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. I don't think I fit into their little boxes!

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.

Incidentally, 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.

leccyblue

I'm no expert on this, just a newbie myself, and I'm sure you'll get much better advice from the regulars. But could you not switch to an offset mortgage (either with your existing provider, or remortgage to a new provider) - and then use your savings to fully offset your mortgage? That way you'll be paying no interest, but also have the freedom to withdraw your savings if you wish (but then obviously you'd have mortgage payments again). You could then start to build your savings up again and once you had them at a comfortable level, pay the mortgage off using your offset savings. A kind of "best of both worlds" option.

pacelec

Thanks for that, I had looked into offset in the past but savings/investments were doing well and beating mortgage interest at the time. I will consider this again.

Maybe I'm getting too fixated on being mortgage free and not seing the bigger picture?

pinkteapot

If you're earning more interest/investment returns than you're paying on the mortgage rate, you're generally better off not paying off the mortgage.

If some offered to lend you £10, and wanted you to pay them back £12, but you were borrowing it to buy something that you could sell for £20, you'd do it. Same principle.

You mentioned interest rate rises - you can pay off the mortgage at any time so you could just keep it for now, and pay it off if it starts costing you more than you're making.

If you just want the psychological feeling of being mortgage-free then you could pay it off, but I would still leave yourself some emergency buffer, just in case, especially as you mentioned that you're self-employed so don't get sick pay etc. You could pay off a chunk and leave yourself with say a £20-30k mortgage and the same in savings...

Kynthia

You should probably pay an independent financial advisor for some professional advice as there are other ways to get a return on your capital without investing it in property (your own or buy to lets).

My initial thoughts are don't become a landlord if you don't want to be one. It can be regular hassle, there are laws and regulations to follow, if people stop paying rent it can be difficult to recover it and often the return/yield is often not as good as other less risky investments. Also if you buy another couple of properties, that really is putting all your eggs in the housing market basket. However, as you said, a lot of people do well out of it long term due to increases in property values. If you make more interest from savings then your mortgage charges you then it makes sense not to over pay, as if things change you can always redirect what you've saved back to the mortgage. I think you need more information on what else you can do with your savings to make a good return. Do you have good pensions, do you invest in shares, etc?

holly_hobby

What a nice dilemma to have !

Traditionally we would always advise repaying debt where there is available capital (in excess of emergency provision), to mitigate the overall long term cost of borrowing.

However, in todays mortgage world, with relatively low interest rates (and depending upon the individuals own requirements), this isn't always the most attractive route (purely from a cost and return point of view I should add).

There are a few things to consider ...

Once you have reduced your mortgage borrowing (and unless you have a flexible mge), then you can't just simply withdraw the overpayments in times of need - you would need to apply for a further advance, which is classed as new borrowing and would need to be underwritten as such with full underwriting/status checks (ie credit history and income verification).

Lending criteria changes over time, which means that if you no longer meet the lenders status requirements (thinking especially of you being self employed), then you may not be able to proceed with any equity release exercise (and may need to look at remortgaging to achieve the goal, which may still not meet your needs).

So, having said that I would certainly initially consider the Offset route, which as explained above gives you full access to your capital deposit, along with your linked mortgage account and chargeable mortgage interest also benefiting from this sum - the thing to note with Offset mges however is that the aren't always as competively priced as standard residential mortgage arrangements - but the flexibility of having best of both worlds generally balances this out.

If you elect not to go the Offset route, and you don't mind retaining the mortgage commitment as part of your household expenditure, I would consider depositing the monies into deposit vehicles consistent with your ATR and withdrawal requirements, that will produce a NET return in excess of your mortgage pay rate (so be mindful of placing under the individual with the lower tax banding) - and as/when/if your mortgage payrate reaches parity with your net deposit fund returns, then you can elect to fully or partially (baring in mind the benefits of retaining an emergency fund), reduce the mge commitment accordingly.

I wouldn't invest my entire capital into BTLs given they are long term pretty ill-liquid assets (and I think you have a cautious ATR from reading), and you need some diversification across asset classes within your portfolio.

It all comes down to whether you actually want to retain the commitment in the first place (regardless of any other factor) , or/and then if you can be disciplined to leave the lump sum in situ, whilst it is actively reducing your mortgaging costings, and then jumping ship when its no longer benefiting you to keep the mge liability on going.

Its as much as personal attitude decision as a financial one TBH.

Hope this helps the pondering process .... !!

Holly xx

dimbo61

1 you are paying 2.5% on your mortgage WELL DONE :-) so really do not want to give that up.
2 You are self employed so having a Large saving pot is a very good idea :-(
3 You are overpaying now and also saving into S&S ISA,s and cash ISA,s well done.
4 Any pension ?
Me I would just keep up the good work and not clear the mortgage yet.
If you used your savings you cannot buy more ISA,s as allowances now £5460 a year. Tax free.
5 being a landlord is not a get rich quick fix and requires time , effort and money.

pacelec

Wow thanks, that is a lot of information! And echoes what I have been told by others.

Just to clarify a few points, I am 41 and have always been a lower rate tax payer. I have a small private pension pot (which will never be worth much) consisting of one frozen pension and one active pension into which I pay a small monthly amount. I Started a private pension at 18 and have been well and truly fleeced over the years by different organisations so have absolutely no faith in the pension system.

I know the figures stack up well in favor of pensions but I truly believe that by the time I get to an age when I may consider retirement the whole thing will have come crashing down. I intend to carry on working for as long as I can and will hopefully just be able to wind down as I get older.

I just naively thought that if we have no mortgage we can save a good amount each month and build our savings back up over time. I would make sure that I was able to leave at least 20K as an emergency fund what ever I did.

Both elements (the main mortgage and the further advance) are on an SVR of 2.5 % and I have a 'flexible mortgage' as far as I understand so the suggestion of leaving it for now and paying it all off if the rates started to rise is a good one (which I have considered).

I just need to have the basic figures in front of me so I can see the implications of each option.

Paying off a large chunk of it and then leaving the rest for most of the term is probably a good idea for us as my income can be quite variable and it may be difficult to start again from scratch although with a healthy amount of equity in the house I suppose most lenders would be pretty accommodating.

Thanks again, I will have another read through all the comments.