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

jamesd

gadgetmind wrote: »

Yes, but given the meagre cap on drawdown, and the high annual costs, how much pa would the guys in pinstripes running the pension platform/fund take versus what the investor was left to spend after tax?

About £475 taxable from the £500 gross income if income is taken at 5% and the charge is £25 once every three years for a GAD calculation. Other charging levels, including much higher, also exist. The minimum level that's sensible will depend very strongly on charges.

gadgetmind

jamesd wrote: »

the charge is £25 once every three years for a GAD calculation. Other charging levels, including much higher, also exist.

I've never seen charges that low thus far but hope we will in future as RDR and its successors start to bite. Many people see 10%+ of their annual income whisked away in fees of one kind or another, which is why many people are forced into annuities despite their high up-front commissions and low rates of return.

wotsthat

lisyloo wrote: »

To assume that the 25% tax free lump sum is going to be available in 25 years time sound like a fairly major assumption to me.

You could get an offset mortgage and then use it to filter money into a pension closer to retirement when, say, the assumption is that the tax free lump sum will need to still be around in 8 years - a much smaller assumption.

lisyloo wrote: »

One good thing about paying off mortgage debt is that is it 100% guaranteed.
You pay off the money, you no longer owe it - that is 100%.

I've been able to beat my mortgage rate on deposit for years. Zero risk up to the government guarantee on savings.

wotsthat

bigadaj wrote: »

That's one view. Alternatively some one could earn a very modest salary outside the south east and have bought a cheap property, you've made one assumption and I've made another.

The aim is to achieve a better return on savings than that being paid on the mortgage. Whether that mortgage is small or large doesn't matter.

jamesd

gadgetmind wrote: »

I've never seen charges that low thus far

It's HL's current charge: £75 once every three years.

gadgetmind

jamesd wrote: »

It's HL's current charge: £75 once every three years.

Now include their platform charge and the fund charges. You'll struggle to get those far under 1% for a small pot but can get sub 0.5% for a larger pot if going passive.

Even so, 5% pa in drawdown, 0.5% taken away from you in charges, there's the 10% of annual income I mentioned.

Fine if you got 40% tax relief, not so fine if it was just 20% with no employer's contributions and 20% tax still to pay.

For basic rates tax payers, having close to 10% of their annual pension income taken up in charges is *not* acceptable in my book.

richyg

wotsthat wrote: »

I've been able to beat my mortgage rate on deposit for years. Zero risk up to the government guarantee on savings.

Wotstahat,

How many years - 5 or 6 yes I know you have - that's the whole point, but saving rate are generally equal to or higher than mortgage rates, BUT NOT AT THE MOMENT. I don't think the next 25 years will be the same.

R

wotsthat

richyg wrote: »

Wotstahat,

How many years - 5 or 6 yes I know you have - that's the whole point, but saving rate are generally equal to or higher than mortgage rates, BUT NOT AT THE MOMENT. I don't think the next 25 years will be the same.

R

I've been making money on debt for a long time. In 2005 my mortgage rate was more than 5% and I had £25k of credit card debt at 0% sat in the account with no fees to transfer between cards.

What about if, instead of overpaying by £10000 two years ago, I put that into a sipp, got 40% tax relief and then saw returns of 22% & 19%? Compare that to the interest I would've saved instead (2.5% x £10000 x 2 years).

It's always possible to beat a mortgage rate - the question is whether you think the gains are worth the effort it or whether you think the (small) risks are unacceptable.

If you're risk averse then pop the money back in the offset and wait until deposit rates exceed the mortgage rate again. It might not happen but if it does and you've paid the money off the mortgage you won't be able to take advantage.

marathonic

Thrugelmir wrote: »

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.

There's no need to be patronizing. I fully understand that interest rates will rise. However, rate rises will also impact those on a repayment mortgage. It's true that the impact will be less significant as time progresses - through both inflation and paydown of capital. However, I would still expect investing over paying down a mortgage to be the most profitable approach - especially if done within a pension wrapper.

stardoman

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?

I think it might be different in terms of benefits you would be entitled to if you were made redundant or became too ill to work. Whereas you might think you can cash in all your savings and pay off your mortgage, the benefits assessors may have other ideas. They will assess you as having more than £16k in savings and so not eligible. So you need to save enough to not only cover the mortgage but also to cover you living expenses if you have a spell of not working.

Had you just paid down you debt - well you had no savings to start with.