Capital or clear mortgage?

sleepymans

I have about equal amounts of savings and outstanding joint mortgage.
OH and I are about a year from retirement, at which time our income will drasticly reduce.
Savings are in the best paying ISAs we can fnd, but none above 2% and mortgage is 2.5% for the remainder of the term (another 7 years).

Should we pay off the mortage or keep the capital and just try to keep plodding away paying the monthly repayments?

I just feel more "secure" somehow, having capital under my control.....but am I being irrational??

FLAPJACK

For me the security of knowing the roof over my head is paid for would be good.

As you have paid over 50% ( I take it that it was over 25 years with 7 left to run) of the mortgage then the place is more yours than the mortgage provider.....so the threat of losing the property (if times get tough....i.e drastically reduced income) is reduced somewhat.

Maybe to could reduce whats left of the mortgage with some of the savings....that way ok it reduces toe capital you have but it would also reduce the monthly mortgage payment too....which may make the reduced income not look so reduced.

You are correct that there is security in having a lump sum behind you but with todays interest rates I would use the money to work for me in providing security over your head and reducing you monthly outgoing.

JimmyTheWig

Ooh, that's a tough one.

Firstly, it sounds like you are in a fixed rate on your mortgage. Normally those in a fixed rate have penalties (ERCs) to pay if they pay off their mortgage early. Is this the case?

Whatever you do you want to have a bit of savings in case the car breaks down, boiler needs replacing, etc.

Other than that you generally just want to do whatever creates or saves the most interest. In the here and now that would be paying off the mortgage as 2.5% is more than 2.0%.
But if the mortgage is fixed rate and interest rates go up you could be better off by keeping the money in savings. Not that long ago (5 years?) it was easy enough to get 6% interest on savings. Would be gutting to return to those times knowing you paid off the mortgage to save 2.5%.

Also, what sorts of money are we talking about and are you still saving into your ISAs?
I ask because if you empty your ISAs then you lose any previous year's ISA allowances. If you then have more than £11k to save into ISAs between you in a year (might be possible if you don't have a mortgage to pay) you won't be able to and will end up paying tax on the interest.

Will you get a tax-free lump sum from any pensions when you retire next year? If so, I'd be tempted to keep the money you have in ISAs and use the pension lump sum to pay off the mortgage if interest rates haven't improved by then.

kingstreet

2.5% is probably Nationwide BMR or C&G's old standard rate.

If you have no intention of moving again and will have no need of another mortgage, I'd pay down the mortgage with some of the money, ensuring of course there are no penalties to do so, as I suspect.

Keep some of it for emergencies.

sleepymans

Thanks for the responses so far....
We do hope to downsize in the next year. Maybe to a similar value house but one with lower running costs (to make sure when we retire we can manage the bills)
The mortgage isnt fixed rate.
We will have a small lump sum (under £25k) at retirement date.
Mortgage and saving now both amount to about £50k each
No other debts.

JimmyTheWig

sleepymans wrote: »

The mortgage isnt fixed rate.

Sorry, I thought your first post meant it was.
In which case I would pay off the mortgage now, leaving enough cash in savings for emergencies. The interest rate on the mortgage now is higher than the interest rate on your savings and this is likely to be the case (if not more so) if interest rates rise.

We do hope to downsize in the next year. Maybe to a similar value house but one with lower running costs (to make sure when we retire we can manage the bills)

If you are happy with the current house other than the cost of upkeep, make sure you check that the fees you will pay for moving aren't more than you will be saving with lower running costs!

kingstreet wrote: »

If you have no intention of moving again and will have no need of another mortgage

With retirement next year they are unlikely to get another mortgage.

Thrugelmir

Personally I would opt for repaying the mortgage.