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

wotsthat

Thrugelmir wrote: »

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.

If you're worried about risk, high interest rates, investment returns, tax free pension lump sums etc etc then leave it until nearer to retirement so you're looking at 5-10 years in the future rather than 25 to remove some uncertainty. Or if it's all too scary just overpay the mortgage, pay it off early and then just up the pension payments. Takes away some risks but, then again, you've missed out on a couple of decades of investment growth - the FTSE total return has trounced mortgage payments over the last 25 years so just another risk to consider.

40 years ago the new kids were getting tax relief on their mortgage payments anyway.

gadgetmind

wotsthat wrote: »

the FTSE total return has trounced mortgage payments over the last 25 years so just another risk to consider.

True, but for many of those years, it was hard to invest without 5% bid offer spread and 2% pa in fees.

And what the TR has done counts for little as it's backwards looking and a single territory. I'm sure people in Japan would have a different view of the best approach.

I'm a bit of an equity/investment hound, but I paid off my first mortgage after six years. I then took a small additional mortgage when doing some serious upsizing, but also paid this one off over an aggressive timescale.

Would I have done better investing the money instead? Yes, though it would have been a rough ride at times (understatement!).

Am I glad that I did what I did? Yes, yes, and thrice yes. I like to sleep soundly at night and heavy-duty gearing isn't conducive to this.

planteria

you have done brilliantly gadgetmind.

getting the mortgage payments out of the way and being able to allocate those monthly funds to investments has to have an appeal if it can be afforded.

'Jim Slater: How to be a Millionaire' is pretty much about this topic. he advocates investing Ahead of debt reduction.

gallygirl

planteria wrote: »

'Jim Slater: How to be a Millionaire' is pretty much about this topic. he advocates investing Ahead of debt reduction.

This would be the same Jim Slater who was a 'minus millionaire' for a few years? I know he's been incredibly successful in the long run but it shows how badly things can go wrong, even when you supposedly know what you're doing.

Thrugelmir

wotsthat wrote: »

the FTSE total return has trounced mortgage payments over the last 25 years so just another risk to consider.

The FTSE is a weighted index not an investmemt portfolio. To mirror the index would require constant portfolio churning. At huge expense.

planteria

gallygirl wrote: »

This would be the same Jim Slater who was a 'minus millionaire' for a few years? I know he's been incredibly successful in the long run but it shows how badly things can go wrong, even when you supposedly know what you're doing.

i dont know gallygirl. but i doubt he got into such a mess just by paying into his ISA before paying his mortgage;)

Thrugelmir

wotsthat wrote: »

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

Missed this earlier. In fact I didn't. My calculation was based on £80 being paid off the mortgage and £100 gross into the pension.

Just posted on another thread. So reminded me of something I did miss.

The pension contributions would suffer 0.5% stamp duty on the share purchases. So the actual monthly contribution invested would only be £95 not a £100. This shaves a further £2,000 off the pension performance. So reduces the benefit to under £7,000. Based on 5% interest rates and 7% compound return.

planteria

Thrugelmir wrote: »

The pension contributions would suffer 0.5% stamp duty on the share purchases. So the actual monthly contribution invested would only be £95 not a £100. This shaves a further £2,000 off the pension performance. So reduces the benefit to under £7,000. Based on 5% interest rates and 7% compound return.

that would 5%, rather than 0.5%?

Thrugelmir

planteria wrote: »

that would 5%, rather than 0.5%?

:beer: I have.

Edit.

Time passes and we forget the past. Appears my figures were incorrect all counts.

Taking the average mortgage SVR rate in December between 1997 and 2007 ( 11 years). The average SVR was 7.13%. With a peak of 9.25% in 1997. In December 2007 in the midst of the crash and pre intervention. Average SVR was 7.5% the highest point for 7 years.

So those believing that current rates are the norm in the longer term are in for a shock.

wotsthat

Thrugelmir wrote: »

The FTSE is a weighted index not an investmemt portfolio. To mirror the index would require constant portfolio churning. At huge expense.

I understand trackers are available to today's new kids on the block and they cost sod all.

Thrugelmir wrote: »

The pension contributions would suffer 0.5% stamp duty on the share purchases. So the actual monthly contribution invested would only be £95 not a £100.

...0.5% of £100 is not £5.

Thrugelmir wrote: »

Taking the average mortgage SVR rate in December between 1997 and 2007 ( 11 years). The average SVR was 7.13%. With a peak of 9.25% in 1997. In December 2007 in the midst of the crash and pre intervention. Average SVR was 7.5% the highest point for 7 years.

I never paid a lenders SVR until the 2009 crash preferring the security of a fix. A flavour of what I was paying - 2001 (4.55%), 2003 (4.49%), 2005 (4.49%), 2007 (4.95%). I'd have to go back to paper records for 1997 - 2001 but I think it's fair to assume it wasn't 9.25%. At the time these were standard fixes for high LTV with Halifax and then Nationwide so we're hardly talking about exotic finances here! Also worth noting that I always chose the higher rate product to get the lowest fee.

What's your experience? If you averaged more than 5.0% for your mortgage over the same period I'll eat my hat.

My decidedly unexciting person pension of the time (NU With Profits/ SW Mixed Fund/ SW Equity Fund) returned 7.48% pa during the same period. That return was achieved on contribution (mainly) getting 40% tax relief.

What's your experience? I bet you beat that.

Thrugelmir wrote: »

So those believing that current rates are the norm in the longer term are in for a shock.

Agreed but my meticulous records show that your 'scary' SVR data were easy to beat and that the most unsophisticated investment strategy with the poorest fund manager ever known to man were ahead of your SVR'S anyway.

Thrug, if you're about the same age as me (mid 40's) and your strategy was to pay off the mortgage in 20 years and then use the mortgage payment to fund a pension you've lost money - lots of it. Although I can see that if you've always been on your lenders SVR that overpayments would have a certain attraction.:)