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

2poor4this

SO far in this thread you've said you will never be out of work and will always earn enough to pay the repayments, you also know how much interest rates will be because you will always have borrowed accordingly to allow you to make the repayments.
You could be very rich indeed with all this certainty in your life.

lisyloo

Whilst I think you are right that most people have more money when they are older you also need to appreicate that

5% mortgage is
EXACTLY the same as
5% NET savings/investment interest (NET = after tax and charges)

Whilst you are right that it would be more affordable when older, you still need to do the best for your money NOW.
Mostly banks charge more for borrowing than they pay savers (this is obvious as they have costs and want to make some profit).
So in general you cannot save for more than you can pay off debt.

You can invest but that's gamble and most people don't want to gamble with the roof over their head. If you are what I'd call a "sophisticated" investor then you might want to do so, but most unsophisticated investors (ordinary folk) wouldn't want to speculate.

Whilst most of us would hope for good health/full employment, there is always the chance you might die, be in an accident, suffer poor health or a collapse in demand for your skills.

On the other hand you might get to 45 and think it's be great to run a business and wouldn't it be fantastic if your mortgage was paid off and you had the option to do so. I guess if you had the money elsewhere you could do so, but as long as it wasn't tied up.

Also note that many people will move up the property ladder so whilst the SAME mortgage would be more affordable, people tend to buy a bigger house for their increasing family and so it's not necessarily so.

However mathematically I would say this is main point

5% mortgage is
EXACTLY the same as
5% NET savings/investment interest

BTW - I took out an endowment policy in 1991. We were quoted on paper for 6%, 9% and 12% and told that real returns were closer to 22%.
Guess what - about 3 million people found they didn't live up to expectations.
Some like me claimed mis-selling and got their money back.
Our first interest rate was 10.5% and we would have been better off paying off the mortgage. The compensation put us back into that position as if we had paid off the mortgage.

gallygirl

Also don't forget that most people remortgage at some stage, whether to move or just get a better deal. If you've been OPing you'll have a better LTV and a lower interest rate.

Personally we have a 1.49% mortgage rate :j. I talk about OPing it but what I'm actually doing is sticking money into 5% and 6% savings/current accounts and topping up my Santa123 account. I 'offset' the savings against the mortgage on spreadsheets so I see the balance dropping.

What no-one has suggested (where is James!) is that financially it's best to pay into a pension and build up a big lump sum to pay off an interest only mortgage, then you're getting the benefit of 20 or 40% tax relief on payments. However, that would have been too high risk for me. I'm happy with what I'm doing .

CLAPTON

gallygirl wrote: »

Also don't forget that most people remortgage at some stage, whether to move or just get a better deal. If you've been OPing you'll have a better LTV and a lower interest rate.

Personally we have a 1.49% mortgage rate :j. I talk about OPing it but what I'm actually doing is sticking money into 5% and 6% savings/current accounts and topping up my Santa123 account. I 'offset' the savings against the mortgage on spreadsheets so I see the balance dropping.

What no-one has suggested (where is James!) is that financially it's best to pay into a pension and build up a big lump sum to pay off an interest only mortgage, then you're getting the benefit of 20 or 40% tax relief on payments. However, that would have been too high risk for me. I'm happy with what I'm doing .

the pension idea has potential as long as you realise that you can only get 25% of the pot in cash and you have to wait until 55 to do it ; but of course you get the tax benefit.

nearlyrich

We paid ours off because we wanted to be secure in our home whatever happens, we didn't skimp on good stuff like holidays etc and we also paid into savings and pensions. We never had a really low rate and we moved it around to save money on interest, my "mortgage money" is paying for my ISA so I can retire at 55 on a reasonable amount of money..

bristol_pilot

For me, paying down my mortgage gives me a higher rate of return than any other risk-free savings or investment vehicle available (especially for a higher-rate taxpayer). Higher investment returns are obtainable by taking risks but I do not want to take any more risk than I need to regarding the roof over my head! Mortgaging myself to the hilt and investing the lot in the stock market potentially could provide excellent returns but the risk is too great - this is what the endowment mortgages sold in the 1980s effectively were and there are now many chickens coming home to roost.

Paying into a pension to build up a big lump sum to pay off an interest only mortgage is vulnerable to the government changing the rules (pension rules seem to change every 5 minutes) and taxing or abolishing the pension commencement lump sum. Not that long ago it was a good idea to save up a large lump sum in a S&S ISA then pay it into a pension all in one go - those who attempted to follow that path came unstuck when the government suddenly limited annual pension contributions.

I am now about to pay off my mortgage and it has had an enormous emotional effect on my life. Not having any housing costs, I am no longer afraid of losing my job, I work because I want to not because I have to etc etc - it's great

richyg

I think the time value of money is irrelevant or rather the same in both cases of mortgage or saving.

As you say a fixed mortgage payment of £1000 would have its pain effect reduced by the time value of money. (ie the real £1000 in 25 years is reduced by inflation) Salary increases may or may not occur.

However the same £1000 invested over 25 years would similarly have its value reduced by the time value of money (inflation also). - and be worth less in future ie return - inflation = real return



I think the net effect is the same and that it simply boils down to

Comparative rates of interest / investment returns between saving / mortgage.

The tax free aspects of ISA's come into play if eg after paying off the mortgage you have savings each year too large to Tax shelter but most are not in that situation.

I think its you pays your money and takes your choice. Bear in mind that interest rates on mortgages are at all all time low

I don't regret paying my mortgage off at 42 as it gives some comfort that even if my riskier investments go sour at least the house should be ok.

lisyloo

What no-one has suggested (where is James!) is that financially it's best to pay into a pension and build up a big lump sum to pay off an interest only mortgage

It has some merit, but as clapton says you have to wait until you are 55.
What if you have the money 10 years earlier?
It's not clear to me whether an extra 10 years interest would ofset the 25% gain.
I guess it comes down to the maths but I'm not sure it's a "no brainer" give the age limit (and of course the fact the government could change the 25% tax free rule).

marathonic

bristol_pilot wrote: »

I am now about to pay off my mortgage and it has had an enormous emotional effect on my life. Not having any housing costs, I am no longer afraid of losing my job, I work because I want to not because I have to etc etc - it's great

Housing costs only represent 25-30% of most peoples expenditure - probably lower if you only consider the mortgage.

I don't think there's many in a position to say that, if they reduce their expenditure by 25%, they will no longer be afraid of losing their job. They can't exactly sell a few bricks or tiles to pay for the weekly shopping or the electricity bill.

My own house, which I've been in for a bit over a year, is currently mortgaged at 50% LTV. When it comes to time to remortgage (my current deal ends this year), I'm going to try to bump that up to 75% and invest the proceeds. A 75% LTV mortgage still puts me well within the banks affordability criteria. I have no desire whatsoever to pay my mortgage of early.

System

Time value of money is indeed irrelevant overall if you borrow and save at the same rate. There are two reasons I mention this however:

1) If you can save/invest at at least the rate of borrowing then you have greater flexibility. E.g. I can be more liquid or I can chose to pay down on the mortgage or both. My reason for mentioning it was to seek guidance on my understanding beyond the very basic arguments such as - I paid down a quid today and saved hundreds on my mortgage (no.s completely made up to illustrate)

2) Time value of money is fundamental to the exposure of risk of default. Assuming stable employment, the risk of default does decrease with increments throughout a persons career.