £6k and the £6k return is allready counted in the original amount before the £10k was used to pay off the mortgage.

Put simply putting £10k into the mortgage with these rates nets you around £2k(or £4k with your numbers).

As a result of this misunderstanding later in the same post we have(remember there is no loss)

So, in summary, the best strategy seems to be to hold onto whatever savings you have now, rather than use them to reduce your mortgage payments. The loss you get for putting lump sums in now doesn't make up for it.

Ok the savings may be small and some may not consider them enough to make it worth while but they are there for the taking.

ScoobyLoot

I never said they weren't there for the taking. It was just my point that the savings aren't as large as the "you saved X in interest payments" would lead you to believe they are. It's statements like that that are misleading. You can make the gains paying of early only if you continue to be prudent after paying off the mortgage. In any case, I revised my thinking in subsequent posts, to the extent that actually I don't recommend a best strategy either for myself or anyone else. Dragging up prior posts is a somewhat moot point.

Some people may desire to maximise their investments etc. but might make the mistake of thinking that becoming mortgage free means you have a lot more leighway with your finances. You may, you may not. It depends what you want to achieve. People can work that out for their own circumstances. Personally I found it useful to know that whatever I would commit to the mortgage, I'll be best served if I continue to commit that to the pot even if I pay it off early, until the original term date. This being a money-saving forum I thought perhaps others might be interested in that. Some are, some aren't. That's cool - those that are interested, I'll help and they'll help me.

It's clear there are certain elements here who can achieve little more than say "you talk b*llocks", "your assumptions are wrong", yada yada, without actually adding anything to educate anyone else as to why they are wrong. Some perfectly and equally well-qualified individuals have no problem with my calculations and have found the examples useful to help work out how to approach their own mortgage. That's great, and it's what I made the posts for - to help people. Take it or leave it, but if you've got nothing constructive to add to proceedings, the latter seems reasonably appropriate.

ernie_3

I have followed this thread, i am an educated person, i can see both arguments. This forum was created for all those to be or to work towards being Mortgage Free.

To be honest this thread is getting quite personal. As human beings we are born, we live and you die.You do not know what is around the corner either for youreslves or your partner.

So please see this for what it is, help others by helpful and useful information. Once the mortgage is gone it is up to you how you spend/invest that extra money.

In the current climate if you or your partner does loose your job, if your mortgage is paid off that is your home and you cant be made to leave it, which to me is the most important issue...its yours.

Take care all ernie from a warm and dry Plymouth

Ed_Zep

So to sum it up rather more succinctly; if you're savings/investment rate is lower than your mortgage rate, then overpay. If not, then save or invest.

ScoobyLoot

ernie_3 wrote: »

So please see this for what it is, help others by helpful and useful information. Once the mortgage is gone it is up to you how you spend/invest that extra money.

In the current climate if you or your partner does loose your job, if your mortgage is paid off that is your home and you cant be made to leave it, which to me is the most important issue...its yours.

Take care all ernie from a warm and dry Plymouth

Nice one Ernie :beer: True we don't know what's around the corner, and for me that's a big motivator to strike the right balance between slaving at the mortgage, and being able to relax about it a bit more and enjoy things now. I could do with some of Stuart's knowledge on maximizing investments to narrow that mortgage/investment interest gap, but there's a big thread to read on that one!

I agree with what you say about the current climate, and as I've said before, each to their own to find the best solution for them.

I found it''s not as simple as mortgage rate vs. savings rate though that is a key factor in the outcome, of course, and you should certainly minimize the gap between the two as much as you can! The outcome is essentially a function of the difference between the two, time and how much you put into one vs. the other. And since even on those last two parameters the result will be a curve with diminishing advantages and tighter margins to retain an advantage after the mortgage is cleared, I'm inclined to strike a happy medium between the two because stock advice to pay off as much as you can doesn't quantify how you can remain quids-in by overpaying.

There's a balance to be struck, and if the more constructive discussions have helped someone with their situation or helped them not stress so much about paying vs. not (or anywhere in between ) then job done as far as I'm concerned.

Whatever your mortgage goal is, and for whatever reasons you want to rid yourself of your mortgage, good luck with it! Now, there's a beer in the fridge here somewhere... :beer:

ernie_3

ScoobyLoot wrote: »

Nice one Ernie :beer: True we don't know what's around the corner, and for me that's a big motivator to strike the right balance between slaving at the mortgage, and being able to relax about it a bit more and enjoy things now. I could do with some of Stuart's knowledge on maximizing investments to narrow that mortgage/investment interest gap, but there's a big thread to read on that one!

I agree with what you say about the current climate, and as I've said before, each to their own to find the best solution for them.

I found it''s not as simple as mortgage rate vs. savings rate though that is a key factor in the outcome, of course, and you should certainly minimize the gap between the two as much as you can! The outcome is essentially a function of the difference between the two, time and how much you put into one vs. the other. And since even on those last two parameters the result will be a curve with diminishing advantages and tighter margins to retain an advantage after the mortgage is cleared, I'm inclined to strike a happy medium between the two because stock advice to pay off as much as you can doesn't quantify how you can remain quids-in by overpaying.

There's a balance to be struck, and if the more constructive discussions have helped someone with their situation or helped them not stress so much about paying vs. not (or anywhere in between ) then job done as far as I'm concerned.

Whatever your mortgage goal is, and for whatever reasons you want to rid yourself of your mortgage, good luck with it! Now, there's a beer in the fridge here somewhere... :beer:

Nice one mate..this is a nice way to put this to bed,,hope the beer is cold...
ernie in Plymouth

alflavor

Our goal is simply to pay off the mortgage by then time we are 40/41, so we can enjoy our years beyond that age with a little less stress and a little more money in the bank! That and the pleasing knowledge that we own every brick !