Why pay off mortgage?

lalman

Does this not all come down to personal risk tolerance?

bowlhead99

lalman wrote: »

Does this not all come down to personal risk tolerance?

No these are absolutes. You should always do what is suggested on a forum

N1AK

NickHStamford wrote: »

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

It will always depend somewhat on circumstances, but given the incredibly low rates available on mortgages at the moment I think the majority of people with more than ~15% equity could benefit from keeping money out of a mortgage.

I just re-mortgaged our property back to 60% LTV (about £50k additional mortgage). It's fixed at 1.89% for just over two years and there were no fees. Even if all we did was stick it in the highest yielding current accounts we could get 2.4% after tax.

My best estimate is that remortgaging will leave us ~£1,200-£1,500 better off when the fix ends than we are now. Not a huge amount, but worth the time required.

As to what I'd do with the £10k, that's a far harder question to answer. If you know you won't need the money for years and can afford to lose some of it I'd probably put the majority into S&S within an ISA wrapper.

jimjames

veryintrigued wrote: »

Al
There is something very satisfying (and ultimately helpful) when applying for current accounts etc and are able to tick the 'home owner - owned outright' box.

Good luck

Interesting how different everyone views things!

I find it more satisfying to get an annual ISA statement showing balance bigger than my mortgage with 10 years still to go.

Everyone has different ways of seeing it.

veryintrigued

jimjames wrote: »

Interesting how different everyone views things!

I find it more satisfying to get an annual ISA statement showing balance bigger than my mortgage with 10 years still to go.

Everyone has different ways of seeing it.

Indeed.

I did do a little bit of the stoozing (maybe 10-15 years ago) back when some credit cards were offering 0% rates and balance transfer free (remember those days?) to juggle every few months to stooze and save this amount I was juggling.

atush

NickHStamford wrote: »

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?

In your case i'd have a pension paid into by the company, and add that 10K there.

irm

We could afford to pay off our mortgage (about 3x over if it came to it), but with a rate of 0.99% it seems silly not to stick the money elsewhere - which is what we've done, with it split up between countless high-interest current accounts, cash and S&S ISAs, extra pension contributions, and so on.

Keeping the mortgage means there's always the possibility to borrow more (more easily) as we can borrow back against the original amount; plus it keeps us "in" with the bank in case we move - could be handy you never know.

As it's an offset mortgage if rates shoot back up (ours is a lifetime tracker at BR+0.49%) to the point where the mortgage rate is higher than the current accounts, then I'd just shunt money back into the mortgage.

Ma77hew

Just curios, if interest rates go back up, theoretically would that have any impact on share price?

As in could share prices fall as a result of interest rate increases, meaning the point at which it makes more sense to pay off the mortgage is also the point at which investments are worth the least amount and therefore potentially unable to cover the mortgage?

I don't know much about economics and the relationship between the 2 if any.

bowlhead99

Ma77hew wrote: »

Just curios, if interest rates go back up, theoretically would that have any impact on share price?

As in could share prices fall as a result of interest rate increases, meaning the point at which it makes more sense to pay off the mortgage is also the point at which investments are worth the least amount and therefore potentially unable to cover the mortgage?

I don't know much about economics and the relationship between the 2 if any.

You're right - I alluded to it but stopped short of explicitly highlighting it in my earlier post when I suggested shares could fall 40% at the same time your mortgage rate went up to 4.5%.

Share prices generally don't like rate rises at the moment because they are used to rates being low.

However, in the long term, while it is true that increases to base rates can cool down an economy, periods of higher interest rates might be associated with higher returns on assets. If the 'risk free' rate is 5% then companies may pay higher dividends to receive your cash. Higher rates may go arm in arm with inflation (if that is the reason for the government calling for a rate rise) which means that company earnings can go up faster than the base-rate-linked cost of servicing the mortgage and you might have seen the interest rate rise coming in any case and moved onto a fix.

If equities crash then (traditionally) the price of their 'opposite number', bonds, will rise as people pile into them. If bond yields (effectively, market interest rates) lower, then loans or finance may be abundant [ Unless perhaps, it is not abundant to you, because you lost your job when one of the companies crashed ].

But at the moment we are in a bit of a funny economic position in that equities are relatively high and bonds are also relatively high and interest rates tiny. The last fall in equities was due to the lack of credit so a fallen stock market did not yield good borrowing opportunities at all - and only when QE happened, to increase credit, did the bonds and equities both start to rally in tandem.

So, given the economy is poised slightly differently than it has been in recent decades, you can make some sort of economic argument for pretty much any doomsday or happy day scenario to come along off the interplay between interest rates, inflation, exchange rates, stock prices, bond prices, house prices and so on.

Long story short, yes if you choose to avoid paying off the mortgage now because you would prefer to get investment returns instead, you may not 'win' by taking that option that has risks over the option that reduced your fixed known mortgage commitment. You would hope to win, but you might come unstuck, and badly. That's why whenever this question is posed you always get some people saying they would pay off the mortgage, some people saying they would borrow more on the mortgage, and others saying it sounds nice in theory but there is no such thing as a free lunch so best not to assume you'll make a killing.

Those people blessed with 1% mortgages which they can already pay off out of cash right now can pretty much invest their spare monthly salary in S&S ISAs or pensions with impunity, but it can be dangerous to copy them or assume that just because a person on a forum or at work is OK with their level of risk, then you ought to be too.

NickHStamford

bowlhead99 wrote: »

Going back to the original post, something I didn't mention in my earlier one:

You have a business partner and both of you are investing or at least considering investing in markets as you have free personal cashflow. Is there a way that you could each utilise £10k within the business to make a useful additional return over the coming years?

Depending on the nature of the business, spending £20k on additional space, marketing, equipment, consultancy or staffing may realistically generate ongoing returns in excess of 3% on that £20k after tax, one would presume.

If you use £10k to buy shares in National Grid or Unilever you are just paying that money to the old owner of the shares, the company does not benefit and you are at the mercy of the directors' policies and the fickle nature of markets to deliver an ongoing return.

Whereas if you wisely allocate £20k of cash among business projects under your control - whether structured as a loan to the business or as just equity/partnership interest - you may elicit significantly higher returns than a national utilities business such as NG.

This would of course not be a risk free approach to beating your net mortgage rate and the investment would be somewhat illiquid. However, if there is long term benefit available, which you can access and I can't (because I don't have the capital or risk capacity to start a business, so I am restricted to the public stockmarkets), then you would be wise to consider it.

Just a thought.

I had thought of this as well and given some consideration to it. It would make the most sense as it would be entirely under my/our control and could potentially make significant gains. However the specific circumstances of the business we are in, mean that there's too much risk of the entire £20k getting washed away with no return (because of how we'd need to apply it in order to see a direct return) I like your thinking however. At the moment I see the business as something to extract money out of, and invest elsewhere. That could change in future as the potential returns from investing into a business that you manage are huge, and no-one else to blame if it all goes wrong.

Atush mentions putting it into a company pension. However I am deeply suspect of pensions and managed investments on the whole and I don't think I would do that.