DON'T Pay Your Mortgage Off Early!!!

Tim_L

No IFA (sorry, no idea why I wrote FSA) I know of charges a fee for an introductory interview, and most work on a no-fee basis because they get paid on commission (there is nothing intrinsically wrong with this).

http://www.unbiased.co.uk/ is a general site with details of IFAs near to you. It doesn't hurt to see a few and find one you're comfortable with.

Tim_L

IFA wrote:

I'm not banking on getting a good pension, I have a matched 4% with my company but how much of that will I see when I retire? I'd rather pay my mortgage off early then start saving into an ISA and continue the matched 4%. Then I'm not putting all my eggs in one basket. It depends how long you think you'll live after 60 or 65/70 whatever (if at all), if it's 10 years then 100-150k savings should be adequate And a lot of people cah save 50k and above on interest payments on mortgage by paying off early.

Few things here.

First of all, your company pension will probably not be with the company itself assuming it's a defined contribution scheme. It will be dealt with externally in all probability, and you can make a judgement about the company its managed by and what the probability is of a decent return depending on how the investment works. But given that you're getting your money doubled to start off with, then getting tax relief and compounding of your fund it would have to do spectacularly badly not to be a decent use of your own resources.

As far as putting eggs into baskets goes, by paying off your mortgage first, you are putting all your eggs into that. If you hit trouble before its done, you still owe what is left over and you have no means of getting the overpayments back. And you are investing in a sector that looks extremely risky - worst case is that you overpay, the value of the house goes down, and you're forced to sell fast at a loss. Having substantial savings to tide you over is a life saver in such situations.

Forget the nominal £50K saving - this is just viewing one thing in isolation. If you have savings and investments equal and opposite to your mortgage, then yes it may cost you £50K in interest on the mortgage, but you gain £50K (at least) in interest on the savings and investments. The effect is neutral at worst.

You can't assume anything about how long you will live. If you're burning savings to live in retirement, then there is a good chance you will run out before you die, which would be a serious problem. You'll certainly end up with a larger fund if you start saving earlier. And your mortgage will end up being paid eventually.

Sloppy_Saver

IFA wrote:

I'm not banking on getting a good pension, I have a matched 4% with my company but how much of that will I see when I retire? I'd rather pay my mortgage off early then start saving into an ISA and continue the matched 4%. Then I'm not putting all my eggs in one basket. It depends how long you think you'll live after 60 or 65/70 whatever (if at all), if it's 10 years then 100-150k savings should be adequate And a lot of people cah save 50k and above on interest payments on mortgage by paying off early.

It's a tricky one, arguments on both sides

And yes I treat my mortgage like my diet

8% into a company pension is a good start, especially when you consider 4% of the investment is free from your employer and a further 22% of your 4% is paid by the government via a tax refund (or 40% if you're a high rate tax payer).

If you were thinking of doing say, a £400 per month overpayment on your mortgage to pay it off in 8 years, then why not do a £100 investment in the ISA, £300 into your mortgage and pay the house off in 12 years. Only a little bit longer to wait, but meanwhile with your company pension and ISA, you're also covering your retirement.

You can save 50K on interest payments on a mortgage, only if you carry on paying the mortgage payments somewhere else once you own your house (i.e. saving it). From a lot of comments on here, many people intend going on holidays, giving up work, lazing about, etc. once their mortgage is paid.

Sloppy_Saver

cupid_stunt wrote:

I see totally what you're saying. You do need a life. But I don't feel like we scrimp and save and do without. I like things (in terms of spending) how they are now and always say to my OH 'do you wish we had more money?'. He says 'yes so we could pay the mortgage off more quickly - but everything else I want I have'. I feel the same way. We have 2 foreign holidays a year, eat out whenever we want and spend a small fortune on my pets. I don't see much else as important.

If we really scrimped and saved we could pay it off at least a year earlier but we're not for the simple reason we do want a life.

I hesitate to reply because your Dad (Tim_L) may get on my back again )

To be fair, Tim is right that you do have a strategy that goes beyond the usual "pay the damned thing off and then sit back, kick off my shoes and relax" mentality on here.

My argument really goes back to the fact that the earlier you start saving for retirement the cheaper it is and so if people defer their retirement savings while they pay off their mortgages, they will never get those years back.

Read our esteemed leaders comments:

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1050245982,43764,#howmuch

Take a balanced view to your money :

Financially, you know that you need to pay off your mortgage, have savings for a rainy day and have a pension for when you retire.

Just as you would to your diet:

Dietary, you know you need a mix of protein, carbohydrates and fat.

you wouldn't eat 5 years of protein, followed by 5 years of carbs, followed by 5 years of fat.

so don't have 5 years of mortage payments followed by 5 years of savings followed by 5 years of pension contributions...

Does that make sense? I've never used food to prove a financial point before. not sure if it works...

IFA

Tim_L wrote:

Few things here.

First of all, your company pension will probably not be with the company itself assuming it's a defined contribution scheme. It will be dealt with externally in all probability, and you can make a judgement about the company its managed by and what the probability is of a decent return depending on how the investment works. But given that you're getting your money doubled to start off with, then getting tax relief and compounding of your fund it would have to do spectacularly badly not to be a decent use of your own resources.

As far as putting eggs into baskets goes, by paying off your mortgage first, you are putting all your eggs into that. If you hit trouble before its done, you still owe what is left over and you have no means of getting the overpayments back. And you are investing in a sector that looks extremely risky - worst case is that you overpay, the value of the house goes down, and you're forced to sell fast at a loss. Having substantial savings to tide you over is a life saver in such situations.

Forget the nominal £50K saving - this is just viewing one thing in isolation. If you have savings and investments equal and opposite to your mortgage, then yes it may cost you £50K in interest on the mortgage, but you gain £50K (at least) in interest on the savings and investments. The effect is neutral at worst.

You can't assume anything about how long you will live. If you're burning savings to live in retirement, then there is a good chance you will run out before you die, which would be a serious problem. You'll certainly end up with a larger fund if you start saving earlier. And your mortgage will end up being paid eventually.

Thanks Tim, Just to add a few things that I didn't make clear before:

I have a flexible mortgage, any overpayments can be borrowed back and I can get payment holidays also. So if I get made redundant which is very likely at the moment I'm ok whilst I look for another job

The pension is managed by Barclays global lifecycle fund. And can be split between cash or higher risk stocks and shares. Same with house prices shares COULD drop WHEN I retire the same as house prices so what's the difference? If the shares take a dive AT THE POINT I retire then it would have been a waste of a few years investing. It's all about timing long term shares and house prices both go up, short term they fluctuate

I'm not putting all my eggs in one basket by paying my mortgage off early if I am also paying 4% of my salary into a pension. I think this is a good balance. Anything over the 4% is not matched and would be better invested safely in a cash isa.

I've not had good experiences with shares (bad timing and tech shares) Even though I still have the shares 25 % of original value, I dont see them ever reaching the original 100% I invested.. So I guess I'm a bit biased

My house price has trebled and the plan is to sell the house and retire to another country (with cheaper housing, 20 acres anyone?) to use my built up equity and savings If I had not bought my house when I did I could not do this and would have some shares maybe making a few k

By the way my mortgage is at a very low level now so shouldn't take long to pay off

Sloppy_Saver

IFA wrote:

I have a flexible mortgage, any overpayments can be borrowed back and I can get payment holidays also. So if I get made redundant which is very likely at the moment I'm ok whilst I look for another job

Do you have to apply for these back, or is it as simple as drawing money from a bank account. If you have to apply for them back and they know you are unemployed, things could get sticky. I have just become self-employed and you'd think I had been put on a bankruptcy register the way I now get treated by banks!

IFA wrote:

The pension is managed by Barclays global lifecycle fund. And can be split between cash or higher risk stocks and shares. Same with house prices shares COULD drop WHEN I retire the same as house prices so what's the difference? If the shares take a dive AT THE POINT I retire then it would have been a waste of a few years investing. It's all about timing long term shares and house prices both go up, short term they fluctuate

Usually managed funds are slowly placed into safer bonds and cash accounts starting 5 years before your intended retirement date, to stop just such an eventuality.

IFA wrote:

I've not had good experiences with shares (bad timing and tech shares) Even though I still have the shares 25 % of original value, I dont see them ever reaching the original 100% I invested.. So I guess I'm a bit biased

I've had good experience with shares for the most part, but then I diversify and don't put too much money with one stock. maybe you had too much exposure on the tech stock?

IFA wrote:

My house price has trebled and the plan is to sell the house and retire to another country (with cheaper housing, 20 acres anyone?) to use my built up equity and savings If I had not bought my house when I did I could not do this and would have some shares maybe making a few k

Lots of people have the plan of retiring to another country, me included. These are my personal concerns: Where would you go, can you speak the language, do you have friends there, will you miss your old friends/family here, what happens when you need to go to hospital or a care home - is their health system as comprehensive as hours?

Tim_L

Offset mortgages are a different kettle of fish to clearing the mortgage, and meet my criteria for having your cake and eating it. I just think you may find better options for doing the offsetting than offset mortgages themselves which combine poor value savings accounts with mortgages.

Shares: there are things in between shares and savings (and which are not bonds) which are lower risk. The situation most people encountered was leading up to 2000 when the market was ramping madly and you could make a packet by choosing basically random shares. People thought they were investment geniuses but they were just being taken up a ramp, and most people got on board quite late on, so the losses were extreme. That doesn't mean that shares are a bad investment in themselves, but that you have to exercise judgement when buying them, or employ someone with the necessary expertise. In any case there are plenty of other things you can invest in which are lower risk. The big one for the last couple of years has been commercial property, but this may have gone off the boil now.

Don't keep shares hoping they will reach their former value either. If you know why you're keeping them (company has good prospects for growth) then keep them, and measure any profits from the point you make that decision. If you don't know why you're holding them you might as well sell them and use the money for something you do know about. It is irksome if they then rise, but it's basically a gamble.

Tim_L

And, IFA, as I can see from your sig, the way to make money from gambling is not to gamble.... anyone else interested can join us on the gambling board to find out how.

cupid_s

Sloppy_Saver wrote:

I hesitate to reply because your Dad (Tim_L) may get on my back again )

To be fair, Tim is right that you do have a strategy that goes beyond the usual "pay the damned thing off and then sit back, kick off my shoes and relax" mentality on here.

My argument really goes back to the fact that the earlier you start saving for retirement the cheaper it is and so if people defer their retirement savings while they pay off their mortgages, they will never get those years back.

Read our esteemed leaders comments:

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1050245982,43764,#howmuch

Take a balanced view to your money :

Financially, you know that you need to pay off your mortgage, have savings for a rainy day and have a pension for when you retire.

Just as you would to your diet:

Dietary, you know you need a mix of protein, carbohydrates and fat.

you wouldn't eat 5 years of protein, followed by 5 years of carbs, followed by 5 years of fat.

so don't have 5 years of mortage payments followed by 5 years of savings followed by 5 years of pension contributions...

Does that make sense? I've never used food to prove a financial point before. not sure if it works...

That does make sense but you're expecting me to think of 3 things at once (mortgage, savings and pension)! This is a struggle for me, and my DH well he's lucky if he can think of one thing at a time!

Though I still don't understand this... as I don't pay tax at the moment, and neither does OH surely it's worse for us to start a pension plan now as we don't get the tax relief that other people would so we're effectively getting less for our money.

So £100 in a pension now is £100 lost for us. But once we're working it's only costing us £78 for each £100 saved. And once we're earning in the higher tax bracket (if that ever happens but I can dream) we'd get even more for our money as £100 in the pension is really only costing us £60. Am I oversimplifying things? Cos I have looked into my mortgage and different options a lot but to be honest I just thought I'd pay into a pension fund when the mortgage was paid off and never thought about it much more.

Sloppy_Saver

cupid_stunt wrote:

That does make sense but you're expecting me to think of 3 things at once (mortgage, savings and pension)! This is a struggle for me, and my DH well he's lucky if he can think of one thing at a time!

Though I still don't understand this... as I don't pay tax at the moment, and neither does OH surely it's worse for us to start a pension plan now as we don't get the tax relief that other people would so we're effectively getting less for our money.

So £100 in a pension now is £100 lost for us. But once we're working it's only costing us £78 for each £100 saved. And once we're earning in the higher tax bracket (if that ever happens but I can dream) we'd get even more for our money as £100 in the pension is really only costing us £60. Am I oversimplifying things? Cos I have looked into my mortgage and different options a lot but to be honest I just thought I'd pay into a pension fund when the mortgage was paid off and never thought about it much more.

You can put upto 300 quid (gross) into a pension pot without having to prove earnings and get 22% tax relief. But you don't have to use a traditional pension in order to save for retirement. You could put the money under your mattress and as long as you don't intend touching it until you retire, then that's your "pension pot".

I don't actually recommend investing your money in a mattress though.. an ISA is probably a safer bet, but you get the idea...