Why pay off mortgage?

NickHStamford

Broken_Biscuits wrote: »

if you are not on a fixed income, overpayments that reduce monthly payments instead of reducing term could make the difference of keeping your house or at least keeping the life style you are used to when times are hard.

invest some but do your research. If you put 10k into one fund/share and the bottom falls out leaving you with 6k, you will wish you took an approach with less risk.

i pay off a little each year so that when i come out of my fix i will be on best terms with 40% owned. If rates stay the same and i have 40%+ equity... Well im not sure i would be overpaying at all. Will let you know when i get there!

Your first paragraph is a new perspective that I hadn't considered, which I appreciate. My income does fluctuate, and always has. I see your point, that using a lump sum to reduce the monthly payments a bit would build in some flex in case of future hard times. I did a £10k lump last year but used it to reduce the mortgage term.

bowlhead99

Ma77hew wrote: »

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.

Well, the feedback you had here was that rather than investing in individual stocks as an alternative to overpaying mortgage, you should invest in investment funds which have less in the way of crazy volatility and more diversification benefits to deliver a steady long term return.

So, if you are considering investment funds, which you probably should, you should consider all the ways you can hold them. An ISA is one type of tax wrapper and a pension is another. You can hold the exact same shares and investment funds in a pension as you can hold in an ISA. Pensions generally have the advantage of greater tax avoidance although there is a 'flexibility cost' to that in not being able to access the proceeds of your investment until you are 55. If you really do need the cash back sooner to pay off your mortgage then it might not be for you, but the potential tax savings should not be ignored.

Where you control your own company, a pension contribution direct from your company is even more lucrative than making a personal pension contribution out of taxed income like we would have to do. The pension contribution is a tax deductible cost to the business, just like a salary would be, but they are not paying employers NI on it and you are not paying employees NI either, as it just goes straight into the pension gross. So, quite a good wheeze.

Tens of millions of people use pensions so there is no need to be 'suspicious'. You can simply have the company contribute to a simple and transparent fund supermarket-type product which you self-manage, if you are concerned about active management, opacity or lack of control.

NickHStamford

bowlhead99 wrote: »

Well, the feedback you had here was that rather than investing in individual stocks as an alternative to overpaying mortgage, you should invest in investment funds which have less in the way of crazy volatility and more diversification benefits to deliver a steady long term return.

So, if you are considering investment funds, which you probably should, you should consider all the ways you can hold them. An ISA is one type of tax wrapper and a pension is another. You can hold the exact same shares and investment funds in a pension as you can hold in an ISA. Pensions generally have the advantage of greater tax avoidance although there is a 'flexibility cost' to that in not being able to access the proceeds of your investment until you are 55. If you really do need the cash back sooner to pay off your mortgage then it might not be for you, but the potential tax savings should not be ignored.

Where you control your own company, a pension contribution direct from your company is even more lucrative than making a personal pension contribution out of taxed income like we would have to do. The pension contribution is a tax deductible cost to the business, just like a salary would be, but they are not paying employers NI on it and you are not paying employees NI either, as it just goes straight into the pension gross. So, quite a good wheeze.

Tens of millions of people use pensions so there is no need to be 'suspicious'. You can simply have the company contribute to a simple and transparent fund supermarket-type product which you self-manage, if you are concerned about active management, opacity or lack of control.

Very open to having my mind changed. I will have a good look into this, my thanks to you and Atush for bringing to light.

Ma77hew

bowlhead99, you quoted the wrong person

My mortgage rate is 3.8% meaning I need a return of 6.1% to be better off not overpaying the mortgage.

Markets appear to have grown the last 4 years or so, and if I was offered the bet:
1. Markets will grow each year over the next 3 years
2. There will be a dip in the market in the next 3 years.

I'd bet on option 2.

Therefore I don't think I would beat 6.1% over my fixed rate timeline.

Coupled with the fact an interest rate rise could potentially increase a dip.

So options as I see them.
1. Potentially make a few % more in the market, but end up with the same or better interest rate in 3 years
2. Make the same or less due to a market dip, but end up with the same or better interest rate in 3 years.
3. Make the same or less due to a market dip, and end up with a higher interest rate at the end.

I guess with my limited knowledge I would plump for scenario 2.

Guess I am low risk, though if markets had dipped last year I would be opting for something else.

jimjames

Ma77hew wrote: »

Markets appear to have grown the last 4 years or so, and if I was offered the bet:
1. Markets will grow each year over the next 3 years
2. There will be a dip in the market in the next 3 years.

I'd bet on option 2.

Options 1 and 2 are not mutually exclusive. Markets could dip and rise overall. Even in 1987 the FTSE ended higher than it started.

I'd expect a dip over the next 3 years but I also think long term equities will do well as my timescale is 10 years plus.

Ma77hew wrote: »

My mortgage rate is 3.8% meaning I need a return of 6.1% to be better off not overpaying the mortgage.

Can you explain your calculations here? My mortgage rate is 2.29%, I need a return of more than 2.29% to be better off not overpaying mortgage which is easily achievable in my view.

Ma77hew

jimjames wrote: »

Can you explain your calculations here? My mortgage rate is 2.29%, I need a return of more than 2.29% to be better off not overpaying mortgage which is easily achievable in my view.

I assumed I would pay tax and am in the HR band.

Gadfium

jimjames wrote: »

Can you explain your calculations here? My mortgage rate is 2.29%, I need a return of more than 2.29% to be better off not overpaying mortgage which is easily achievable in my view.

You'd need to factor in any tax payable on interest earned.

Se here for more details:
http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings?_ga=1.99780702.1181806746.1352188082#payingvsaving

bowlhead99

Ma77hew wrote: »

bowlhead99, you quoted the wrong person

Aha, I see! Not quite sure how that happened.

You mention a return of 6.1% needed to beat 3.8% rate. Probably some funny roundings but I guess the implication is that you are paying about 40% in tax and so you have to earn 6.1% before tax to beat the interest rate charged to you? And this is Gadfium's point too in responding to Jimjames.

However the obvious point to make is that these returns can be made in an ISA wrapper (zero tax), pension wrapper (tax relief/deferral) or even unwrapped (dividend income taxed at less than 40% and capital gains taxed at potentially 0% if you are not already using up your annual CGT allowance).

Obviously the pension route is a non starter if you definitely need the money back in 3 years to remortgage at a better LTV after your fix is finished, and indeed any market-based investment is a non starter if you need the money back in 3 years and don't know what the market will do, which we never do.

Still, the tax gulf between 6% gross and 3.8% net is less of a concern than the maths might imply, given the relatively high ISA allowances (£45k+ over 3 years), pension allowances (£120k+ over 3 years) and CGT allowances (£33k+ of gains realised over 3 years) that are available to mitigate tax exposure

jimjames

Ma77hew wrote: »

I assumed I would pay tax and am in the HR band.

Gadfium wrote: »

You'd need to factor in any tax payable on interest earned.

Se here for more details:
http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings?_ga=1.99780702.1181806746.1352188082#payingvsaving

All of my surplus goes into my S&S ISA so the return it makes is the return I get.

sterlingstash

It is not only about comparing the returns on paying off mortgage (in interest saved) vs investing. There is also a value in flexibility of having cash/investments available and also keeping the mortgage credit line open.

I prefer having the cash in the bank rather than paying off the mortgage even if it is not making more. I have the option of accessing that cash quickly, and also of porting a good mortgage rate if I ever need to move - who knows what will happen to mortgage rates/spreads. If I pay this one off then I may never get the same deal again so why risk it!