Did I give good advice?

A_Nice_Englishman

Your friend's ex has just been made redundant? That does change my advice a little!

If he can't get another job at the same salary he may not be able to be so generous with the maintainance payments so perhaps it would be better to keep the £7000 in her savings accoiunt for now 'just in case'.

Tim_L

This isn't going to go down well on this board, but there is no rational reason for anyone to pay off a mortgage early. It is almost always more sensible to put the money into savings and investments, which can generally beat mortgage rates, especially when put into tax free vehicles. If you overpay a mortgage, your money disappears somewhere where it is impossible to get at in time of need when remortgaging may be difficult to arrange.

The only situation where it might be worth considering is if the build up of savings means that people are ineligible for benefits. But in these cases probably most people would prefer to have savings to tide them over since they will have problems anyway.

Early repayment of mortgages is a purely emotional thing to do. It frees you from a perceived burden, but in fact there really is no logical reason to do it. Offsetting with a single provider is a reasonable halfway house, but generally the best solution is to take a market leading mortgage and use a mixture of savings and investment products for on which an IFA can advise.

Personally I'd keep my mortgage forever if I could, though I can pay it off whenever I like. I make far more from having the money available to me than I would if I sank it into the bricks and mortar.

skintchick

The reason I suggested she try and get her mortgage down is that it is high for her age and also for her skill level, in that in teh future she may struggle to pay it off when she no longer gets the child's maintenance, and because it is entirely possible that her ex will want to drop his payments in the future.

He has been redundant for months, but he got a massive payoff and he says all is fine.

Also, if she remarries she obviously then loses her maintenance (not child's) and so I thought it would be sensible for her to get it to a more manageable level, bearing in mind she can only do admin and is 41 now.

I was simply trying to help her (cos she has an anxiety problem and this is something that's bothering her, about the future, but she isn;t very clued about about stuff).

I see the point about life insurance and will talk to her about it - she may have it covered already but it makes good sense.

Thanks everyone!

Tim_L

All of these problems will still exist if she sinks the 7K into the bricks and mortar. 7K sensibly invested will generate as much interest as would be payable on the mortgage, so this part of things is completely neutral. But the key advantage is that the money remains available.

There are really two scenarios to consider. One is the best case where your friend can afford to make mortgage payments (i.e. stays in work or has maintenance). In this case if she can "overpay" into savings and investments, eventually the mortgage is paid off, and she has a large pot for retirement which she can access easily. If she overpays into the mortgage, the mortgage is paid off early and she can then put money into retirement saving (however this has less time to grow).

The second case is where there are problems - redundancy or loss of payments. If money is sunk into the house, then there is less of a mortgage, but still no money to pay it with, so the chances are that she would run into problems with the lender. If money is available in savings and investments, then this can provide a period of grace to allow the situation to be dealt with.

The emotional response is to try to knock chunks off the big debt, because of the fear of repossession if things turn nasty, I suppose. But in many cases doing this could make a bad situation worse. This is the classic asset rich cash poor scenario.

I suppose what I'm saying here is that you have to be very careful about giving advice to anyone unless you're absolutely certain there's a sound basis to the advice, because you may lead them into trouble. "Mortgage free wanabees" and the whole "mortgage free in X years" industry terrifies me, because it is all about encouraging emotional responses over financial logic. Personally I'd encourage anyone considering it to see an IFA (or several) before committing to it.

Thefunkygibbons

I completely disagree that it is better to keep savings rather than pay a mortgage off

Once one has a rainy day fund, then payinmg off the mortgage is a sensible use of money

The reason is that it is a tax free and risk free rate of return, and the effective rate, especially for a higher rate tax payer cannot be matched

Sure, there are investments with a higher return, but they are not risk free

Reducing a debt is risk free

One could argue about whether owning a property is a good idea, but once that decision is made, then getting rid of the debt asap is the best idea

Joe_Bloggs

There may be advantages to overpaying other than having a shorter term. I can get the money back or take a payment holiday until the LTV goes back up to 80%. A cheap kind of payment protection insurance. I would not catagorise my overpayment strategy as an emotional response. It is a very low risk option which may indicate a fear of failure and lack of ambition to some. Perhaps when a few more financial safety nets are in place and when I can afford to lose some money, I'll buy a lottery ticket.
J_B.

Tim_L

"Risk free" is a very subjective concept. It's actually pretty risky to own a building but to have little available money: your options are very limited and you can lose a lot of cash by having to arrange some sort of remortgage at unfavourable terms, or even having to sell up and downsize. In fact by trying to get mortgage free, you are implicitly taking the risk that residential property is a good investment (which it may or may not be), and ignoring the problem that it is one of the least liquid investments you can make. So I'd argue very strongly against the notion that paying off a debt is risk free.

There's also a continuum of risk with investments. You're not constrained to just safe cash savings and risky stockmarket investments: there are plenty of options in between. But for most people a cash ISA (or two for couples) will beat mortgage rates for as much money as they can afford to overpay. Even if you can't quite beat the rates, the differential will be tiny and a price worth paying for not losing access to the cash. But as someone with an essentially very cautious nature, I would be very unhappy if my own investments were netting less than 7% overall, where my mortgage rate is currently about 5.9% (in point of fact my returns are massively better than 7%, but we are in a bull run).

As I say, offset mortgages provide an very easily understandable and accessible means to have your cake and eat it here, but if you accept this as a concept it makes sense to extend it to taking on market leading mortgages and the best investments you can find. It's a bit more work but worthwhile: fundamentally this gets you into a situation where you could pay off your mortgage if necessary, though my own judgement having got to this point is that it isn't.

I can pay my mortgage off immediately if I want to. I can also deal with years of unemployment without any problems, and I have a large cash pot to go into retirement with. In the meantime I have plenty of cash to invest or save as seems appropriate. To my mind, this is completely risk free, in that it maintains all of my options completely open.

Joe_Bloggs

It is great to have a discussion with Tim_L. I can't match the eloquence or passion. The clear thing is that Tim can afford to lose money and I can't at this stage. Tim is also very much smarter than most of us, in my opinion. Most of us are not in the same situation and have to gamble that we are taking the least risk option.
J_B.

Tim_L

I'm extremely risk averse, and I don't like losing money at all.

If you can't afford to lose money, you absolutely shouldn't be sinking it into your mortgage, because it is very expensive to get it back again (either by remortgage or forced sale). It's a pure gamble doing this, and one with a very significant downside. It is most resolutely NOT the least risk option.

If you are completely risk averse, then the way to go is to offset with a single provider. This provides the cheapest means of accessing the cash and cancels out the tax. For people prepared to discuss their finances with IFAs (and for some reason people don't like doing this, possibly because they feel they will be ripped off) then I'd be confident that you could beat the mortgage rates easily with a mix of low and medium risk investments. At essentially zero risk (cash ISAs) you can generally beat mortgage rates for the amounts that most people have available to overpay every year.

But it's very bad advice to suggest that paying lump sums into mortgages is a good financial strategy, which takes us back to the original post. It may be something you want to do yourself - nothing wrong with this really, though I wouldn't - but in most circumstances it's not the least risky nor the most sensible way to behave.

Joe_Bloggs

It is beneficial to have the discussion. Some would argue that they can beat an offset with a mixture of flexible mortgage and cash ISA.
My mini-cash ISA rate beats my mortgage easily so I am filling this up as soon as possible.
J_B.