To pay off or not to pay off?

pacelec

Hello all, Iv'e just registered on her as I don't seem to be able to get a straight answer from any of the 'professionals' I have spoken to.

My situation is this, My partner and I live in a house which we bought 7 years ago for £310,000. We used funds from the sale of our previous property and an existing mortgage plus a further advance to make up the difference of £180,000 which was a big number to get my head around at the time!

Over the years the two mortgage elements have been fixed or on a tracker at various times but have now reverted to the SVR at 2.5%.

We have worked hard (I am self employed) and have always managed to make over payments each month firstly by keeping payments static when interest rates came down and then by paying a set amount extra each month.

Indecently, when we were in our previous home we also (over a 5 year period) reduced the term of our mortgage (originally a 130k mortgage over 30 years) initially from 28 years to 20 years and then down to 12 Years, wincing at the high monthly re payments but celebrating the interest savings.

Anyway, back to the current situation. Our mortgage liabilty now stands at £89,000 And we are in the fortunate position to be able to pay the whole lot off if we chose to. To do this we would have to cash in most of our savings and investments most of which are in cash ISA's or investment ISA's built up over the years.

I really like the idea of being mortgage free as we don't have any other debts, loans, credit cards. etc. But it is nice to have a decent buffer of cash in reserve in case of emergencies. Our house (though not perfect) is big enough for us and our two young children, and suits our needs so we have no particular need or wish to move in the near future. Also there is no redemption penalty on the mortgage so we could have a clean break.

I am just not sure what to do? The thought of owning the house outright and not being at the mercy of increasing interest rates is very appealing but would we be putting all our eggs in one basket? We are not the sort of people who are going to waste the extra money we would have each month and would almost certainly put most of it back into building up our savings and investments again to fund possible university fees and retirement planing.

Another option would be to borrow more against the house (currently worth about £400,000) and buy another house or houses to rent out. I know several people who have done this and are living very well because of the low interest rates but I don't think I could handle the stress of being a landlord.

Other thoughts include paying off most of the loan leaving about £30 or £40 K or making large monthly over payments to decrease the term further. The current redemption date is 2026 although this is probably more likely to be about 2022 because of the over payments we have made.

It just seems to me (with my basic understanding of these things) that it makes more sense to get rid of the debt because of the vast amounts of interest I will be paying over the remainder of the term. Any advice would be much appreciated.

muddywhitechicken

Hello

I'm no expert but I do see similarities to my own situation (original mortgage + further advance just over £200,000 at highest, now considerably lower and at 2.5% SVR, sufficient savings - shares, cash ISAs, S&S ISAs, regular savings + loyalty accounts etc - to pay off majority of total mortgage, don't fancy being a landlord etc).

The reasons I haven't cashed the lot in and paid off the mortgage are:

Savings a/c - whilst my mortgage rate is 2.5%, I am happy to have some instant access cash savings/emergency fund (approx. £5,000) as long as it's earning ~2%. Now that my regular saver introductory rate is finishing I will transfer that additional money to the mortgage.

ISAs - I wouldn't want to lose the tax-free wrapper on my savings - interest rates are going to rise one day and I want to have as much money in my ISAs as possible when they do!

Shares - we keep the shares we have that pay a 5% dividend as this is higher than we pay on the mortgage - the dividend is used as a mortgage OP though. My OH works for a company listed on the NASDAQ. We tend to sell these shares fairly regularly as they are at a good price to pay for holidays, MOPs or more recently to transfer to a S&S ISA.

Whilst I want to be mortgage free sooner rather than later, I don't want to put all my eggs in one basket and pay it off in the shortest possible time. I am happy to know that we are reducing the total amount owed/term every month and that we could pay it off if we needed too.

One major difference between us is that I'm not self-employed - not sure how important a factor this is.

Hope this makes sense and is of some help!

MWC

pacelec

Thanks for that MWC, sorry for the slow reply but I put my post in another section as I didn't seem to be getting much of a response in this one.

You are right, our situations are similar. I think on balance I was probably getting a bit carried away with the thought of having no mortgage. I am going to have a think over Christmas and make a decision in the new year.