Should I pay off my mortgage discussion

jamesd

Eagertobemortgagefree, at your 6.74% mortgage rate compared to the 5.80% ISA rate your 11,500 in savings would gain you 108.10 more in mortgage interest reduction than savings interest in the first year. This growth would increase slowly year by year.

The tax benefit of having 13,500 in savings in an ISA at 5.8% instead of a non-ISA savings account is 156.60 a year and that lasts for as long as you want to keep the savings after the end of the mortgage - maybe until you die many decades from now.

For that reason, you're probably still best off accumulating any desired cash savings inside the cash ISA using the full annual limit. Anything beyond that could be used for the mortgage.

sammybe, the same argument applies in your case. It would be foolish to throw away the ongoing tax savings of cash ISA money to get a small benefit on the mortgage cost now.

For it to make sense to use cash ISA money to pay off a mortgage it needs to be in the early days of the mortgage, not near the end. Once you get within ten years or so of the end you'll be better off using the ISA first if you plan to keep saving.

bootman, it's not only the interest paid on the mortgage that matters, it's also the interest gained from the savings and the tax saved on the savings interest once the mortgage is paid off. You're probably best off by fully using your ISA allowances first, then using extra money on the mortgage.

Dithering_Dad

James, this is all assuming that everyone is using their ISAs to save for retirement and can afford to use their full entitlement every year.

If they're just saving for a rainy day, to pay off the mortgage or to spend on a holiday (i.e. they are going to spend their ISAs anyway) or they are just putting away £1500 per year instead of the full £3k and have a higher interest rate on their mortgage, then they are better off paying off the mortgage and then starting resaving with their ISAs, but now they will be able to put much more away - instead of spending (wasting?) £1500 per year on mortgage payments and £1500 on ISAs, they can put the whole £3k into an ISA and up their savings much faster.

If they're saving up in ISAs for retirement then they need to stop using cash isas as not only do they lose out if their ISA rate is less than the mortgage rate, but they also are losing money in real terms to inflation. Stocks & Shares ISas should be used in this case.

It seems strange to suggest that it is better to lose money by saving in a cash ISA than overpaying on a mortgage, just so that cash savings are held tax free in an ISA for life, especially when it's probable that the cash ISAs won't be held for this long (and really shouldn't be due to inflation). Nope, I'm sorry but I remain unconvinced that saving in Cash ISAs is financially more astute than directly overpaying on a mortgage.

roddydogs

Again, everbody (including Martin) seems to miss out on key point-if you pay you mortgage off, lets say its £50,000, you then obviously dont have that £50,000. If you let you Mortgage Run, at the end of you term you STILL HAVE your £50,000, so its not a straight comparison.!!

borntobefree

...I have been following all the arguments here:-

.... but surely if you pay of your mortgage earlier you are then left with an extra, say £1k per month, which you then use to save which will have built up by the time you "would have" PaidOYM.....so don't really understand the last point....

B2bF

Dithering_Dad

roddydogs wrote: »

Again, everbody (including Martin) seems to miss out on key point-if you pay you mortgage off, lets say its £50,000, you then obviously dont have that £50,000. If you let you Mortgage Run, at the end of you term you STILL HAVE your £50,000, so its not a straight comparison.!!

I feel that you're the one who's missed the key point. We're really discussing interest payments here and which method (paying down a mortgage or investing) gives you a better return on your money.

With your example, if you have a £50k mortgage and let it run the full term, say 25 years at 6%, you won't STILL HAVE your £50k because over that period you'll have spent £50k in mortgage interest payments.

Basically, your whole argument only holds water if your mortgage is interest free. If they were, then we'd all be insane to pay them off and would allow them to run forever.

My view is that if you're confident that you will have a job for life, have decent continuous pay rises, will never have a long-term illness and a good grasp of the stock market, then it makes total sense to leave your mortgage running to full term and invest the overpayment money elsewhere.

However, if you're like most people who don't have a job for life, have income that fluctuates due to the arrival of children, downturns in the economy, illness or the desire to take a less stressful and less well paid job then overpaying on your mortgage while you can afford to do it, makes absolute sense.

roddydogs

borntobefree wrote: »

...I have been following all the arguments here:-

.... but surely if you pay of your mortgage earlier you are then left with an extra, say £1k per month, which you then use to save which will have built up by the time you "would have" PaidOYM.....so don't really understand the last point....

B2bF

Read my post no 178, these are actual figures! ive edited the post to make it clearer.

loonygooner

Now I am really, totally and extremely confused

I have a £124,000 mortagage which is 6 months into a 5 year fixed rate deal with Nationwide, rate 6% I think (End date: 2025 :eek: ). I make a £500.00 over payment most months and I would like to think that I may be able to for the immediate future.

I do not pay any monies into a ISA though.

Should I continue paying off against the mortgage or start saving.

I am 45 years old, have a wife and 3 kids.

Am I better off paying and reducing the term (£500 each month makes term 11 years) or saving and leeting it go to term but have monies saved for old age....

Help....

Dithering_Dad

roddydogs wrote: »

Read my post no 178, these are actual figures! ive edited the post to make it clearer.

Roddy, your example is not correct because you're not comparing 'like for like'. You say that if you have a £25k mortgage and £25k savings, if you pay off the mortgage then you've 'lost' £25k ( paid onto the mortgage), whereas if you let the mortgage run it's course, you've 'gained' £25k (your savings and mortgage paid).

What you're forgetting is that you do actually have to pay your mortgage loan back! Regardless of whether you repay it instantly with the £25k savings or over 15 years at £138 per month (£25,000 / 12 months / 15 years), the net effect is the same.

In your example, you bank the 25k and then use other money to repay your mortgage at £138 per month, so that at the end of the 15 years you are mortgage free and also have £25k in savings. This seems so much better to you than just having your mortgage paid off...

However, if you paid your mortgage off straight away with your £25k savings and then put the £138 per month mortgage money into a savings account, at the end of 15 years you will have paid off your mortgage and have £25k in savings!!!

No difference.

jamesd

Dithering_Dad wrote: »

With your example, if you have a £50k mortgage and let it run the full term, say 25 years at 6%, you won't STILL HAVE your £50k because over that period you'll have spent £50k in mortgage interest payments.

That 50,000 is earning money somehow. If invested it's likely to be earning more than the mortgage interest rate so you'll actually end up with more than you started with. If it's in savings it's likely to be about the same.

You don't just lose 50,000 in mortgage interest paid. You gain what the investments make less the mortgage interest.

roddydogs, you need to allow for the interest on the mortgage, while saving or investing the repayment part. See this example calculation. There's more at the interest only option including discussion of how unlikely it is to fail to pay off the mortgage.

looneygooner, see the examples in the last paragraph. So long as you are content to take some investment ups and downs you're likely to be significantly better off by investing instead of overpaying the mortgage. Even if you want savings account levels of safety you can get cash ISAs paying more than 6% so you're better off at the moment using them than overpaying. It doesn't actually matter whether you reduce the term or the minimum monthly payments unless you're at the limit of the overpayments you're allowed. All that matters is the total monthly payment that you make. If you let the required monthly payments reduce that gives you more flexibility for the future, perhaps when you're between jobs, because you can cut back to the lower required payment level. So if overpaying, let the minimum payments reduce until you reach the point where you're overpaying as much as allowed, then switch to reducing the term so that you can continue to overpay as much as you want.

If your wife doesn't pay tax, look at regular saver accounts. You can get more than 7% from some of those at the moment and that's a better deal than overpaying the mortgage.

roddydogs

Re the last 2 posts-My repayments are £220.50 PM Repayment mge, i will not still owe £25000 at the end of 15 years!-- if i compound the sum i will get at the end of 15 years if i leave the £25,000 invested-5% interest after tax compounded x15 years actually gives me £51973.
Of course i could pay off the mortgage and "Drip feed" the £220.50 into a savings account paying the same 5%, however the calculation is more complex and i havent found a site that does this-obviously a "lump sum" is easier to calculate.
but id be willing to bet it isnt as much as £51973!