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

115K

wotsthat wrote: »

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.

Without overtime my DH earns about £46,000 before tax so he should increase his pension contribution instead of us overpaying the mortgage and saving?

He works for London Underground and has a decent pension so should he ask them to increase his contributions or we should open a private pension and put the extra money in there so his salary is just taxed at 20%?

(I'm not sure if that makes sense but that is what I think people are saying about overpayments not being the best way forward so can someone say if that is right lol?)

atush

i wouls ay yes, he should pay more into a pension to receive HRtax releif. but how much is he currently paying in? This needs to be taken into acct ie is the 46K gross pay or net of current pension? At 46K you only have approx 4K to get HRTax rel on.

As for the PP and AVC debate, that will most likely depend on the scheme riles and normal retirement age. Saving into a PP or outside a pension can help you retire early, whereas the AVC can give you more bang for the buck as you get NICs relief too.

115K

I have his most recent tax slip in front of me, £47,000 is gross pay and nearly £46,000 is net taxable gross.

He pays nearly £200 a month into a pension at the moment.

wotsthat

115K wrote: »

Without overtime my DH earns about £46,000 before tax so he should increase his pension contribution instead of us overpaying the mortgage and saving?

He works for London Underground and has a decent pension so should he ask them to increase his contributions or we should open a private pension and put the extra money in there so his salary is just taxed at 20%?

(I'm not sure if that makes sense but that is what I think people are saying about overpayments not being the best way forward so can someone say if that is right lol?)

I'd say yes but obviously that's my opinion rather than advice.

As a minimum I'd ensure that I was paying the minimum amount into a pension to ensure I became a standard rate taxpayer even if that meant not overpaying the mortgage. It's not so clear cut what to do with any surplus after that - it depends how important getting rid of the mortgage is to you vs getting wealthier.

You need to remember that the earliest you'll see the money back from a pension is 55 and there's an investment risk although the tax relief does give you a head start.

Thrugelmir

wotsthat wrote: »

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.

On a 25 year mortgage term with the mortgage of a £100k at 5% and an investment return of 7% net of fees. I calculate the benefit to be less than £9k in favour of the pension. The mortgage owner however reaps the benefit of lower LTV and having no requirement to pay product fees to switch mortgages let the alone the cost of remortgaging to another lender. The mortgage owner repays their mortgage after 20 years and therefore can contribute some £50k to their pension pot over remaning 5 year term.

I also think it's generous to allow for 5% mortgage rates. As that's nearer the realistic level of BOE base. So on a borrowing rate of 7% to 8% the investments would have to perform extremely well after all costs. Some might individually but unlikely in collective funds.

wotsthat

Thrugelmir wrote: »

On a 25 year mortgage term with the mortgage of a £100k at 5% and an investment return of 7% net of fees. I calculate the benefit to be less than £9k in favour of the pension. The mortgage owner however reaps the benefit of lower LTV and having no requirement to pay product fees to switch mortgages let the alone the cost of remortgaging to another lender. The mortgage owner repays their mortgage after 20 years and therefore can contribute some £50k to their pension pot over remaning 5 year term.

I also think it's generous to allow for 5% mortgage rates. As that's nearer the realistic level of BOE base. So on a borrowing rate of 7% to 8% the investments would have to perform extremely well after all costs. Some might individually but unlikely in collective funds.

So £9k for little risk and effort and you've, conveniently, ignored the tax benefits too. Also 8% returns when the BoE rate is 5% probably won't be as difficult to achieve as 7% returns when they're 0.5%.

I'm within 10 years of a planned early retirement and paying higher rate tax and have long fixed mortgage rates. I'd be a mug to allow for your 'normal' BoE base rate of 5% but thanks for trying to keep my lenders profits up.

I'd caution against the very idea you propose that it's better to pay off the mortgage and then divert the overpayments to pension savings once it's paid off.

lisyloo

I'm glad not everyone takes advantage

For most it was a complete fluke.

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

I don't get that at all.
If you're very credit worthy, why would find it difficult to take advantage.

In fact I've just made an investment (solar PV in fact but that doesn't matter).
The fact is I was only able to make that long term investment because I had the cash.

Surely having cash and a great credit rating make you more able to take advantage. There's nothing to say you can't borrow even if you don't need to.

I'm sorry I don't get that point at all.

Thrugelmir

wotsthat wrote: »

So £9k for little risk and effort and you've, conveniently, ignored the tax benefits too.

Little risk? Over 25 years the risks aren't quantifiable.

Perhaps you should ask yourself if it was that good. Why weren't people doing this 40 years ago? As nothing new. Just new kids on the block believing the Holy Grail has been found.

wotsthat

lisyloo wrote: »

For most it was a complete fluke.

Maybe, however not for you and I. We saw the opportunity and not only drifted with it but milked it for everything it was worth.

You may as well say getting free banking is a fluke.

lisyloo wrote: »

If you're very credit worthy, why would find it difficult to take advantage.

In fact I've just made an investment (solar PV in fact but that doesn't matter).
The fact is I was only able to make that long term investment because I had the cash.

Surely having cash and a great credit rating make you more able to take advantage. There's nothing to say you can't borrow even if you don't need to.

I'm sorry I don't get that point at all.

If you've paid £100 off the mortgage that's £100 cash you couldn't invest in solar PV. Even if you just kept savings in an offset you could retrieve it at the click of a mouse. Who would have thought solar PV would come along, or 0% fee free credit cards, or rock bottom mortgage rates? The thing is these investments will always come along and offsetting allows quick and easy access.

Obviously I accept if someone opts to stick the money in a pension it's even more inaccessible than paying off the mortgage.

planteria

it's an interesting debate, and there is no 'right' answer for everyone.

i certainly think that investing alongside repaying debt makes sense, if it can be comfortably afforded. mortgage interest is very very significant over a 25 year period, even in our current low-rate environment.

it's all down to the numbers at any one time. as a Priority List, i currently favour investing in a S&S ISA, Pension Contribution, Other Investments, then Debt Reduction: both Credit Card and Mortgage.

Cash Savings don't really feature for me, at the current low rates, other than that I am using Regular Savers to raise some chunks to pay off 0% card debts. at the moment, any spare cash has to be better used by investing/paying down debt than leaving in cash earning very little.