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

CLAPTON

G_M wrote: »

Certainly the interest rate being charged by the lender Vs the return you can get elsewhere is a significant factor in any sensible decision.

Personally, however, I believe avoiding or paying off debt is generally a good policy (be the debt a mortgage or other loan).

I over paid on my mortgage as much as I could almost from the start (admittedly interest rates were 7-8% then), and got rid of it in around 12 years.

Around that time I was made redundant and was unemployed for a year or so. I thank god my home was mine and paid off. More recently (but still within the original 25 year term) I've become sick, been forced to take early retirement due to ill health and, again, it's a huge relief not to have money worries

how would that be different if you had a savings equal to your mortgage or maybe S&S 2 or 3 times your mortgage after 12 years?

jimjames

Walcott wrote: »

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?

I'm investing not overpaying. Now have more than enough invested to pay off mortgage if I wanted but still have 12 years to go. For me anyway it has been the right way to go.

gallygirl

CLAPTON wrote: »

how would that be different if you had a savings equal to your mortgage or maybe S&S 2 or 3 times your mortgage after 12 years?

Having the savings is the same as OPing, except difficult to find savings rates the same as or better than mortgage rates (we have 2 x 300 reg savers at 6% and 3 x 2.5k NWide accounts but that only accounts for a very small part of the mortgage. And when the reg savers mature what do you do with them?)

What if the S&S is not worth 2 or 3 times or even equal to the mortgage? What if needing the money coincides with another downturn and the value has plummeted? You can mitigate risk by moving to safer investments nearer the time you KNOW you'll need the money but what if it's unexpected? To quote Mr Rumsden, it's the unknown unknowns that put me off doing this as a strategy.

flynnf

hello. im am probably wrong int his response so please feel free to let me know, but if for example you earn a 1000 per month today and as it is at minute inflation is greater than wage increase the cost of living is going up so it will take more to buy the same. where will the extra money come from in later years to pay off the mortage, is it not wiser to pay it off as early as you can. like i said feel free to correct me if im wrong

115K

mrcow wrote: »

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!

G_M wrote: »

Around that time I was made redundant and was unemployed for a year or so. I thank god my home was mine and paid off. More recently (but still within the original 25 year term) I've become sick, been forced to take early retirement due to ill health and, again, it's a huge relief not to have money worries

I feel the same.

I am saving at the moment as my husband's health isn't good but we will be overpaying the mortgage when we have built up a buffer of savings. I think it is a psychological feeling of safety from being mortgage free and I can understand why people take that route.

System

I agree with Walcott, to a point.

From a cold hard point of view of figures, if you invest your spare money, over 25 years you are very likely to outstrip the interest saved on a mortgage.

However, life is not as simple as this.

Firstly is that emotional satisfaction of seeing your debt shrink.

Secondly, what if you did lose your job and cannot afford your repayments? You have your investments, but say the market has crashed. You then need to cash some in at a significant loss.

Or if you wanted to buy a bigger house, you may also need to crystallise investments, potentially at a loss.

If you could guarantee that you would not need to touch any of your investments for at least 25 years, then it would be sensible to invest only. However, you cannot.

Therefore a combination of the two is the best option (personally I have an offset mortgage so I can get at the cash, should the worst happen. Otherwise you would need some cash savings).

lisyloo

If you can save/invest at at least the rate of borrowing then you have greater flexibility

You are absolutely correct.
I'm in the great position of having a 0.99% mortgage so I am doing exactly what you suggest and NOT paying it off.
However this is a complete fluke.
It's not normal at all for banks to pay people more to save that to borrow.
They are giving me money.
Why would they intentionally do that?
It's a gamble that they lost when they gave BOE+0.49% trackers.
But - it's not normal.
The normal situation is banks charge more to borrow than to save,
Thtat way they cover their costs and make a profit.

It is obviously assumed that employment will be stable when the bank lends.

Not quite sure how old you are (you sound young), but this isn't the no brainer you seem to assume it is - certainly not in this climate.
My OH & I and both graduates both worked all our lives and been relatively successful.
My IT work is conntinually under threat from outsourcing.
My company continually makes UK staff redundanct because it's cheaper to get IT done in places like India.
Many of my collegues and myself are continually facing rounds of redundancy.
Should I have forseen this? Well I started working 23 years ago and I don't think I could have forseen it to be honest in the same way that plumbers many decades ago could not have foreseen the influx of immigrants from Eastern Europe.

My DH has done much better than me in career terms and progressed to higher management. He's 47 years of age.
Despite being successful and good at his job he's just spent a YEAR - yes 12 months, looking for work.
He's tried really hard, netowrked with all his contacts and considered long commutes and bit paycuts (and I mean big), so he's done everything he could to find a job.
In the end he's taken a much lower skilled job with a very long commute.

I'm not asking for a medal or symapthy, I'm just trying to point out to you that the assumption that you'll have a job for life if you are skilled and hard working just is not true anymore.

Luckily we have enough to pay off our mortgage.
It's not physically paid off but it's earmarked and that is a massive relief.

CLAPTON

gallygirl wrote: »

Having the savings is the same as OPing, except difficult to find savings rates the same as or better than mortgage rates (we have 2 x 300 reg savers at 6% and 3 x 2.5k NWide accounts but that only accounts for a very small part of the mortgage. And when the reg savers mature what do you do with them?)

What if the S&S is not worth 2 or 3 times or even equal to the mortgage? What if needing the money coincides with another downturn and the value has plummeted? You can mitigate risk by moving to safer investments nearer the time you KNOW you'll need the money but what if it's unexpected? To quote Mr Rumsden, it's the unknown unknowns that put me off doing this as a strategy.

that's clearly true


it's just that one needs to be clear on why one is pursuing a particular policy rather than the rather silly 'debt is bad' per se argument

lisyloo

over 25 years you are very likely to outstrip the interest saved on a mortgage.

Many people tried with endowments and failed (about 3 million I think).
These were inflexible and high cost products.

So it's certainly not a no brainer.

Perhaps people who are savvy enough to use hargreaves landsdown and manage their own porfolio might be ok, but the average Joe might get ripped off by the finance industry and we've seen many times.

Many of you on here are savvy people.
Most ordinary folk are not sophisticated investors.

Most ordinary folk would get sold PPI or something useless and end up paying for stuff we don't need.

We've had the endowment scandal, bank charges, PPI etc.
I'm sorry but I just don't believe most of the population could acheive what you suggest.

robrooo

I started to overpay my mortgage when the credit crunch hit, when I started to wonder how long I could continue to earn a salary that would pay it off and give me a decent standard of living. As soon as my overpayment fund matched the outstanding mortgage I paid it off. That fact that there were no decent returns on savings (without high risk or long term lock in) made the decision easier. I now feel more secure, I don't feel like a wage slave and I am looking into doing more meaningful work since I can now live on a lower income. My overall outlook has become a lot more optimistic. While I am still earning my "surplus" income, I have increased my pension payments to max out my employer's contribution, and I am building up a separate long-term fund, as well as being able to support some causes that are important to me.