Should I pay off my mortgage discussion

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Dithering_Dad wrote: »

Not for me, I have my own company and so this sort of insurance is prohibitively expensive. Instead I have a large amount of savings in my Offset account. Once my mortgage is gone I'll move this into cash ISAs.

If you are not using you ISA allowance there are offsets that allow them as well as ordinary savings so you can start to build up the TAX shelter.

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Jennyi wrote: »

I've got an offset mortgage of 4.79% at Clydesdale bank. I've been starting to use it for savings, but then I started to wonder, am I better actually paying off the mortgage? If I reduce the capital amount I pay less interest. How do I work it out?
Thank you.

Offset if used properly makes no difference.

muggles

At the risk of being accused of being a Troll, I'm going to say "Don't pay off all your mortgage". OK, less shouting and arm-waving, keep reading, this is a MONEYSAVING tip. Your mortgage company hold the title deeds to your house as security. If you pay off 100% of your mortgage, they will send them to you. Keeping them in the house is not a sensible idea by any means, so you will then have to go to a solicitor, who will charge you an extortionate amount to keep them in a safe.

So, this is what you do. If you're in the fortunate position of being able to pay off your mortgate, find out from your lender what the minimum size mortgage you're allowed to have is. Then pay off down to this amount, and set up repayments to match the interest. The mortgage company will still own a fraction of your house, but they will also be looking after your deeds for what is quite likely to be considerably less than a solicitor would. Certainly in my experience it is cheaper to do it this way. We currently repay about £6.00 a month, which works out to be better value than our local solicitor's safe. Worth thinking about.

jamesd

Jennyi, there is no difference in the mortgage interest saving between using the offset account and overpaying on the mortgage. Both will reduce the mortgage interest by the same amount.

If you have available cash ISA allowance you're worse off by using the offset account for savings because you can easily get a higher interest rate than 4.79% on a cash ISA. For the same reason you're worse off overpaying on the mortgage if you have unused cash ISA allowance. Your loss in the first year from overpaying or offsetting in this ISA available case would be about (6.3 - 4.79) / 100 * amount paid, or 15.10 per 1,000.

If you don't have a cash ISA available you'd need a 6% savings rate as a basic rate tax payer to be better off and that's also possible for term or regular savings accounts.

jamesd

muggles, you could also pay off the mortgage, verify that the Land Registry entry is correct, then have the deed framed, since there's now generally no reason to safeguard deeds, except for sentimental value.

MSE_Martin

Yes woodhouseian.

If you didn't pay off the £1000 on your debt, then the interest CHARGED there would effectively have compounded up too. Thus the total cost would be £790

Martin

stphnstevey

I have a more complex problem.

I am considering selling a house we own in the near future. However it has a substantial penalty charge for paying it off as it is a long term fixed rate. The penalty is a % of the money outstanding. I can make overpayments of upto 10% per year with no penalty.

Obviously the more I pay off before selling, reduces the penalty and hence increases the profit.

I believe with certain investments I can substantially beat the mortgage rate (even after tax).

As this problem is not as simple as most people's, I think I need to calculate every scenario and see what happens? Anybody see the wood for the tree's?

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woodhouseian wrote: »

I will assume I have £1000 in a savings account earning 5% pa gross (let's say it's a cash ISA to avoid tax complication). If I leave it in the bank for 10 years, my computer tells me I would end up with £1628.89 at the end of that time. In other words I would make £628.89 in interest over 10 years.

Alternatively, if I used that money to pay £1000 off my mortgage, which has say a 6% interest rate, then, as I understand it, I don't get any benefit from compound interest. I just pay £60 less in mortgage interest ever year, namely £600 in total over 10 years. There is no equivalent to the 'earning interest on interest' gain that I make on my savings, because I only reduce my mortgage capital debt by the original £1000.

In other words I actually end up worse off (by £28.89!) by overpaying my mortgage, even though the interest rate on my mortgage (6%) is higher than that on my savings (5%).

Am I missing something here? Hopefully someone with better maths than me will be able to set me straight!

Simple really, you forgot to put the £60py back into your savings account.

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stphnstevey wrote: »

However it has a substantial penalty charge for paying it off as it is a long term fixed rate. The penalty is a % of the money outstanding. I can make overpayments of upto 10% per year with no penalty.

Obviously the more I pay off before selling, reduces the penalty and hence increases the profit.

I believe with certain investments I can substantially beat the mortgage rate (even after tax).

Really depends on the size of the penalty and how good these investemts will be, you also need to live somwhere so have to factor in rent.

One way round the penalty may be to port the loan somewhere, so is there a family member that could help out perhaps a house with no mortgage, there are other considerations with this sort of plan though.

sghkey

Interesting article - but how about overpaying a mortgage compared to putting money into a pension scheme? Which one should take priority, for a self-employed person?