Pay off the mortgage or off-set it

AlwaysPondering

Hello, I've got an off-set mortgage, which my wife and I have been putting any spare money into our off-set savings instead of overpaying. Now my wife was made redundant a few months ago and by putting all her redundance money into savings - our savings now just exceed our mortgage amount - so with the off-setting no interest to pay.

Now at the moment we're managing to live (just about) on my income - thanks to alot of advice from this web-site - and still pay the mortgage (approx £500 per month). In addition to this we've got a mortgage payment protection - ill health/death type policy which is costing another £10 per month.

So we've trying to work out whether to

a) Pay off all of the mortgage, cancelling the ill-health mortgage protection (don't need it) and hence being able to save approx £510 per month (will be saved for next house as current home is a little small and wanting to start family). Mortgage lender will charge us £150 for early repayment, but given the savings we will have made in interest - its still a gain for us.

b) Leave things as they are, and in 11 years time (mortgage term left) will have no mortgage and a large amonth of savings

My concerns - if something happens to me as the now main/only breadwinner then following plan (a) we would have very little savings, however following plan (b) we would spend 10*12*11 = £1320 on a policy I don't know if I need, as we would have the money to pay off the mortgage.

I hope that all sort of makes sense - I'm thinking that plan a is the most likely and it also has the advantage that we would be able to save around £6k per year, so each max out our ISA

I look forward to your replies, comments, thoughts and/or suggestions

Thanks

AlwaysPondering

jamesd

This board is for people who want to be mortgage free so that's likely to affect the suggestions you're given. Some alternative options:

Invest up to 25,000 each at Zopa in the 3 and 5 year C markets, which pay around 10% before tax. While not working your wife is not a tax payer and the interest is paid gross so she might make 10% on 25,000 while paying your mortgage rate of say 4.5% on the 25,000. Assuming her alone this would cost 1125 a year in mortgage interest and earn 2500 for a net gain of 1375 a year. Note that you cannot withdraw money once it is lent out, you get the steady stream of payments from the people the money has been lent to instead and that stream can be split to pay the mortgage interest on the money and provide either income or money to re-lend. The 25,000 limit can be exceeded by working with Zopa to get a consumer credit license and that could allow lending of as much as 116,000 before her personal allowance is exceeded. Since she's not earning it's best for her to do the lending so the income is within her personal allowance.

Since your wife is not a tax payer at present, exploit her status by putting savings into her name to use her personal allowance. Your mortgage is almost certainly at a lower interest rate than the gross rates available from bank saving accounts, so taking money form the offset account and putting it in savings accounts will be a gain. This assumes that she doesn't get another job - if she did she'd be a tax payer and wouldn't qualify for gross interest so this wouldn't work. Only applicable if she's not looking for a job. There are lots of regular saver accounts out there to exploit...

Use the full cash and stocks and shares ISA allowances each year, taking money from the mortgage offset account as necessary. The gradual move to stocks and shares funds is likely over 11 years to deliver more growth and income than the interest cost on the money.

Consider permanent health insurance for you to protect your income if you become unable to work due to illness or injury. If you get this, cancel the ill-health mortgage protection, since it duplicates this.

In general, think where you get the best return for your money: can you save or invest and get a better return than your mortgage interest rate?