DON'T Pay Your Mortgage Off Early!!!

clairehi

Thanks SS and TimL/others. I had been thinking about overpaying the mortgage in order to help create some space in the future finances for college fees etc (due to happen in about 10 years). having read this thread, I will consider the other options too.

the only thing that I dont quite get is why some posters have been saying that as its more beneficial for a higher rate taxpayer to pay down the mortgage as opposed to investing the money - why is this?

cupid_s

Because as a higher rate taxpayer you pay 40% tax on all your interest earned (except for isas but you cant save much in them) so it would actually be much harder to find a savings vehicle that pays as much in interest after tax as you're paying on your mortgage.

Mojo71

Hi, newbie here.

Been lurking for a couple of weeks now, this site is really addictive. I thought Sloppy Saver's original post was an interesting viewpoint, although like most felt it came off the rails when messages just became just personal comments between members.

Anyway, it's interesting to read everyone's opinions in this thread, I too would like to be a mortgage free, however, I don't think psychologically that I could plough all my savings into clearing this, really for the the fact that keeping savings tends to give me peace of mind and security. And also, I think if I was mortgage free, I'd tend to become carefree with my money, and wouldn't be able to discipline myself to save as well if I didn't have those commitments to reign in my spending.

I'm quite happy to use my salary over the next 10 years to see my mortgage go down as my savings go up, but being comfortable in the knowledge that I could pay it off in a year or two's time really helps ease my mind.

I've been sitting here playing with spreadsheets for the past few weeks, budgeting for when my fixed rate period expires in a few months.... should I overpay by a bit more and still save some each month... or overpay by a lot and forego the savings. I tend to look at it like a smaller debt, e.g. incur interest on a credit card balance for a few months and still continue with my savings, or stop saving for a few months to pay off the balance quicker. At the end, I'll just think "oh well, one extra month paying off the card balance" which is actually just to pay off the extra interest accrued, but at least I've still got a lump-sum in savings accumulated at the same time. (Not sure if I've explained that last bit very clearly).

Anyway, everyone's actions and opinions should be respected, and that's where Sloppy definitely overstepped the mark.

nrsql

I posted on another thread that I didn't think it a good idea to pay off a mortgage in the initial years when times were tough. Probably better to leave it as interest only and save elsewhere - hopefully inflation (in particular wage inflation) would make it easier to overpay by more in later years. OK you end up paying more for the mortgage but you should take into account inflation when calculating that.

I recently paid off my residential mortgage but that still leaves a lot of investments elsewhere.

I still say the best place for the money is wherever you are motivated to put it. If that's paying off the mortgage then fine, if it's the highest paying deposit account or shares then that's good too. No one can tell what's going to happen and what you are doing could be the best option. It'll certainly be better than squandering it so motivation is the key.

RufusFrog_2

SloppySaver wrote:

At the risk of making a sweeping generalisation, I think I can safely say that not many people have £260000 houses paid off and are able to save a further £80000 for the next one (as well I assume, continue to pay into other investments)...

I hope you don't mind me having responded to your post. I am sorry if it is taken the wrong way, but at no point was I having a go or being intentionally mean to you. Apologies if you felt this.

No I'm not at all offended, I didn't mean to boast, I just wanted to say as convincingly as possible that 'it ain't necessarily so'. I used to have a well-paid job and a lot of stress. Now I work part time for peanuts in my local university and feel a lot happier. If I had spent more of my income when I was younger rather than paying off the mortgage I may have had more fun but I don't think I would be in the position I am in now where I feel I have the option to say 'sod the ratrace, I want to spend less of my life in an office'. I also had a few years of unemployment as a result of the stress and continually worried about meeting my mortgage payments; now I never have to have that particular worry again.

I agree it's all about balance which is what you've said as well (as I understand it, you've been advocating sensible broad-spread investment rather than carelessly overspending one's income and getting into a stupid amount of debt). There was another thread from someone living miserably in a tiny house - should they double their payments to pay off the exisiting mortgage or spend the same monthly amount on a bigger, longer mortgage in a house they would actually like to live in? I thought that was a no-brainer - get a house you like first before even thinking about overpaying. So I am definitely not in the 'pay-off-your-mortgage-at-all-costs' camp.

As for retirement saving, I admit I've only contributed a few percent of my salary each year to a pension. I'm prepared to downsize when I retire to free up some capital to fund my life of leisure (although I'm secretly hoping that at least one of our parents fails to spend the family house on residential care!). I don't want to have to actively manage an investment or BTL portfolio because I'm fundamentally lazy. My choices suit me and I'm not going to oversell them to anyone else but I do want to support and encourage other people who are paying off their mortgages because it is the right choice for them too.

getmore4less

Just read through the thread and it is a shame it got personal but that happens.

Stepping back a bit on this one,

What peole neeed to think about is the long term goal, and for most people that is having enough non earned income to meet the bills and live so they can retire.

Paying of the mortgage buys you reduced spends, no rent on a property or money, saving up a stash that produces an income does the same it covers the rent or the interest on a loan

You also need another pot, pension,ISA, savings whatever to provide income for the other things like food, to top up whatever the state will be giving out at the time you need it.

With these goals in mind you also want to pay as little tax as possible so protecting future income from tax is a good idea, there is only one vehicle that currently does this thats ISA's and for low rate taxpayers dividends are also TAX free, pension income is taxable. The significance of this kicks in at around £20k(age allowance) and the HRT threshold.

Now the problem here is that the ISA limit is not that high and paying off the mortgage can leave you with more than that allowance surplus so you should look at future cashflows and if you are even remotely likely to ever be a HRT payer OR have surplus income to exceed the ISA limits then start the ISA NOW, you only need one years tax savings to cover all the fees from previous years(£25py) and this money never sees a tax return again(for now under current rules).

For a lot people the other vehicle is the company pension where the company contributes free money. don't miss out on this.

With both these vehicles you should look to direct investments(self select) or low costs investments where possible. My prefered statagy in the ISA is a "High Yield Portfolio" with some more risky stuff fo some of the money.

Next comes the mortgage(debt) and other investments not protected by the tax wrappers and for HRT further pension contibutions can be considered.

Remember the ISA allowances are use or loose so if you think you will be using them start early and build up the investment slowly learning about what the investment options are, paying off the mortgage and then finding you have a lot of surplus cash to invest might mean you cannot protect it all from the tax man.

Remember pensions tie up your money and you loose the capital when you die, also the tax break is on the way in and income is taxed so the benifits are not as good for BRT payers as they may seem. Learn about draw down for pension schemes these can produce better returns than an anuity.

Once you are generating in the order of the MAXI ISA allowance forget the cash ISA use a different place for emergency funds.

Another thing people forget is the TAX free lump sum from pensions, If you intend to invest this think ahead on how you can protect this investment from TAX it could take a few years to ISA it. Rather than paying down a mortgage using the ISA allowance and the lump sum to clear the mortgage is an option worth considering.

This last option is often usefull for those on lower incomes but with the good final salary pensions with cash lump sum.

Paying of the mortgage is a good thing to do and a no risk option but should not be done without considering the longer term.

Jonbvn

getmore4less wrote: »

With these goals in mind you also want to pay as little tax as possible so protecting future income from tax is a good idea, there is only one vehicle that currently does this thats ISA's and for low rate taxpayers dividends are also TAX free, pension income is taxable. The significance of this kicks in at around £20k(age allowance) and the HRT threshold.

Sorry to be pedantic but the above is not completely true. NS&I Index Linked savings certificates are tax-free, and you can save up to 15k per issue. If you are a tax-payer (which if you are paying-off a mortgage is very likely) then these certs beat nearly every other savings vehicle, except ISA's.

getmore4less

Jonbvn wrote: »

Sorry to be pedantic but the above is not completely true. NS&I Index Linked savings certificates are tax-free, and you can save up to 15k per issue. If you are a tax-payer (which if you are paying-off a mortgage is very likely) then these certs beat nearly every other savings vehicle, except ISA's.

You are right forgot NS&I, thanks,

There are also premium bonds allthough returns are less predictable.

And spread bets.

Probably some others as well.

Jonbvn

getmore4less wrote: »

You are right forgot NS&I, thanks,

There are also premium bonds allthough returns are less predictable.

And spread bets.

Probably some others as well.

PB's are generally not considered a good investment. See Martin's article, and are unlikely to beat your mortgage rate (unless you hit the big one!).

Is spread betting tax-free?

IFA

Pay off your mortgage then save the money you'd normally spend on the mortgage and then die early with lots of money