Should I pay off my mortgage discussion

jamesd

en8wall, you might consider these in a stocks and shares ISA and extra above the limit outside the ISA:

BlackRock UK Absolute Alpha, about 12% growth in the last year (red).
CF Arch Cru Investment Portfolio (see details), about 8.5% growth in the last year (blue).

If you compare the fairly consistent lines here to the FTSE all-share (excluding investment trusts) index (yellow). Don't just use the 12% one. They invest in different ways and the diversification gives you extra protection. Performance is not guaranteed and they could see decreases in value, though both have avoiding that as a core objective and have done an excellent job so far.

Because they pay in capital growth you get the gain tax free up to 9600 a year because of the capital gains allowance each person gets, even when held outside an ISA. If you have a wife that's up to 19200 gain a year free of tax. At 12% on 38k you'd only use half of one person's allowance each year so buying then selling to move into the ISA as fast as possible wouldn't produce any tax bill at all, unlike savings accounts.

If you want you could put the money in and take some out each month to cover part of the mortgage bill.

If you're getting 8-12% tax free there's no point in paying off a mortgage that's costing 4.69%, provided you're willing to accept the investment risk.

cagney123

We have a joint current account mortgage with natwest
our account balance is....-£7,316.64
We are ahead of plan.......£28,918
And our available facility is.£40,683

Early in 2007 we were in a position to pay it off but decided to open two isa's drawing £6,000 from the account, We are now in a position to finish the debt once more but dont know what to do.

The target repayment date is november 2018 and the interest rate is 6.45%

Can anybody please advise the best course of action

Thank you..David

jamesd

cagney123, the funds I mentioned in the post just before yours are expected to grow by more than 6.45% so if you're comfortable investing those or others would beat paying it off.

Cash ISAs would currently have trouble getting better than 6.45% but since it's a use it or lose it allowance those may also be better than paying it off.

If you're tired of having the mortgage and don't need the facility as an emergency fund you could pay it off but keeping a low balance and the facility available could be useful.

cagney123

jamesd wrote: »

cagney123, the funds I mentioned in the post just before yours are expected to grow by more than 6.45% so if you're comfortable investing those or others would beat paying it off.

Cash ISAs would currently have trouble getting better than 6.45% but since it's a use it or lose it allowance those may also be better than paying it off.

If you're tired of having the mortgage and don't need the facility as an emergency fund you could pay it off but keeping a low balance and the facility available could be useful.

Thank you for the advice, it is useful to have the funds available, might just run it down to small amount

beccasmummy

Hi all,

My hubby and I are at odds with this one.

We have a £79000 endowment mortgage with Yorkshire building society which has 14 years left to run and I have recently recieved a payout of £75000 from a critical illness policy.
He wants to put the whole lot into the mortgage and pay the remaining off over the next few months.
We have no savings and I am really worried that we will be left with nothing.

I understand his wanting to pay it off but I am concerned that we will only be better off by the mortgage payment every month, and have nothing for emergencies....

I really dont know what to do....what do you all think??

erpentz

This has been bugging me for years as I am unsure if I am doing the right thing.
I have an offset mortgage and savings account that has exactly the same amount of funds so in effect they cancel themselves out. I receive the same amount of interest on the savings account as the interest I pay on the mortgage so I am not paying interest either.
I have a Life insurance policy costing about £15/month that will pay off the mortgage on either my or my wife's death. That is if one of us dies the other gets paid a lump sum (the mortgage)
I do realise the insurance has a time span.
Could anyone give me an opinion on this?

jamesd

beccasmummy, what he's suggesting is not very efficient. It's straightforward to get 8-12% from low risk investments, not guaranteed. At the moment you can get 7-11% income from investments instead if desired, so you can go for growing the money or getting an income to pay the interest and still growing it less.

This sort of thing is expected to make you more than just the mortgage payment. Over the term you're talking about you'd expect to end up with significantly more than the mortgage repaid, without the unpleasant catches that endowments have been known for.

I don't know your mortgage rate so I'll assume that it's 6%. 6% interest on 75,000 is 4500 a year or 375 a month.

Estimated yield (annual income, excluding growth or loss in capital value) from the AEGON High Yield Bond is 11.55% and from the Gartmore High Yield Corporate Bond is 9.2%. Put a 50:50 mixture of those two into 7200 of stocks and shares ISAs for each of you this year and you'd expect about 831 + 662 = 1493 tax free (not tax free outside an ISA). After three years you'd have put in 43200 and be expecting about 4479 a year, paying the mortgage interest from then on. For five more years to match the next paragraph's time you'd be able to save the 375 a month in interest and it'd be worth 26294 8 years from now. You'd also have saved 1493 in year 1 and 4479 in year two so the total extra gain from saving the monthly payments that this pays instead is 26294 + 1493 + 4479 = 32266.

That leaves 31800 to put somewhere and that could perhaps go into the BlackRock UK Absolute Alpha fund outside an ISA, split 5:50 between you. That doesn't pay income but is likely to grow at about 12% a year with little chance of a decrease in value. That's a way to accumulate money to pay off the capital part of the mortgage. For that to pay off all of the 79000 mortgage capital it'd need to grow to 2.48 times its starting value. At 12% that would take about 8 years from now (a bit less because you have more in this fund during the first two years while you move the money into the bonds). You'd actually move this money into the ISAs starting in year 4, to avoid capital gains tax at the end. You'd still have the 43200 plus interest from the last paragraph left over.

Instead of investing if you paid off the mortgage you could have 375 a month invested at say 6% into a cash ISA for 8 years. That would be worth 46291. That's a bit more than the capital 43200 from the first paragraph but you also get that 32266 so you'd expect to be better off by 43200 + 32266 - 46291 = 29175 by using the investing approach instead of repaying. The bonds would probably also grow by 3-5% a year and that could add another 11701 in gain from investing.

So long as you're willing to accept some variation in just how long it takes this looks like a plan that would leave you considerably better off than repaying the mortgage immediately. And if you ever changed your mind, the money is there to be taken out. Or you could do half pay off and half invest to get a bit of each way of doing things and he could put his half of the 375 in mortgage interest saved into either investments or a cash ISA, using the rest of his ISA allowance to help you get the invest half into ISAs as fast as possible.

An IFA could easily help you to set up things like this, selecting a broader range of investments, since I've just selected a few to show how you can stop paying the mortgage interest and still make more money than paying the mortgage off.

jamesd

erpentz, if you're getting the best possible savings rate that's fair enough. You might instead look at the quite low risk investments that I suggested earlier, since those would be expected to earn more than the mortgage costs.

talk2me

Hi

My outstanding mortgage of £17000 will finish by Dec 2009 (next year), I definitly want to move up the ladder and buy a new house. But the present credit crunch situation and the history attached to House price falls of (1991) I want to pay off in full and keep this house as back up,in case anything undesired happens with my new and big commitment . My broker suggested if I leave £500-£1000 on my mortgage and put it back to its original end date Dec 2026 ?

I can't work out the reason why I need to leave this amount on the mortgage before I move on to a nice bigger house and OBVIOUS BIGGER COMMITMENT??

Please guide me to the best course of action.

jamesd

If you have a portable mortgage that might leave you with a better deal than available for new mortgages.