Should I pay off my mortgage now and live with no savings in the bank ?

ThankYouAndEnjoy!

Hello
I asked the exact same question....
The response given was that the debt is also effected by Inflation, so if you are able to save at an APR greater than mortgage APR, it is more profitable to do so.

andrewmoorcroft

Broke_Student wrote: »

Hi. Im a student and am never usually on this board. I actually read the thread by mistake but it got me thinking...

If you have ~50k on a mortgage on a low rate (lets say 5%) and ~50k in savings at a higher interest rate (say 6%), surely you are financially still better off paying off the mortgage (despite what mosat people here are saying)?

My reason being that you would not make much profit in the savings. On top of this the savings will probably be taxed 20% or 40% and after tax you might even be recieving less interest than your mortgage is costing.

Im sure some of you are thinking 'ye but ISA's are tax free'. That's true but I still believe it is cheaper to pay off your mortgage due to inflation!? If inflation is 4% but you are making a 1% profit in an ISA then doesn't it mean the value of your money is actually decresing? It would therefore only be worth saving if your savings recieve interest at such a high rate that it beats the mortgage rate, after tax, whilst still taking into account the rate of inflation?

Somebody please tell me if this makes any sense lol. Im know nothing about property and am not an economics student either. I might be missing something really obvious. This was just a random thought...

God help the future of this country. I guess your not studying maths!

It's got nothing to do with inflation. You don't need a house etc. If you can invest at a higher rate than your loan you will make money. This is easy if uve got a low rate loan and you or your partner is a non taxpayer and get the best investment rate tax free. Alternatively if you are a tax payer then you can invest £3K per person per year tax free. Instead of paying £3K off the mortgage, it's better to invest the £3K at a higher rate than your mortgage. It's simple - they are lending you money to invest at a higher rate.

andrewmoorcroft

Dithering_Dad wrote: »

I don't see how saving money whether to put onto your mortgage or into an ISA, Pension or any other form of investment/saving plan can be called "Money Wasting".

You are wasting the money earning potential if you make capital repayments that could have been used to invest at a higher rate than your mortgage.

Dithering_Dad wrote: »

In my book, money wasting is buying the latest plasma TV because your old one was only 36" and now they are out at 50" or buying a new car every three years because you don't want the hassle of an MOT and because Mr. Next Door has just got a new one.

I agree

Dithering_Dad wrote: »

I must admit I'm getting tired of all of the sweeping generalisations that are made about people who are paying down their mortgages. What may be a good strategy for Mr Moorcroft here isn't necessarily a good one for everyone.

I agree. That's why i said "most" people and not "everyone". I gave examples of how it would work for "most" people.

Dithering_Dad wrote: »

To cover myself I am paying a large amount of money into my offset account so that should I need the money quickly, I'll be able to get at it with no penalties. If I were to put them into anything other than a cash ISA, I wouldn't have this easy access.

That's why i suggest cash ISA's as a safe way to beat a capital repayment mortgage. Also a shame that the best offset rates are 'generally' poorer than 'normal' rates.

Dithering_Dad wrote: »

Does no one remember the stockmarket crash(es)?

Does anyone remember a 25 year period in history when the market hasn't beaten the mortgage rate?

Dithering_Dad wrote: »

Other people have their own reasons for choosing to be a MFW that are as valid as my reason. Not everyone has a cast iron job with a set regular income that they can plough away into shares on a monthly basis over several years.

That's why i suggest cash ISA's. The benefit being that you save money and can get the investment back easier than an overpayment in 'most' cases.

Dithering_Dad wrote: »

Also not everyone has the time, knowledge or inclination to monitor the markets for the right stocks/funds.

You will if you come on this site for long enough. You don't need to invest in the stock market!

Dithering_Dad wrote: »

Sorry for ranting on, just wanted to add my 2p to the debate

Don't be sorry. There may be others that think the same as you and this will answer some of there concern/questions. Thanks for your comments.

Dithering_Dad

Wow, the return of Sloppy Saver! :rotfl:

Broke_Student

andrewmoorcroft wrote: »

God help the future of this country. I guess your not studying maths!

No need for that!

andrewmoorcroft wrote: »

It's got nothing to do with inflation.

Fair enough, forget inflation, but isn't the priciple still the same? Save the 50k and watch it grow at 1% per year whilst paying off 50k on the mortgage OR pay off the 50k mortgage now and save another 50k which would grow at 6% as you earn it. Don't know the maths behind it but the second option seems like it would give you more real value?

Edit: Actually I think i've not fully thought this one through. Not taken into account that as you do pay off your mortgage slowly you would still have the rest of the money saved in the bank and that would be earning full interest....

oldenufftoknowbetter

Hi reading this with great interest as we are in a similar position.
Got £51k outstanding mortgage on a tracker paying £560 pm for the next 10 years plus over pay a bit as well. Now in a position to pay it off next week :beer:
Even if we maxed out cash isa's for the year we would only gain 1% on £6k so not a masive saving by my thinking

Dithering_Dad

Say I have a mortgage of 150k at 5.6% APR, with a monthly repayment of £1000, consisting of £700 interest payment and £300 capital repayment. At the beginning of the tax year I win £3k on the lottery. I don't know whether to pay this 3k onto my mortgage or put it into a cash ISA at 6% APR.

3k off mortgage @ 5.6% = £168 annual saving (£14 per month).
3k into cash ISA @ 6% = £180 annual saving (£15 per month).
Hence the cash isa is giving me a better return of £12 over the year.

However, with the mortgage overpayment option I have effectively reduced my monthly repayments by £14 per month, but decide to keep the current repayment level at £1000. This means I am doing a monthly overpayment of £14, so over the course of the year I am saving a further £4.78 in compound interest.

The gap now between my ISA return and Mortgage overpayment is £7.22 over the year or 60p per month. Is it really worth the effort of me doing this?

If we add interest rate rises (we've had one already this year and could see another soon) into the pot, where traditionally rates rise on mortgages virtually over night, but on savings takes a month or so (if at all). This would further close the gap between the mortgage repayment and ISA options.

A final thought is the psychological effect of seeing that mortgage drop. For me the "feel good" factor of seeing my mortgage go down is worth more than 60p per month. It also encouranges me to try and overpay a little more, so suddenly that £14 a month could be up to £50 per month.

Hurdler

DD - I agree about the "feel good" factor - for me it's the loop of lower monthly payment equals more money swept into a savings account the following month, equals more money to throw at the mortgage, equals more of a montly payment reduction and so on. Also marginally more money to split between capital repayments and mortgage - and yes we might only be talking a few pennies, but I'm sure it all mounts up!

shays_mum

With the interest rates going up & up & catching up with current accounts etc, would it not be better to pay off & then put extra money into savings etc?. Trying to get fixed deals are really hard, though in saying that i have an abbey national remortgage at 5.79 totally fee free fixed for 2 years ready to go....
I really am stuck, o/h is self-employed & was thinking of ploughing everything into just getting rid of it....any thoughts are gladly appreciated, thanks in advance