Should I pay off my mortgage discussion

Dithering_Dad

jamesd wrote: »

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.

The 50,000 you overpay is also making money, by saving thousands of pounds in mortgage interest. However, I deliberately left out the interest (both mortgage & savings) so as not to confuse the example that whether you borrow £25k and pay it back straight away or borrow it and pay it back over 15 years,he net effect is that same.

jamesd wrote: »

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

James, I think we need some clarification in this discussion because it's getting a tad confusing when one minute we are comparing Cash ISAs with Mortgage repayment and the next the spectre of Investing via a S&S ISA is thrown in. I'd therefore like to draw a line under parts of the discussion if possible....

From your statement "If it's in savings it's likely to be about the same.", I believe you agree with me that whether you use £3k to overpay your mortgage directly or you put it into a CASH ISA, the difference in interest rates between the two are pretty negligible and so, as you say, the return is likely to be about the same.

The perceived advantage with paying into a CASH ISAs is that your savings are tax free forever, but this is a fallacy because keeping more than a few thousand £'s in a CASH ISA is wasting money as it is whittled away by inflation. So CASH ISAs therefore should only be used for emergency CASH savings that you may need in a hurry (say 3 or 6 month's worth of your household budget).

When we look at investing in a Stocks & Shares ISA instead of overpaying into a mortgage, the discussion is not as clean cut. You could argue that with a good investment strategy, you can get well over 10% returns - far better than your mortgage rate. In this instance you would be wise to invest your spare cash and after 10 years or so you will have a larger lump sum to throw at the mortgage than you would if you you overpaid directly.

However, you can also argue that all the share dealing investment websites, banks, building societies and EVERY OTHER financial institute carries the warning "Investments may go up or down and you may end up with less money that you put in" for a reason. If it was absolutely guaranteed that you make money on investments, they would not require that warning. This is why always smile when I see you roll out the old chestnut "If invested it's likely to be earning more than the mortgage interest rate", because it's also likely not to be earning more.

My view is that if you want to pay off your mortgage (and remember, WE ARE in the MORTAGE FREE WANNABE board here) then you will not find a surer way of doing it than with cash payments made directly onto the mortgage debt.

If you are a stockmarket wizkid or 'like a flutter' then by all means have a go on the stockmarket, hopefully when it comes to the time you wish to pay off your mortgage you won't be in the middle of a sotckmarket crash like we are now!

setmefree2

Dithering_Dad wrote: »

but this is a fallacy because keeping more than a few thousand £'s in a CASH ISA is wasting money as it is whittled away by inflation.

Hi DD,

Don't agree with this, I'm afarid. Whilst we can argue until the cows come home about what inflation is, or isn't, if I get 6.5% on my cash ISA, which is easily achievable, then it is not being whittled away by inflation.....don't think anyone is saying inflation is greater than 6.5%.......Inflation is used by many as a good reason NOT to POYM - the argument goes (as I'm sure you know beacause some have probably used it against you) that over time inflation whittles your mortgage away, which is true in times of high inflation, which we havn't got - which is why I am a MFW too. If we suddenly hit a period of very high inflation, more than anything, I would probably regret POmyM.

Cash must be seen by many "professional" investors as a vehicle for investing as I have just moved half of my pension into cash and half into the far East. Cash was an alternative offered to me.

I think what you do with your money does depend on what you are trying to achieve. Your plan is right for you as, I believe, you said that you were trying to find income to send your children to private schools...so for you it makes sense to POYM. If you want to save for old age - put it in a Cash ISA, of course, you have to move it constantly or the banks will give you paultry interest. This is true of mortgages too though.

Depends on what you are trying to do....no one way is best surely/

setmefree2

Dithering_Dad wrote: »

and remember, WE ARE in the MORTAGE FREE WANNABE board here

and I really don't want to get into an argument with you honest.....but indicating that people shouldn't be using cash ISAs is surely not Martin Lewis' message . I thought the MSE msg was POYM after you've used your cash ISA allowance....not trying to pick a fight honest....everyone is entitled to their view:D

jamesd

Dithering_Dad wrote: »

However, I deliberately left out the interest (both mortgage & savings)

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.

No, you didn't ignore the interest: you apparently made the bogus claim that the mortgage interest would eat up all of the money.

Hence my objection to you charging mortgage interest but ignoring the interest on the 50,000.

Dithering_Dad wrote: »

I believe you agree with me that whether you use £3k to overpay your mortgage directly or you put it into a CASH ISA, the difference in interest rates between the two are pretty negligible and so, as you say, the return is likely to be about the same.

Yes, I agree that the returns during the mortgage period are likely to be similar, with the edge often going to the ISA at the moment. Not always, but often. May well change in the future, in which case I'll be changing what I suggest.

Dithering_Dad wrote: »

The perceived advantage with paying into a CASH ISAs is that your savings are tax free forever, but this is a fallacy because keeping more than a few thousand £'s in a CASH ISA is wasting money as it is whittled away by inflation.

That depends on the person. If the person intends to keep lots of cash, then the cash ISA will probably be worth keeping. If they intend to use S&S then they can use it for a good start on that. Neither is relevant if they aren't going to be using their allowances after paying off the mortgage, though - in that case it'd simply be an interest comparison during the mortgage term and we'd probably be agreeing.

Dithering_Dad wrote: »

So CASH ISAs therefore should only be used for emergency CASH savings that you may need in a hurry (say 3 or 6 month's worth of your household budget).

That's not necessarily so. Remember that a set of investments will contain a cash portion and that's where the cash ISA can also have a role.

Dithering_Dad wrote: »

You could argue that with a good investment strategy, you can get well over 10% returns - far better than your mortgage rate. In this instance you would be wise to invest your spare cash and after 10 years or so you will have a larger lump sum to throw at the mortgage than you would if you you overpaid directly.

It doesn't even take a good strategy when the main UK index has over the long term grown by 12% before fees, about that 10% after. Lots of ups and downs along the way but for a 25 year mortgage term, that's definitely into long term investing territory, for those who are interested in that. For those who aren't, they can stick to short term comparisons of cash ISA rates to their mortgage rate and use whichever is highest.

Dithering_Dad wrote: »

This is why always smile when I see you roll out the old chestnut "If invested it's likely to be earning more than the mortgage interest rate", because it's also likely not to be earning more.

There certainly will be periods when it's making less and dropping but there isn't a period where that has been true for ten year investment terms in the main UK index in the last few decades. Since mortgages cover 25 years, they are well beyond that ten years period that was enough to recover from even buying at the worst possible moments, just before big drops in value. And that's assuming lump sum investments, not regular payments, that substantially shorten that time period. But of course that's the past, so maybe the future experience will be less good.

Dithering_Dad wrote: »

My view is that if you want to pay off your mortgage (and remember, WE ARE in the MORTAGE FREE WANNABE board here) then you will not find a surer way of doing it than with cash payments made directly onto the mortgage debt.

It's absolutely true that the surest way to pay off a mortgage is to make overpayments to the mortgage.

Still, this is part of pure money and the overall objective is to leave people better off. That does include looking at their position after clearing the mortgage and whether that's their best course. For some it will be, for others, not. And some will simply want to be rid of the mortgage even if that is more expensive.

Dithering_Dad wrote: »

If you are a stockmarket wizkid or 'like a flutter' then by all means have a go on the stockmarket, hopefully when it comes to the time you wish to pay off your mortgage you won't be in the middle of a sotckmarket crash like we are now!

A typical stock market crash doesn't matter if you're even putting in only the difference between interest only and repayment: the expected surplus of investing that money, getting only 7% and moving out ten percent a year for each of the last five years is enough to handle the 50% drop of a real bear market, not the piddling drop we've seen recently. The only US or UK drops we've seen in the last century or so that it can't handle is the 1929-30s bear market.

And that's part of why there are no guarantees and I write "likely" and "probably".

seven-day-weekend

I've not read most of the thread, but would like to cut through all the financial number-crunching arguments to say.....

....paying off your mortgage gives you freedom. It doesn't matter if you lose your job or want to go part time, or leave the country, you can do it.

THIS is why most people chose to pay off their mortgage if they can.

roddydogs

seven-day-weekend wrote: »

I've not read most of the thread, but would like to cut through all the financial number-crunching arguments to say.....

....paying off your mortgage gives you freedom. It doesn't matter if you lose your job or want to go part time, or leave the country, you can do it.

THIS is why most people chose to pay off their mortgage if they can.

Yes, but if your Mge is x and u have x or more saved, if needs be u just pay it off.

setmefree2

Hi 7daywkend,

I totally agree with you. You are highly motivated and that is great. You have worked out that POYM is best for you, as your goal is to work less. Having no debt will allow you the freedom to do this. Many on this board are similarly motivated. The SMFs have paid nearly £100k of our mortgage in 5 years. Our motivation was pure fear. We did not like owing a quarter of a million pounds. It scared the hell out of us.We felt like we were about to literally drown in a sea of debt, taking our family with us.

But surely this might not be the right route for someone who has a different goal?

Savings will generate freedom too as it comes with interest every year which is classified by the tax man as "unearned income" Savings on £20k in an ISA will generate roughly £1k of untaxable interest per year which can be used to live on.

This is, however, as DD said the "Mortgage Free Wannabe Board" so why does it matter? The only reason that anyone has to mention it at all is because saving/ not saving in a tax free ISA DOES have tax implications in the future on your "unearned income".That does not necessarily matter, as long as someone brought it to your attention, you then make your (informed) choice. If we all had an infinite pot of money :rolleyes: we could make all the choices:D

SMF2

Dithering_Dad

seven-day-weekend wrote: »

I've not read most of the thread, but would like to cut through all the financial number-crunching arguments to say.....

....paying off your mortgage gives you freedom. It doesn't matter if you lose your job or want to go part time, or leave the country, you can do it.

THIS is why most people chose to pay off their mortgage if they can.

Well done SDW, you've put your finger on it - no matter how many people come onto the MFW board and argue the minutae of finance, and which method is better than another, there are these undeniable facts...

• There is no surer method of paying down your mortgage than direct overpayments onto the mortgage.
• There is no better feeling for a MFWer (and I guess most of us are one because why else would we frequent this board?) than to see their mortgage balance drop and their mortgage repayment term decrease (sometimes by years!)

If people believe fervently that they should be ploughing all their hardearned into savings or pensions or mattresses then they should do it and enjoy the feeling of wellbeing it gives them. I have to say though that I don't see many of us MFWers on the Savings and Investment board or Pensions Boards telling them they are wasting money and should be paying down their mortgages instead

Jonbvn

Dithering_Dad wrote: »

...... I have to say though that I don't see many of us MFWers on the Savings and Investment board or Pensions Boards telling them they are wasting money and should be paying down their mortgages instead

DD,

A bit of a straw-man argument I believe.

Personally, I prefer a balanced approach with some investments/savings and overpaying the mtg.

stuffcrash

Kaz2904 wrote: »

I need to earn 6.6% interest on savings to beat my 5.29% mortgage but when I run it through the calculators I still wouldn't be able to clear my mortgage at the time it thinks I can. I, like DD find it a good psychological boost to see my mortgage coming down month by month and to that end will continue to overpay. I for one know that I would probably dip into the savings. I do have savings which are there to be used for necessary (and sometimes not!) purchases but they still need to be replaced and I count borrowing from savings as a debt.

I think one thing that Martin has forgotten to point out is that if you have a considerable sum in savings/investments and you lose your job any savings are taken into consideration when your benefits are calculated.

Move you money out of the country bit by bit, pay off your debts and sit back watch the fireworks go off.