Why pay off mortgage?

NickHStamford

My business partner made a comment the other day when we were discussing the current low interest rates on mortgages. He said "why would you pay off your mortgage?"

It got me thinking. My current mortgage rate is 2.38% on a lifetime base rate tracker.

I've got a spare £10k in a cash ISA (money above and beyond a cash safety blanket) and due to the poor savings rates I had been inclined to use it as a mortgage overpayment and reduce the term of the mortgage slightly.

Now I am thinking about investing the £10k into stocks with a potentially good dividend yield instead. If I am borrowing at 2.38% and can make at least 4% on dividends, with maybe some capital growth to boot, that would seem to make sense.

I appreciate that the base rate will rise, but no-one can time it.

I read a Motley Fool article suggesting five UK stocks with good Dividend potential, Unilever, National Grid, Reckitt Benckiser, Diageo, Glaxosmithkline. I'm actually overexposed to the UK market so would probably look at similar in the US.

I guess it does come down to appetite for risk but interested in opinions. What would you do with the £10k?

black_taxi_2

I targeted my mortgage ,paid off in 5 years

bowlhead99

My mortgage rate is higher than yours and I am overpaying (slightly) because of the opportunity to get down to a lower loan to value eventually.

If I am paying (say) 3% on £500k, but overpay down to £475k, it seems like I am just going to save 3% on £25k but actually I get to move the whole thing to a rate of 2.5% on the whole £475k instead of 3% on £500k which is incredibly more lucrative. These figures are just made up but are relevant for some people.

However I am not max overpaying because if you pay the maximum you can't necessarily get it back without remortgaging or borrowing and nobody wants to be caught short in an emergency. Cash safety blankets don't always spread as far as one likes. Plus I do want to build up some investments.

The problem you have with stocks is volatility and timescale. Ignore tipsheets and fool articles that suggest a few names of stocks that might be OK for someone who already has a lot of stocks and needs a few more. 5 stocks is nowhere near enough to give you a stable dividend source to deliver your money reliably without big risks.

For example, Tesco paid a good yield, then it halved in value and then cut the dividend. So if your £10000 becomes £9000 because one of your 5 stocks halves, or £8000 because one of them dies, then you need one of the others to go up 50 or 100% and start making enough profits to take over dividend-paying duties of the one that fell by the wayside.

Basically, dividend potential doesn't do you any good if they pay you 4% or even 5 or 6% when the capital value falls by 40% like it did in 2003 or 2009. You can get way underwater and not recover for years, and that is on a broad portfolio of stocks within a fund, let alone a concentrated pile of individual shares.

If you have a 10 year timescale then an equity income fund paying dividends should hopefully cover the 2.5% mortgage interest. But, if in 5 years time the interest rate is up at 4.5% and the shares are temporarily down 40% you are out of options to pay down your mortgage and avoid the high charges, because you would ideally be investing more in the market at cheap prices not trying to pull it out at disadvantageous prices.

So, investing in the markets (which can do badly when interest rates rise) is not a great way to hedge an open ended base-rate tracking loan. But paying off the loan if you don't need to, when the finance is cheap, is also a bit fruitless. If you split your money between cash and investments rather than purely investments, you will be better placed to clear down your mortgage if circumstances move against you.

mad_rich

If you haven't already, read the "Should I overpay my mortgage?" article.

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

lalman

With my BTL mortgage that I am just remortgaging on, I managed to get the rate from 2.99 to 2.39% (with 40% equity now). Instead of lowering the payments, I actually increased them... yes its counter intuitive and most investors want to maximise the cashflow from rental properties but my strategy is to reduce the risk of my current portfolio so as I save up new deposits for new properties the risk doesn't necessarily go up...



By increasing the term, I managed to reduce the term from 22 years to 17... which creates flexibility if anything happens... i.e. I can go interest only, extend payment period to 25 years again... etc

Also, if you believe like I do that there is a risk of full out deflation then real rates would be rising...

jimjames

I'm making minor overpayments but most of my excess just goes into S&S ISAs. No point overpaying at 2.5% when I can make more from investments.

brightonman123

I would hit the mortgage- reduces overall interest paid.

jimjames

brightonman123 wrote: »

I would hit the mortgage- reduces overall interest paid.

That statement is true in isolation but reducing the interest paid may not be beneficial overall.

If you can invest £10,000 at 10% pa instead of paying 2.5% interest then you'd have an investment growth of £15,000 compared to interest payments of £2800.

Obviously no guarantees with investment but it's a risk I'm prepared to take and so far paid off very well.

NickHStamford

black taxi - I did exactly the same as you with my last property and then enjoyed a period of being mortgage free. Saved up a decent amount in cash (as no mortgage payments) and with the equity released from the house at sale, plus the savings, was able to make a 40% deposit on the next place and thus get the best mortgage rate at the time. Made a big jump up the ladder.

However the property on which the mortgage was paid off was not where I wanted to be ie not somewhere I would be happy if I had to live there the rest of my working life, so back in debt to the bank I am! What I also found is that with no mortgage it was too easy for me to overspend on "luxuries" (ie stuff I don't really need) and so for me, it helps to have some mortgage debt or a d/d into investments each month, then I just live to the new means, and in the long run I am either a) paying down mortgage gradually or b) investing in funds.

inflationbuster

If you have the opportunity to pay off debt do it. I did and had extra cash leftover which l invest/trade the markets.

It's nice to be 100% debt free!

shopaholicz

I'd overpay on my mortgage. I currently pay 2.5%. Can you get all yours paid off before the interest rate rises? I'm already overpaying on mine and hope to pay it all off by the end of the year. Hoping the interest rate doesn't go up before then. As this is my only debt, I can't wait to be debt free. May even drop some hours at work then!!

But it doesn't really matter what either me or others on here would do. I think you've already got an idea what would be best for you.

Whatever it is, go for it.