DON'T Pay Your Mortgage Off Early!!!

Tim_L

Cupid, the key to building savings is to start early and compound. The later you start the more you need to save to get to a particular outcome. Starting late means you miss out on years of compounding, and if the rate you can generate on your S&I is higher than the mortgage rate, this strategy costs you a lot of money. 5k a year into a pension at age 20, increasing as you have more cash available, will get you a very nice result. 10K a year starting at age 50 will generate a very disappointing end product.

Anyway if you're going to put all of your disposable income into savings later when the debt is cleared, you don't actually end up with any extra cash, you just shift where you are putting it after a period of time. It's a very linear strategy where you arguably should be doing a number of different things.

cupid_s

Tim_L wrote:

Cupid, the key to building savings is to start early and compound. The later you start the more you need to save to get to a particular outcome. Starting late means you miss out on years of compounding, and if the rate you can generate on your S&I is higher than the mortgage rate, this strategy costs you a lot of money. 5k a year into a pension at age 20, increasing as you have more cash available, will get you a very nice result. 10K a year starting at age 50 will generate a very disappointing end product.

Anyway if you're going to put all of your disposable income into savings later when the debt is cleared, you don't actually end up with any extra cash, you just shift where you are putting it after a period of time. It's a very linear strategy where you arguably should be doing a number of different things.

I am 24. Our mortgage is currently set to finish when I'm 46 if I make no overpayments so including overpaying we're looking to pay off our mortgage by the time we're both just 28.

I am still a student and have never had a (full time) job, my DH has only been employed for a year of his life and is also a student so putting 5k a year into a pension for the last 5 years would never have been possible. But we're kinda hoping that starting to put maybe 10k a year into a pension fund from the age of 30, and then increasing it as we get more money will still be pretty good. This will mean 5 years of just work contributing towards the pension and then after that we'll put as much extra in as we can. And still be able to spend whatever we want on 'luxuries' and save plenty of money for our childrens education.

And our mortgage is quite a high rate (fixed at the moment) - higher than we're getting on any of our current savings.

Sloppy_Saver

cupid_stunt wrote:

I am 24. Our mortgage is currently set to finish when I'm 46 if I make no overpayments so including overpaying we're looking to pay off our mortgage by the time we're both just 28.

I am still a student and have never had a (full time) job, my DH has only been employed for a year of his life and is also a student so putting 5k a year into a pension for the last 5 years would never have been possible. But we're kinda hoping that starting to put maybe 10k a year into a pension fund from the age of 30, and then increasing it as we get more money will still be pretty good. This will mean 5 years of just work contributing towards the pension and then after that we'll put as much extra in as we can. And still be able to spend whatever we want on 'luxuries' and save plenty of money for our childrens education.

And our mortgage is quite a high rate (fixed at the moment) - higher than we're getting on any of our current savings.

Why wait until you're 30 before starting a pension? That's 6 years wasted - doesn't sound much but with compound interest it'll really make a difference when you retire.

When you pay your house off at age 28, will you never move again? If you do then welcome back to the mortgage "Millstone" - will you continue to use the "POYM at all costs" strategy on that one, then the one after. So that your pension never starts and you end up spending your last years working with Keeperbear as a deckhand on my yacht. Is that what you want? Is it?

Tim_L

Cupid, that will be an absolutely brilliant result, and obviously very carefully worked through. Extremely impressive that you can do this as a student, and it bodes extremely well for your future plans.

cupid_s

Sloppy_Saver wrote:

Why wait until you're 30 before starting a pension?
That's 6 years wasted - doesn't sound much but with compound interest it'll really make a difference when you retire.

Because we don't have jobs at the moment!
Because if I still have a mortgage when I have kids we cannot afford for me not to work and I'd like the opportunity to be able to stay at home with them for as long as I can.

Sloppy_Saver wrote:

When you pay your house off at age 28, will you never move again? If you do then welcome back to the mortgage "Millstone" - will you continue to use the "POYM at all costs" strategy on that one, then the one after.

That is counting on us wanting to buy a significantly more expensive house when we move so that we do not have the difference already in savings.

Sloppy_Saver wrote:

So that your pension never starts and you end up spending your last years working with Keeperbear as a deckhand on my yacht. Is that what you want? Is it?

As soon as we get jobs work will be contributing towards a pension scheme which is quite generous anyway. So we would not be in the position of having no pension at all.

comping_cat

You are also assuming that everyone will make pension age!!!! I have a small work pension that started when i was 17, and once i re started work after having my children, i started a private pension. However, i will not be putting all my money into a pension whilst i have a mortgage, as that is the payment that takes most of my wages each month, and the sooner i can get rid of that, the sooner i can start thinking more about when i retire - hopefully i will have 20 years if i can get my mortgage paid off in the time scale im aiming for.
Once i have put money into a pension, i cannot get it back, however, all my overpayments can be borrowed back if i need it (within 48 hours) so i have access to money if i needed it, also, once that debt has gone, i will have freed up all that money to do other things with, like some people have said, pay more into a pension, holidays, reducing hours at work etc.

What if, you plow all your money into a pension, and then find you only live to 60? You will have scrimped for all your life for a future that doesnt happen.
Im a very big believer in living for today, but planning for tomorrow as well - thats why i spend some, save some (which is overpaying my mortgage) and thinking ahead (my pension that i have now).

Sloppy_Saver

cupid_stunt wrote:

Because we don't have jobs at the moment!
Because if I still have a mortgage when I have kids we cannot afford for me not to work and I'd like the opportunity to be able to stay at home with them for as long as I can.

I'm confused, how can you pay off a 67k mortgage in 4 years (you said in your post that you're currently 24 and it'll be paid by 28), if you don't have jobs at the moment?

Sloppy_Saver

catowen wrote:

You are also assuming that everyone will make pension age!!!!

Not this old chestnut again! Statistically we are all living longer. Fact. That's why the government can't afford to keep us all in retirement with the state pension. Hence, you should provide for yourself.

What if halfway through scrimping and saving and doing without to pay off your mortgage, you get trampled by an escaped elephant. What a miserable last few years you had on this earth (two can play at that game, missy!!)

catowen wrote:

Once i have put money into a pension, i cannot get it back, however, all my overpayments can be borrowed back if i need it (within 48 hours) so i have access to money if i needed it, also, once that debt has gone, i will have freed up all that money to do other things with, like some people have said, pay more into a pension, holidays, reducing hours at work etc.

A Retirement fund need not have to be a traditional pension that locks away your cash, it can be a combination of ISA, Stocks, yada yada yada (does no one read the previous posts??!!)

catowen wrote:

What if, you plow all your money into a pension, and then find you only live to 60? You will have scrimped for all your life for a future that doesnt happen.
Im a very big believer in living for today, but planning for tomorrow as well - thats why i spend some, save some (which is overpaying my mortgage) and thinking ahead (my pension that i have now).

Hold on, how did you turn it around so that I'm the one scrimping and you're the one with the balanced approach to investing (spending some, saving some and investing in a pension). You're doing exactly what I have advised throughout this entire rant.. erm.. discussion thread...

What you're not doing Mrs. "Live Life for Today", is living life for tomorrow by scrimping to pay off a mortgage to the exclusion of everything else. Well done, you have joined me and the other guys on the dark side. Now leave this place and go to the "Saving and Investments" or "Pensions and Annuities" threads where you belong!

Tim_L

The question is not what happens if you die at 60 having made provision for your retirement - in that case it won't bother you all that much. It's what happens if you die at 85 if you have not made provision. Old age and poverty are not a pleasant combination. The balance of probability these days is that you will have many years of retirement, and ignoring this uncomfortable fact to "live for today" is really nothing more than denial.

Incidentally a pension is just a tax and regulatory wrapper around savings. You don't have to use the wrapper, you can obtain most of the same underlying investments elsewhere. Pension savings should be part of a an overall strategy, combined with whatever other savings and investments suit your goals.

The point people are making here is that you have to balance things. By paying a mortgage off early you give yourself the impression that you have a roof over your head for life. But in reality you have sunk all your money somewhere you can't get at it, and a couple of years of unemployment even after you have paid it off will probably be sufficient to lose your gains and maybe lose you your house anyway. And one other uncomfortable truth is that the older you get, the more likely it is that you will be unemployed.

Tim_L

Sloppy, not sure it's productive to be picking holes in Cupid's strategy. It seems to me that she is a highly motivated and focused person with a clear and achievable plan, and the likelihood is that in a relatively short period of time (and at a time when she is younger than most people are before they even work out they need a plan in the first place) she'll have a fully paid for home and be in an excellent position.

I don't know how students can do this either, but I'm pretty confident that this particular one will manage it. There is a whole life plan behind this, and I can recognize cool determination when I see it.

My worry is much more the sorts of people who believe that mortgage free status is a thing to aspire to in itself, or come to these boards and get persuaded that it's a good thing to do when they should I think be more balanced in their strategy.