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Can someone please explain to me why people pay off their mortgage early?
Legacy_user
Posts: 0 Newbie
May be I am being thick but if you have excess cash, is it not better to invest or save that rather than pay off your mortgage?
I know everyone has a different situation but am I wrong in thinking the following (as a generalisation):
You take out a mortgage today. This balance is the capital + interest over the entire term (as per the contract) divided by the number of month/payment frequency. So it is basically what you can afford today and is fixed, other than going up or down for interest rates.
The person/family pay that over 25-30 years usually. But as time goes on the mortgage becomes more affordable for the average person through increments s/he receives through their job. So as a cost it gets lower and lower over time.
So why would anyone want to pay off today when it is much more expensive to pay in todays money than it is in the value of money in 20 years time?
I understand people say they saved interest but doesn't that factor in the time value of money too so that the actual saving of the interest cost is much lower than the actual saving in todays money? So doesn't it actually make sense to save/invest at least for the medium term and use that money to pay off the mortgage (if early payment is an absolute must)?
Or have I completely missed the point?
I know everyone has a different situation but am I wrong in thinking the following (as a generalisation):
You take out a mortgage today. This balance is the capital + interest over the entire term (as per the contract) divided by the number of month/payment frequency. So it is basically what you can afford today and is fixed, other than going up or down for interest rates.
The person/family pay that over 25-30 years usually. But as time goes on the mortgage becomes more affordable for the average person through increments s/he receives through their job. So as a cost it gets lower and lower over time.
So why would anyone want to pay off today when it is much more expensive to pay in todays money than it is in the value of money in 20 years time?
I understand people say they saved interest but doesn't that factor in the time value of money too so that the actual saving of the interest cost is much lower than the actual saving in todays money? So doesn't it actually make sense to save/invest at least for the medium term and use that money to pay off the mortgage (if early payment is an absolute must)?
Or have I completely missed the point?
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Comments
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What are you going to invest in that's guaranteed to give you a better return than your mortgage interest saving?
Is it risk free?
I'm going to be mortgage free before I'm 45. We'll own a £350k property with no debt on it.
I would never have saved that up in the same time period. With three children and family commitments, it just wouldn't have happened. Once it's all paid off, I'll be saving £20k a year on top of that."One day I realised that when you are lying in your grave, it's no good saying, "I was too shy, too frightened."
Because by then you've blown your chances. That's it."0 -
It doesn't need to be risky investments or any investments at all. It could be savings, ISA's and maxing out pensions with the last two being much more tax efficient than mortgage interest.
I'm confused regarding your point of owning a 350k property. How would you not own that very same property if you let the mortgage run it's course?This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0 -
Why would I want to "max out" my pension?!
I won't see that money for 30 years! In the meantime, I'm paying a fortune on my mortgage interest.
Not sure why you're confused about my situation? If I have a mortgage, I don't own my property!
As it is, I will own it outright before I'm 45. And then I can live there mortgage free for the rest of my life. That's down to the fact that I'd overpaid.
If I then lose my job or anything else, who cares? That house is mine to do whatever I wish with. If I had a mortgage and lost my job or got ill etc, I could well be stuffed!"One day I realised that when you are lying in your grave, it's no good saying, "I was too shy, too frightened."
Because by then you've blown your chances. That's it."0 -
basically if the interest on your mortgage is higher than the return you get from your savings / investments then pay off the mortgage
otherwise keep the saving/investments
always assuming you have sufficient ready cash available so you never need to borrow (i.e. car etc)0 -
Why would I want to "max out" my pension?!
I won't see that money for 30 years! In the meantime, I'm paying a fortune on my mortgage interest.
Not sure why you're confused about my situation? If I have a mortgage, I don't own my property!
As it is, I will own it outright before I'm 45. And then I can live there mortgage free for the rest of my life. That's down to the fact that I'd overpaid.
If I then lose my job or anything else, who cares? That house is mine to do whatever I wish with. If I had a mortgage and lost my job or got ill etc, I could well be stuffed!
I genuinely don't get this.
How are you paying a 'fortune' in interest? You are paying time value of money + the interest charge. You obviously can afford this as you have the mortgage now. In 10 years you will be able to afford this even more easily because the payment to make monthly would have eroded further by the time value of money. On the other hand your overall lifetime wealth would actually increase if you take advantage of tax efficient methods such as ISAs and pensions.
On the other hand your other variables seem completely arbitrary (to me at least). Why would you take out a mortgage if you weren't sure of your ability to be able to secure employment in the long term?
Sorry but I am genuinely intrigued.This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0 -
basically if the interest on your mortgage is higher than the return you get from your savings / investments then pay off the mortgage
otherwise keep the saving/investments
always assuming you have sufficient ready cash available so you never need to borrow (i.e. car etc)
So unless a person is actually going to need the cash within the term of the mortgage, s/he should always max out ISAs and pensions at the minimum as the tax benefits of these should for most people outweigh the cost of borrowing on a mortgage? (I'm being really simplistic here and ignoring the many other investments that a person could make)This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0 -
[QUOTE=Walcott;64691639Why would you take out a mortgage if you weren't sure of your ability to be able to secure employment in the long term?
[/QUOTE]
Seriously? The average Mortgage is 25 Years, could you realistically say you'll be continuously employed in that time? a lot can happen in 25 years, a world crash for example which saw a lot of people from all sectors loose their jobs.0 -
2poor4this wrote: »Seriously? The average Mortgage is 25 Years, could you realistically say you'll be continuously employed in that time? a lot can happen in 25 years, a world crash for example which saw a lot of people from all sectors loose their jobs.
Yes, seriously.
I am trying to understand the concept in general and not really work towards extremes that most probably won't happen to the majority of the population.This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com0 -
So unless a person is actually going to need the cash within the term of the mortgage, s/he should always max out ISAs and pensions at the minimum as the tax benefits of these should for most people outweigh the cost of borrowing on a mortgage? (I'm being really simplistic here and ignoring the many other investments that a person could make)
In general the interest rate on mortgages is higher than the interest rate on savings (net of your tax rate)
when it comes to investments, whether in a pension rapper or not is harder to calculate as you need to guess the future0 -
Currently interest rates are low, why would you not try to pay/overpay your mortgage off now as the future might see interest rates at a level where you can no longer afford the repayments.0
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