Should I pay off my mortgage discussion

[Deleted User]

setmefree2 wrote: »

There are no tax implications to POYM, I don't think. Maybe the person is abit *cough* out of touch and is thinking of the (very) old MIRAS scheme. Maybe they mean you would be better off putting your money into a cash ISA? Have you read Martin Lewis' guide re POYM?

I think that the logic against going hell-for-leather for the goal of paying off your mortgage goes something like this, if you will forgive this extremely crude example (in which I will ignore comparative interest rates):

Let's say I am able to save or overpay £7,200 a year, and I also owe the bank £54,000.

In this extremely oversimplified example, this would be redeemed in five years if I pay the normal monthly payment of £900 a month, and in three years if I put the extra £600 a month into it instead of into ISAs.

If I put the whole lot into ISAs each month for five years, I'll be left with £36,000 of tax-free savings.

If I put the whole lot into the mortgage each month for three years, then put as much as possible into my ISAs for the remaining two years, I'll have £14,400 of tax-free savings (my maximum limit over those last two years) plus a further £21,600 that would be subject to tax.

jamesd

Bristol9, if you have savings and investments in ISAs that you would use to pay off the mortgage, you'd lose their tax free state if you did so. Since secure investments and cash ISA accounts are available that pay more than most mortgage interest rates you could end up both losing the accumulated tax free savings amount and losing higher growth in your money than the interest you save by paying off your mortgage.

If you're routinely using your full ISA allowance now, and expect to continue to do so in the future for at least a few years, it's probably going to be a bad idea to actually repay the mortgage and a better idea to know that you can whenever you want to.

On the other hand, if you're going to live the high life after clearing the mortgage, haven't been saving much and won't in the future, then you may not miss the lost tax advantages.

If you're living on means tested benefits or will be, that's one case where repaying the mortage may be the best decision.

One thing you shouldn't do is pay off the mortgage thinking that putting the money that was going to the mortgage payments into the investments will mean you're no worse off. You end up much worse off by doing this because you lose the greater investment growth of the big lump sum you use to pay off the mortgage. Better to keep it invested and use the income from the investments to pay the mortgage payments.

Who told you about this, what reasons did they give and which of the descriptions I gave best describes you? Any sign of you being a higher rate tax payer now or in the next few years?

mike1967

I'm not really seeking advise, just opinions.

I have an endowment (actually took it out before I bought a flat) that I no longer have associated to an interest only mortgage - when I moved 7 years ago I started a repayment mortgage but kept the endowment going - it's supposed to mature in mid 2015 for 60K.. which it wont !! I can surrender it for around 23K at the moment (it was 22.5K last year, and i've paid 1K in the last 12 months - so it's not really moving)
The thought is, should I surrender the endowments and take 23K off my mortgage (mortgage is £87K)... I'm also started overpaying my mortgage recently by 30% a month.... i just want to get rid of it !!... I have savings of 10K in a 6.5% interest account... these are now getting increased 1K a month....

Two years ago I put 32K to prop up my pension fund to buy my office so hopefully I have a reasonable pension fund building'

the more i think and write comments like the above.... i've got to cash it in !!

angelavdavis

Definitely cash in. I did this, put it onto the mortgage at my annual review and have never regretted it.

You have adequate savings and a good pension investment, you are losing money in the endowment to be worthwhile (although endowments are long term investments). You could always use your £1000 per year investment to put into another investment option going forward.

Are you a tax-payer? If you are, ensure you use your tax free allowance in an ISA. I also invest in NS&I tax free bonds from time to time. Nice safe bet which don't make huge amounts, but enough to make me happy.

mike1967

yes I am a tax payer - is there a way i can avoid this

yes i'm cashing it in. I've tracked it for the last three years and it isn't getting any better.

i went down the 'miss-sold' route a few years back and was told i wouldn't be compensated, and that if i wanted my endowment to cover 60K then i should treble my payments !!

jamesd

mike1967, are you a higher rate tax payer? if so, will you or any significant other be 55 or older when the mortgage has to be repaid? If so you might consider a pension mortgage - paying the mortgage off using tax free cash from taking part of your pension.

mike1967

The mortgage that I have now will be paid off by the time in 56... although I plan to cut this quite considerably..... the endowment is due to mature in 7 years.

I am a higher tax payer. But 70% of my wage is at normal rate.

rallp54

I can't get my head round this at all! I am coming to the end of a 4.39% fixed rate term, and presume the new rate will be high, so am looking for options, one of which is paying the remaining £50k off.
My complication is that, whatever "setmefree" below says about the very old MIDAS system, when I fill out my self assessment form, I CAN offset the mortgage interest payments against the income from a property that I rent out, so in effect, the mortgage interest rate is not as high as it looks. What I need to know is - allowing for the tax relief on the ~£2k interest, at what new mortgage interest rate does it become worth paying it off and losing the interest on the cash I no longer have in a savings account?
See my problem?
Anyone got a calculator to help out?

en8wall

Hi all

I've just taken vol redundancy and will be getting just over £38k next week. I'm starting a new self-employed job (London Cabbie) straight away.

My mortgage is £55k with 17 years to run and i'm in my late 30's. i'm currently paying £400pm at 4.69% on a fixed deal to Oct 2010. My initial reaction is to pay the whole lot against the mortgage reducing my payments down to £130pm but i will incur a penalty of £900 for paying over the £500 monthly overpayment limit on the mortgage. I've looked into putting the money in a savings account to avoid the penalty but everyway i seem to turn it seems cheaper to take the penalty on the chin and save on the mortgage interest. We have savings of approx £25k but dont want to touch them.

Any ideas/tips on best way to utilise the money against mortgage or savings? Thanks.

Poolman99

Hi en8wall, between now and Oct 2010 I think you could overpay (using cash from the redundancy) by £14,500 without incurring charges. Leaving you with a balance to pay of around 34k at that time.

£38k minus £14,500 is £23.5k (plus any interest from savings) so I think you could probably have a good chunk of that last £34k left in savings from the redundancy money alone. That would be the most efficient way of doing it I suppose.