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

CLAPTON

robrooo wrote: »

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.

yes
if the return on savings is less than the cost of the mortgage then an excellent tactic


saving for the future makes sense too.

dzug1

lisyloo wrote: »

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

Inflexible yes but high cost???


The problem with them is that they were too low cost and failed to invest enough to cover the mortgage sufficiently robustly

lisyloo

Inflexible yes but high cost???

There were high charges yes and I don't mean the seperate life insurance element, I mean the charges taken off the funds back in the 90s.

Regardless of the exact details, do you agree that it's glib to say that the great unwashed can simply invest and get a higher return than they can save?

Most people I know - let's say your average soldier or lorry driver, would not have a clue about investing and would have to rely on an advisor. I've given several example of where that's gone wrong the recent past.

In general I think most people (incuding lenders) now view repayment mortgages as more sensible than I/O plus investment.
If you are a savvy sophisticated investor then this may be different.

Do you agree with this point in the main, regardless of the picky details?

CLAPTON

lisyloo wrote: »

There were high charges yes and I don't mean the seperate life insurance element, I mean the charges taken off the funds back in the 90s.

Regardless of the exact details, do you agree that it's glib to say that the great unwashed can simply invest and get a higher return than they can save?

Most people I know - let's say your average soldier or lorry driver, would not have a clue about investing and would have to rely on an advisor. I've given several example of where that's gone wrong the recent past.

In general I think most people (incuding lenders) now view repayment mortgages as more sensible than I/O plus investment.
If you are a savvy sophisticated investor then this may be different.

Do you agree with this point in the main, regardless of the picky details?

do you apply this logic to pensions?
would you suggest people only hold cash and not S&Ss ?

BillJones

Walcott wrote: »

Look, I get this is an emotive issue for some...

I don't think that it's emotive, I think that people are getting exasperated that you seem to be getting your numbers a bit confused.

You are implying that you'll be financially better off by putting your money into savings instead of paying off your mortgage. Because, in general, you receive less for savings than you are charged on your mortgage, this is simply wrong, and you'll end up wealther at the enf of the original term if you pay down soon, and then only invest later, once the debt is cleared.

You also seem to be mixing together personal vaue function of money, security, optionality etc. with actual expected returns, which is making it hard for you to present your case clearly.

So why would anyone want to pay off today when it is much more expensive to pay in todays money than it is in the value of money in 20 years time?

This bit suggests that you are confusing yourself with your maths. You seem to believe that you'll have more pounds in your savings account at the end of the original term by investing it in a savings account rather than by paying off your mortgage. I think that you need to go back over your numbers, as (assuming savings rates, net of tax, are lower than mortgage rates) the opposite is true.

BillJones

marathonic wrote: »

Of course, you're always going to get the traditional people who think that overpaying your mortgage is the absolute best thing you can do with your spare money. Whilst this is better than frittering it away, it's HIGHLY unlikely to turn out to have been the best course of action.

Which is why all the other rates traders here at work have paid off their mortgages as soon as they could?..

Strange, it's almost like your runimations must have missed some really important points.

lisyloo

do you apply this logic to pensions?

Mostly no.
Investing for retirement is not the same as the roof over your head.
If you don't meet the target of X% then you get a slightly worse pension, you don't fail to purchase your house.
The timescale is also generally longer which makes a difference too.

However I'm sure you know that a pension is merely a wrapper and doesn't automatically mean equities. It can mean cash, bonds, property etc.

would you suggest people only hold cash and not S&Ss ?

No.
My personal view is that paying the roof over your head is done best with repayment for your average unsophisticated investor.
If you have spare money that you can afford to loose that is not paying for the roof over your head then S&S is fine.

There is of course plenty of scope for individual with different attitudes to risk etc. I am talking about the average unsophisticated investor broad brush here.

PeacefulWaters

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

To reduce the amount of interest they pay.

To free up funds to save / invest / spend elsewhere once the mortgage has gone.

To remove a psycological monkey off their back.

I've deliberately kept my mortgage going due to a very lucky low rate of interest. But if I was paying 2.5% or more I'd probably pay down the debt.

jamesd

flynnf wrote: »

hello. im am probably wrong int his response so please feel free to let me know

You're completely wrong. You give a correct situation but come to the opposite conclusion from the correct one.

flynnf wrote: »

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

What sort of mortgage do you have where the amount you owe goes up with inflation?

The mortgage amount owed stays the same in money terms. It doesn't increase with inflation or cost of living.

Wages historically increase at about RPI inflation plus 1%. Not for all years, but that's the long term average. What this means is that if you just pay nothing off the mortgage capital, wage inflation makes it easier to repay it later than doing it today.

jamesd

gallygirl wrote: »

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.

I see that marathonic was kind enough to do the deed in my absence.

gallygirl wrote: »

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.

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 .

You've given three entirely proper things to consider:

1. Lower LTV. If this gets you a lower interest rate, that's on the whole amount borrowed. You could end up overpaying £10,000 to save 0.5% on a £200,000 mortgage. That 0.5% on £200,000 is a 10% return on the £10,000 "invested" in overpaying! And it's guaranteed.

2. Risk tolerance matters. Some people just won't want to take the ups and downs of investing. Or maybe not for all of it. It doesn't have to be 100% of anything, you can do some pension, some S&S ISA and some overpaying if you like.

3. Using the savings to offset the mortgage is what I do. Some people won't like it but I like the view it gives of progress towards meeting goals. Those who might be on means tested benefits need to be aware that the savings would end up disqualifying them for benefits, while overpayments into a flexible mortgage wouldn't, because the lower mortgage balance isn't part of the benefits means tests.

My pension 25% lump sum value is currently around 72% of my mortgage amount owed, with some 15 or so years to go until I have to pay off the mortgage. I have about twice the mortgage balance in non-pension savings and investments at the moment, after deducting the value of all unsecured debt (which I have deliberately for stoozing).

I value knowing that I can pay all of my bills indefinitely more than I value having the mortgage gone. Getting to that point was one of my highest financial priorities. No mortgage then being forced to sell to pay the bills wouldn't be a good trade.