Paying off Mortgage early

trumbo

I have read that paying off your mortgage early isn't a good way to create wealth.... the book was 'The truth about money' by Ric Edelman.

His idea off keep the Mortgage because it is the cheapest money you'll ever borrow and instead put extra money into a higher interest account but he is an American FA writing about American financial ideas but would this idea work here in the uk.

I dont have the book to hand but was wondering if anyone else out there has read it and agrees with it or not?

Basically he was saying that those that paid there mortages off early weren't as wealthy as those didn't, something to do with the time saving and interest accumulating and the fact that your house will be worth more than you'd have paid for it over the 25years anyway.....

bunking_off

Each to their own, but the idea put forward by the book sounds daft to me.

As I've said before, dragging down to essentials you need to look at what rate of return you'll get for a given £1 invested.

"Invest" it in paying down your mortgage, and you'll effectively get whatever your mortgage rate is (say 5-6%?) net. Invest it elsewhere, and you may get a higher or lower return.

You then need to build in risk. Your investment in mortgage repayment is "risk free", ie you're guaranteed that return (I guess there is "risk" insofar as future interest rate changes, but leave that to one side).

An investment in a building society/bank account or government bonds is similarly risk free, hence you'd be comparing like with like. An investment in the stock market isn't risk free, and the excess of the <<long run average return of the stock market>> over a <<risk free account>> reflects the increased return that shareholders expect to compensate them for the risk.

The author of the book suggests that you don't pay your mortgage down, but invest spare money in a high interest account. For that to work, the account would have to be paying (net) more than your mortgage rate. If that was possible, then you'd have what my old Finance lecturer used to refer to as a "money making machine". If such conditions existed, then it would make sense to max out all your borrowings to put the money in the bank...the return from your bank account would outstrip the mortage interest. Very soon, the bank offering the high interest account would bankrupt themselves, as they'd be paying out higher interest on accounts in credit than they're collecting from accounts in debt.

There may be an argument to invest excess cash in the stock market, but only if you believe you'll get a better return (after tax) than you'd effectively get by repaying your mortgage. It's down to how you regard the risk.

The one argument for not repaying one's mortgage is flexibility. If you use all your spare cash to repay the mortgage then subsequently something unexpected arises, you might not have the spare cash you need. Then again, with a flexible mortgage you don't have that issue...

david78

Can't disagree with what bunkin_off says here. Unless you want to take a greater risk and invest in the stock market you will generally be better off paying off your mortgage.

you'd have what my old Finance lecturer used to refer to as a "money making machine". If such conditions existed, then it would make sense to max out all your borrowings to put the money in the bank...the return from your bank account would outstrip the mortage interest

It does exist though in the form of 0% credit cards and stoozing, fill your boots up!

Very soon, the bank offering the high interest account would bankrupt themselves, as they'd be paying out higher interest on accounts in credit than they're collecting from accounts in debt

Egg, please note.

bunking_off

David78

Point taken...my view should have been caveated "with the exception of when providers are daft enough to act as a charity, e.g. 0% credit cards..."

squarecat

following on from this;

I have money sat in a 'savings account' and a mortgage at the standard variable rate. What do i need to do/ be aware of if I am going to pay off my mortgage?

Thanks in advance

Joe_Bloggs

@squarecat
If you have money in the bank and are paying SVR then you may be in a position to negotiate with your existing lenders or to remortgage with other lenders who will charge you less than the existing SVR. Any savings you could make depend upon the size of the mortgage,the new interest rate versus the fees for making the change. Watch out for overpayment penalties in your existing/future deal and for tie in periods at the SVR rate. You could approach you lender and find out the facts as they affect you and ask for a better deal.

Some numbers would be helpful, such as your SVR and outstanding mortgage commitment/existing term/type of mortgage/ etc.

Financial institutions trade on consumer inertia. You have to actively seek out the best deal.
J_B (Just my view, I am not a financial advisor but a financial consumer, moneysaving so I can remortgage .)