Better to be mortgage-free or have "good" debt when young?

californiagirl

Hi everyone,

Husband and I are about to pay off our mortgage within the next couple of months. We built another house and are in the process of selling our current one, and when it goes through it will clear the remaining mortgage (£150k), family member's loan (£78k), as well as credit cards we have used to fund the build (£50k). We will be left with a three bed end of terrace house with a small garden, parking and is of a decent size for us and our two small boys. Obv mortgage and debt-free (can't quite believe it).

Our income is approx £4K net per month, and I have worked out that our bills will be £500, £500 food/fuel, and a lease car payment of £280 (although when this ends next Sept we will buy a second hand car outright).

We bought our first house together when we were both 21 and renovated it entirely (husband is a builder). When we sold it we made good equity which we put into our next house and have also renovated, extended that. We have been lucky in that the market has risen well since we first bought in 2004, but it has also been sheer hard work as all renovations/house build have happened on weekends and in spare time (whilst also having two kids).

It feels great that mortgage free living is within sight, but I wonder whether it makes financial sense to be without a mortgage when interest rates are at a historic low and our income is good? I know everything can change, but should we be taking on "good" debt when we are young and the money is coming in? Our house is decent sized, and we are not the "keeping up with the Joneses" type, but I do think we will outgrow it if I am lucky to have a third kid, and I would like a bigger garden. Should we move and take on another mortgage (up to £150k) sooner instead of focusing on savings when interest rates suck?

I realise this is a lovely dilemma to have, and I am very grateful for this position. The thought of not doing building work does appeal, but at the same time, we want to keep an eye on the future, and as husband is on the tools, it would be great for him to retire early at 60... As we have been putting all our money into property over the past decade, we have not yet started a pension...!

Thanks everyone for any advice you can give.

(I did post this in Mortgage-Free Wannabe forum but I wonder if this may be a better place as it's really about savings/financial sense.)

If you haven’t already, join the forum to reply! [purplesignup][/purplesignup]

Thrugelmir

californiagirl wrote: »

we have not yet started a pension...!

Then that would be my focus of attention. A reasonable retirement income will require a large pot of money.

jimjames

If your mortgage is low enough rates that I'd definitely keep that going. Ours is 2% and it seems pointless paying it off faster when I can invest money and get a much better return on it.

TheShape

Nothing wrong with having debt if it is cheap debt.

I imagine it would be nice to be mortgage free but for myself it is not my main priority because my mortgage borrowing is cheap debt.

A year ago I had a need to remortgage my property. I had approx 8 years left, my monthly payment was approx £900 p/m. I thought that £600 p/m was a more affordable amount to be paying so decided on remortgaging for approx 12 years. While discussing affordability etc I came to the conclusion that if I were to lose my job or have a big cut in income, even £600 p/m might be too much (I live alone so no second income to pay the mortgage) so I extended the term to 30 years making the repayment < £300 p/m with the intention of overpaying by £300 p/m with the ability to stop over-paying if I couldn't afford to.

When it came time to start making over-payments I came to this forum to ask about the effect of over-payments and whether they would reduce my monthly payment or term. I got the answer but also stumbled upon the Savings and Bank Accounts forum. I never did make those £300 p/m over-payments because with a mortgage rate of 1.74% I am better of putting that £300 p/m in high interest current accounts and regular savings all of which are earning 3%+.

I've now got a nice cheap mortgage and a decent size savings/emergency fund. My priority now is more pension contributions and a S&S ISA because I feel I would be better off paying into these now than paying off a sub 2% mortgage.

Primrose

You are in a good place to be and there are good arguments for both your options, especially taking on cheap debt.
However you say you have no pension arrangements and Ii think that is an omission which needs early attention.. if you been busy house renovating you probably haven,t had too much time for family life and maybe it's time to take time out for quality family time with your children now before they grow too big and want to spend all their time with their friends.

Also your husband is doing a very physically hard job and you need to take into account that as he gets older he may suffer ill health as a result or be unable to work at the same pace as he is doing now. Being able to fund early retirement if it's necessary may not be easy if you still have debts.

It probably boils down to how important the "peace of mind" factor is for you. Will you want to fund your children through university later perhaps?
If you have spare cash now, maybe stash it away sensibly in pensions and possibly stocks and shares ISAs. If hardship subsequently hits you, you may be better placed to face it in your existing home without necessarily having to disrupt family life by downsizing. How important is it for you both to be able to sleep at night where finances are concerned? That is probably what should guide your decision making.

Personally I think being mortgage free is totally liberating. There are enough other potential woes in this life to face without taking on debts, even affordable ones, you don't have to! And bear in mind that our Brexit situation may leave the economy with economic uncertainties for a long time so the low interest rate era may not last as long as one might hope.

AnotherJoe

Another vote fur not putting everything into mortgage but pension.
Every £1,000 you pay off your mortage saves you perhaps £3 a year, the same in a pension gains you £50* plus probably 50% more growth than the £3 saved on the mortage. Or if you are higher rate tax payers it will get back far more.

* you'll get £250 but then most likely later pay back £200 when you withdraw.

californiagirl

Thanks everyone. Some helpful and interesting points there.

TheShape wrote: »

I've now got a nice cheap mortgage and a decent size savings/emergency fund. My priority now is more pension contributions and a S&S ISA because I feel I would be better off paying into these now than paying off a sub 2% mortgage.

This is what I wonder about. It's a long story, but we have to clear the mortgage when we sell anyway (we can't port it over to the new house), so I'm not sure whether it would make financial sense to get a new mortgage and use it for savings/investments, because after the arrangement fees etc it wouldn't be much different than just putting our income into high interest savings?

Primrose - yes; family life has suffered for us all whilst doing all the works, so we are looking forward to having some quality time all together again. Sleeping at night is very important to me...I wake at night thinking of our sky high credit cards - although it has a plan and will soon be cleared, it still freaks me out.

I'm thinking we will spend perhaps 5 years at our new house, so maybe we should just use that time to be together as a family, have that third kid, save our socks off, sort a pension, then buy our "forever home".

The irony is that we have always been quite spendy with our money, and it's only now we are going to be in a brilliant position of solvency that I am planning to turn frugal and thrifty! 😂

Bring on the cutting of coupons 👍

TheShape

californiagirl wrote: »

This is what I wonder about. It's a long story, but we have to clear the mortgage when we sell anyway (we can't port it over to the new house), so I'm not sure whether it would make financial sense to get a new mortgage and use it for savings/investments, because after the arrangement fees etc it wouldn't be much different than just putting our income into high interest savings?

It all depends upon the cost of the mortgage vs the rate of return on savings/investments.

At a minimum it's a good idea to have an emergency fund. It's often suggested that 3- 6 months of outgoings is a minimum amount to consider. With your husband being self-employed it might make sense to aim for the upper side of this or more.

If the choice was between being mortgage free and having no emergency fund or having a 30k mortgage and 30k in easily accessible savings, I'd choose the latter. I've chosen 30k as an amount because many mortgages require minimum borrowing of 25k and you could easily save 30k between you in current accounts paying between 3% and 5% (Nationwide,Tesco,BOS,TSB).

You can then do the Maths and work out whether the cost of the mortgage (interest+fees) is matched by what you earn in the emergency fund from interest payments. Perhaps run the figures over the next two or three years to see where the break even point is. You'd have to make a few assumptions such as the mortgage and savings rates staying stable for the next two or three years.

If you're paying a big arrangement fee for the mortgage the sums may not add up but if you can get a long-term or lifetime tracker with no/low fees and no over-payment or early repayment charges (like my HSBC Lifetime Tracker) you have the peace of mind of having an emergency fund and also know that if you ever decide to pay off the mortgage, you can do so immediately.

You're then free to use any spare money each month to invest in pensions etc without having to first build up an emergency fund.

californiagirl

@TheShape Food for thought. Thanks!

jdw2000

"High interest saving accounts" don't really exist... it's peanuts.

bigfreddiel

You youngsters have it so easy these days, us oldies didn't have the luxury of these low interest rates, try 17% for starters, low pay, recessions, three day week, powers cuts, fuel rationing(luckily never happened, but there was a 50mph speed limit) virtually zero tax free allowance. Need I go on.

It was harder then than now to get on the ladder.

So youngsters, fill your boots while you can, pension and ISA - it's easy just do it

fj