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

jamesd

Walcott wrote: »

The person/family pay that over 25-30 years usually. But as time goes on the mortgage becomes more affordable for the average person through increments s/he receives through their job. So as a cost it gets lower and lower over time.


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?

Or have I completely missed the point?

You haven't missed the point but some people just find that having a mortgage makes them uneasy and they want it gone even if that's inefficient and makes them poorer long term, say by delaying pension contributions or forcing them to retire later to get the same retirement income. For those with low risk tolerance it's a price they are willing to pay, if they even realise they are paying it.

There's a very common failure of perception that's formally called exponential growth bias. It refers to people failing to appreciate the effect of compound growth over time, including failing to appreciate just how much of a difference even a small surplus of savings or investment growth over a mortgage term will have. Another variation on it is the mistaken belief that paying off the mortgage then investing the mortgage payment money will make up for not investing earlier, without realising that it's unlikely that this will be possible due to all of the years of missed compound growth on the investments - this failure is called future value bias.

There are many scholarly papers discussing this sort of thing but one that's perhaps worth a read to those unfamiliar with the subject is Exponential Growth Bias and Household Finance by Victor Stando and Jonathan Zinman.

Best to try to be understanding and try to educate those who show these biases but it's really hard because they are so thoroughly ingrained in how things are perceived.

Mortgage savings calculators don't help this because they magnify the misunderstanding by not adjusting the saved interest for inflation and not presenting an investment or savings alternative.

Note that the bias just refers to perception of things. If you fully understand the costs and benefits and just have a bais towards wanting the debt gone, that's a completely different thing. The behavioral economics issue is a failure to understand correctly, not undertanding then just preferring the other choice.

latecomer

We will pay ours off sooner rather than later (hopefully in 8 years time or earlier). We also have savings but little in investments so far. I'm working up to moving some of our cash ISAs into a S&S ISA but OH is more risk averse than me so I dont think we would ever put a large proportion of our worth into shares. I know this isn't necessarily the best course of action but its one we are comfortable with.

veryintrigued

Walcott wrote: »

Sorry but I am genuinely intrigued.

Are we related?!

On a serious note I paid mine off at 35.

Last few years have given me the flexibility to save and invest and look at other less tortuous careers.

Huge weight, debt and responsibility lifted.

bigadaj

The other thing that jamesd often raises is what sort of property do you want?

The logical thing to do is buy the cheapest property that suits your needs and then invest the rest, whereas most people's approach is to save a low depsoit and then take as large a mortgage as the lender will offer. Uk property prices obviously don't help and it's often a. Stretch for people to be able to afford any property but it's another element to throw into the mix.

nearlyrich

marathonic wrote: »

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.

Whilst you can't sell a few bricks it's a huge comfort to know that if you lose your job you don't have to rely on the job centre helping with the interest after 13 weeks or never if your partner has a job.
Horses for courses we all do what we feel is best and knowing the house is ours we can afford to invest in slightly riskier funds to grow the retirement pot.

atush

I can se the appeal of shortening your term, and pying less interest in 'normal' times. And I do overpay.

But I reduced the amt we overpay down to the reasons that our mtg is just over1%, and I can do better by investing, or paying for things i was investing for out of income instead of cashing in investments i already have (ie universtiy costs).

Basically, it is very easy to see the appeal of overpaying a mtg, but i would not do it instead of a pension, a cash emergency sum, or instead of investing.

It is somehting to do alongside of all of the above.

Thrugelmir

marathonic wrote: »

Assume a 25 year old obtaining a £250,000 mortgage over 30 years at 3%. They will pay £1063 per month in mortgage repayments.

Your post fails on the first assumption. Interest rates aren't going to be 3% over 30 years.

If you don't understand why interest rates are so low now then suggest you do some reading.

If wages rise in real terns i.e. above the rate of inflation. Then interest rates will rise. So unlike previous periods of history people will find themselves no better off. the difference between now and previously was productivity. As wages exceed inflation due to an increase in output.

As for investments. Corporate profitable is mediocre on the whole. Shares are well up with events. So until there's a genuine sustainable recovery. Shares may not perform as you expect.

nearlyrich

atush wrote: »

).

Basically, it is very easy to see the appeal of overpaying a mtg, but i would not do it instead of a pension, a cash emergency sum, or instead of investing.

It is somehting to do alongside of all of the above.

Totally agree everyone needs a financial plan for short medium and long term goals, with plan B in case of " unexpected" but very possible scenarios like redundancy, poor health and even sadly some people die tragically young so insurance and other buffers are important. However in view of the fact that life is short even if you don't die young having holidays and fun times is also important good luck to all with getting the balance right.

Thrugelmir

nearlyrich wrote: »

good luck to all with getting the balance right.

Sums up precisely the issue. Like the Grand National through life many people will unfortunately fall at a fence.

richyg

JamesD,

Like your intelligent posts with detail and great knowledge but have a question.

Intrigued by your 25% tax free method of paying of the mortgage from a pension.

But unless I misunderstand isn't the rest of the money (75%) available to get paid out only at the rate agreed by the government e.g. annuity rate of 4% or so until / unless you have £20000 per annum guaranteed from final salary / pension / annuities.

If you have paid eg a £300,000 mortgage with 25% there is a lot of money tied up £900,000 ? that you may want your hands on eg at the age of 75 no lets say 55.1 in failing health in bigger lumps than 4% per annum at the whim of the bond markets.

Just interested unless I have misunderstood.

R.