Can someone please explain to me why people pay off their mortgage early?

richyg

Wotsthat,

Your probably right. If you duck and dive a bit 0% here and there for 25 years with 20K you are probably right,


But

1. Don't go over the cliff with everyone else in the dot com boom of 2001
2. Dont get made redundant out of internet/ tech companies 2002
3. Dont get caught up in the 2001-2003 recession and lose money or your job
4. Dont buy a house in 2008 to find it lose 40% in 2009
5. Don't buy high dividend yield index funds in favour 2007 (they were all banks yielding 6%-8% or more lovely)
6 Dont go 100% at the highest stock valuation bull market 2007.
6. Dont get caught in a 45% stock collapse (or 90% see point 5 above) 2008
7 Do buy stocks on 9th March 2009 with DJIA at 6000 the lowest point with blood on the floor with all the cash you have-mortgage your granny. You may never have this opportunity again but you might not recognise it on that day.
8) 10 March 2009 Fix your mortgage as low as possible for life if you can and throw all your money and credit card money as well at stocks as they will do well for 5 years
9) 2014-2032 If you can fill in the blanks please email me. Thanks

Best of luck

R.

jamesd

gadgetmind wrote: »

For basic rates tax payers, having close to 10% of their annual pension income taken up in charges is *not* acceptable in my book.

That's a £10,000 pot, the sort of size that's bad value for annuities. Can't completely escape the small pot economics whatever you do, unless triviality is available.

wotsthat

richyg wrote: »

Wotsthat,

Your probably right. If you duck and dive a bit 0% here and there for 25 years with 20K you are probably right,


But

1. Don't go over the cliff with everyone else in the dot com boom of 2001
2. Dont get made redundant out of internet/ tech companies 2002
3. Dont get caught up in the 2001-2003 recession and lose money or your job
4. Dont buy a house in 2008 to find it lose 40% in 2009
5. Don't buy high dividend yield index funds in favour 2007 (they were all banks yielding 6%-8% or more lovely)
6 Dont go 100% at the highest stock valuation bull market 2007.
6. Dont get caught in a 45% stock collapse (or 90% see point 5 above) 2008
7 Do buy stocks on 9th March 2009 with DJIA at 6000 the lowest point with blood on the floor with all the cash you have-mortgage your granny. You may never have this opportunity again but you might not recognise it on that day.
8) 10 March 2009 Fix your mortgage as low as possible for life if you can and throw all your money and credit card money as well at stocks as they will do well for 5 years
9) 2014-2032 If you can fill in the blanks please email me. Thanks

Best of luck

R.

If you've got £100/ month spare and are considering overpaying the mortgage that has very little to do with the dot com boom and a house can fall in value whether you're paying the mortgage off or not etc.

The other way is to play it safe. Since the end of the flexclusive ISA it's become difficult to beat mortgage rates on deposit. Therefore, if you have an offset mortgage, you overpay the mortgage AND put all of your cash saving in there too.

Ref 2014 - 2032 - there will come a point when that offset cash will be able to achieve a better return than the mortgage rate. Of course each year that passes is an opportunity to become a higher rate taxpayer and also a year closer to retirement so filtering that offset pot (with guaranteed 40% tax relief) into a pension starts to look ever more attractive.

Absolute worse case if you won't take any risk - you've another opportunity to maximise tax free savings on top of ISA allowances. That's guaranteed whether prices rise / fall or there's a stock market crash or not.

I can see the dilemma because being mortgage free must feel so good but my priority is to maximise retirement income - having a mortgage debt helps to achieve that. I could've cleared my mortgage years ago but it would've damaged my retirement plans.

It was a lightbulb moment when I first 'got it' and has been much helped by the posts of jamesd and Loughton Monkey. It's worth reading up just in case I've expressed it badly before thinking that making overpayments is a good thing to do with spare cash.

CLAPTON

stardoman wrote: »

I think it might be different in terms of benefits you would be entitled to if you were made redundant or became too ill to work. Whereas you might think you can cash in all your savings and pay off your mortgage, the benefits assessors may have other ideas. They will assess you as having more than £16k in savings and so not eligible. So you need to save enough to not only cover the mortgage but also to cover you living expenses if you have a spell of not working.

Had you just paid down you debt - well you had no savings to start with.

yes that is a factor worth considering: it's not all clear cut
however if unemployment strikes you don't have to clear the mortgage, but simply have enough to pay the mortgage monthly payments and your other expenses which you surely would have.

bigadaj

wotsthat wrote: »

The aim is to achieve a better return on savings than that being paid on the mortgage. Whether that mortgage is small or large doesn't matter.

Yes but the post I quoteds main point was the 40% tax relief! which wouldn't be applicable in my perfectly reasonable scenario.

Thrugelmir

marathonic wrote: »

However, I would still expect investing over paying down a mortgage to be the most profitable approach - especially if done within a pension wrapper.

Let's continue to monitor developments. As we are still in unusual times. Too easy to believe that now is normal.

wotsthat

bigadaj wrote: »

Yes but the post I quoteds main point was the 40% tax relief! which wouldn't be applicable in my perfectly reasonable scenario.

So take 20% tax relief instead?

Some might say what's the point - 20% in and 20% out but there is 0% tax relief for paying off the mortgage and no entitlement to a 25% tax free lump sum.

Choice 1 - earn £100, pay £20 tax, and put the remaining £80 in the mortgage saving about £3.2 in interest per year.

Choice 2 - put that £80 post tax income in a pension which immediately grosses up, even at basic rate relief, to £100 so you're already £16.80 up. You can then get £25 as a tax free lump sum and take an income from the remaining £75 paying basic rate tax.

The difference between the two choices is staggering and not only are you up nominally when you do come to pay tax on the income from your pension pot it's only on 75% of the initial earned income because you've taken a tax free lump sum.

lisyloo

I've been able to beat my mortgage rate on deposit for years. Zero risk up to the government guarantee on savings.

Yes - me too.
Well done - have a gold star :-)

However the ultra low mortgage rates we've seen in the past few years have been a fluke and a mistake by the the banks.
You and I are absolutely right ot take advantage of it, but in general banks do not deliberately pay people more for saving than they do for borrowing.
I've made thousands out of it, but if everyone did this the banks would make a loss and be out of business.

Thrugelmir

wotsthat wrote: »

Choice 2 - put that £80 post tax income in a pension which immediately grosses up, even at basic rate relief, to £100 so you're already £16.80 up. You can then get £25 as a tax free lump sum and take an income from the remaining £75 paying basic rate tax.

And if your investment portfolio had of contained RBS, Bradford & Bingley, Lloyds, HBOS, Northern Rock what then? Over simplification is very easy. The first rule of investing money is not to lose any. As once you do it makes recovering capital far harder.

wotsthat

lisyloo wrote: »

Yes - me too.
Well done - have a gold star :-)

However the ultra low mortgage rates we've seen in the past few years have been a fluke and a mistake by the the banks.
You and I are absolutely right ot take advantage of it, but in general banks do not deliberately pay people more for saving than they do for borrowing.
I've made thousands out of it, but if everyone did this the banks would make a loss and be out of business.

I'm glad not everyone takes advantage - it leaves enough 'free' money for those that do.

The point I'm making is once the mortgage has been repaid its just that bit more difficult to take advantage of those 'flukes'.

Thanks for the gold star.