Explain to me Why its Good to Pay off Your Mortgage quickly!

djbd1973

Dithering_Dad wrote: »

SAP is the name of the software company that created the business software that I help companies configure to match their own business processes. It costs £0.5M just for the software, so only the larger companies have it (microsoft, Heinz, lots of goverment departments & councils, ICI, etc).

To give you an example of what I do, I worked at a large manufacturing company for a year and redesigned all of their Human Resource business processes to make them more efficient (i.e. Their recruitment processes, definitions of short and long term absences, terminations, etc) and designed an interface to their payroll system.

Hi DD, Thought you might like to know that I was talking to someone last night at a party that worked on SAP! I said to you that your info would come in useful!

GettingThingsDone

Hi DitheringDad - my point is is that you are not a 'typical' case.

And just because it suits you doesn't mean it is good advice for all. OK, it's not exactly misselling, but it could be construed as bad advice.

All I am saying is that maybe there should be a sticky on the forum detailing the plusses and minuses of paying off your mortgage early, and the suitable conditions and reasons for doing so.

gtd

djbd1973

Dithering_Dad wrote: »

Lol, it must have been a thrilling conversation to have at a party

... the conversation did move on quickly from there, but instead of nodding and saying "thats nice" and not having a clue, it was a good ice breaker.

On the mortgage front, My wife and I are paying money into an ISA which has a better interest rate than our current mortgage rate which is fixed, so the idea is to chuck that at the mortgage which the fixed rate finishes.

weezl74

Hi,

I agree with you ditheringdad, I don't think we need a health warning, about paying off your mortgage early, It's covered on the MSE main site anyway, and this board is for mortgage free wannabees, that's why we're here.

The health warning from Martin is at the top of the page, and I think it applies to every post, that we should all be cautious about implementing others' strategies.

Not that I at all consider paying off the biggest debt most adults ever have in order to not pay for their house three times over to the bank as a strategy needing caution!;)

Maybe the health warning could be something like: Warning: paying off your mortgage early could seriously damage your debt!

I guess we'll all have our different reasons. Mine is that at the moment I commute for three hours a day, 3 days a week. And when we're mortgage free I will have more choice over what work I do.:D

Just thought I'd chuck in my twopennorth!

Weezl

robp

Once your eyes are opened to something that can work in your personal favour in such a big way, it's easy to become 'evangalistic' about it.

And so we should up to a point, many people never consider all of their financial options (myself included until recently).

It's good that we have a thread where we can write about it and help people consider alternatives.

seven-day-weekend

beachbeth wrote: »

I understand that if you pay your mortgage off sooner rather than later you will pay a heck of a lot less interest so Im not being thick here.

The way my hubby and I look at it is this:

We are 46 and 42 and have never had a pension. My husband never believed in them and we couldn't afford to take one out at the beginning of our marriage what with paying a mortgage and having kids etc. I used to worry myself silly that we didn't have a pension. Then there was all the news about pensions collapsing and, of course, we all know that there are many people out there who put money into a pension for years and years only to end up with nothing. It turns out that my hubby was right all along.

Now, we both have a similar attitude to mortgages. Why work yourself silly, possibly doing without things in order to pay your mortgage off early? If you cut your mortgage say from 20 years down to 10 years then its all well and good once the 10 years is up and you now have no mortgage to pay but what if you die before the 10 years is up (sorry to be pessimistic!). You could say it was all for nothing. Why not carry on paying your mortgage over the 20 years, enjoying some of your money now because the repayments aren't so high and then it won't matter what happens because you are making the most of life today.

Now Im not here saying that people who pay it off quickly are wrong Im just asking for a discussion as to whether it really is the right thing to do.

I haven't read most of the thread, forgive me if I've repeated anything.

We paid off our mortgage on our main home in our 40s. This gave us choices.

We did take out another mortgage, on an investment property, but this had the advantage of not being our own home and had equity in it so that if times got tight or we wanted to do something else we could always sell it.

And that is precisely what we did. We took early retirement at 54 and 55 , sold the investment property and bought outright a little house in Spain (whilst keeping our original house in the UK).

We were able to do this as we had my husband's Teachers' Pension which he drew early for us to live on in Spain until we can draw our State Pensions, of which we both have the full amount. I also have a small LG Pension to come.

We can chose whether to live in UK, or Spain, or a bit of both.

Paying off our mortgage and paying into Pension schemes has given us choices and opportunities we would not have had otherwise, and I don't intend to live my life thinking I might drop dead in the next two years. I'm hoping for a ripe old age with enough to live on and have a few extras.

So those are my reasons for paying off the mortgage early and having a pension.

GettingThingsDone

Dithering Dad - you are not a typical bloke, you're an IT contractor

I used to be one and I've spent all my working life with them and the last phrase I would use about them is 'typical'.

In fact many of the IT contractors I know (if not most - you never really know what they are up to most of the time, especially with their money ) used their high incomes to create large property portfolios, paid off the underlying mortgages through selective portfolio management and now use the income to, erm, p it up the wall e.g. ride around in Bentleys etc. A husband of a friend even bought a £20,000 TV recently - how a TV can be that expensive, I don't know. Another IT contractor friend and his wife have just retired to France at age 40 - again by using the leverage effect of mortgaging to buy and sell properties to attain their goal in life. Another bought and runs an arts centre to stop him drinking all day Another set up a hotel laundry business that rakes in a fortune etc etc. A few of them still have high mortgages, but the interest is simply a low cost method for borrowing money to run their other projects.

When I was contracting I could have easily paid off my mortgage and it was these guys who convinced me that it wasn't necessarily the be-all-and-end-all.There are lots of ways to make and lose money and we all lead different lives with different goals and aspirations. I was all in favour of being a MFW again as an 'arbitrary goal' until I read a similar thread to this, that made me think about the long-term implications.

Sorry to bang on, but what may seem like a great idea and give you great satisfaction, may in effect be limiting in other ways that you never know about - such is life . I have no problem with people paying off their mortgages early and in fact, like DFW, I think being a MFW is a fantastic idea, because it enhances focus and attention to detail. It is not necessarily the best thing to do, but it is definitely a good thing to do, if you see what I mean.

Also, I work in the world of mortgage regulation, which is why I was wondering about whether the sticky should be more explicit

gtd

djbd1973

Dithering_Dad wrote: »

When you pay your mortgage each month and a lot of money disappears from your current account (most of it in interest if it's as large as my mortgage), don't you wish you hadn't listened to those guy's advice? I don't know how long I will be contracting, it could be 3 years or 30 years. If it's three, then at least I have "made hay while the sun shines" and made best use of my increased pay for the short time I had it.

A lot of people fall into the trap of believing that the good times will roll on forever....

I totally agree with this. At the company I worked for until it was liquidated in Feb, I saw two different directors end up in different positions. One who had driven top cars and a live for today attitude is now in trouble because he has no financial backup plan to help him in his 'early retirement' (he is 60), and his wife now works full time to gain an income as he cannot/will not work, and the other Director who had always been careful with his money has no mortgage - paid it off years ago, now spends all his free time playing bowls. The second director had a humble life in comparision by paying the mortgage and planning ahead and he is loving it now.

When I get to my 60's, I want my bills to be as small as possible, and my savings to be as big as possible. The amount of extra interest that I would be paying for my current house for the remaining 14 years let alone the whole 25 is scary especially when I know how hard I have had to work to get the money I have.

GettingThingsDone

@DitheringDad

p.s. just for background; like me, most of the MFiT gang have company/personal pensions and a decent amount of emergency savings. Thought I'd mention that in case your "long-term implications" are merely based on the premise that we're overpaying our mortgages to the exclusion of everything else...

Argghhhh - that's the point I'm trying to make. In other words, the seduction of 'Paying your mortgage off early' should be countered with something along the lines of 'before you embark on this have you considered x, y and z'.

I know Martin mentions this in his piece, I was just thinking maybe a checklist like the one you posted earlier would be more useful. It could, for example, explain the best types of mortgage products to hold to make the best of over-paying.

A lot of people fall into the trap of believing that the good times will roll on forever...

So, it's a good idea to advise people to put cash (that they might need back) into an asset that might be difficult to sell in the near future? Again, maybe some explanation as to which type of mortgage is best for over-paying - for example, some allow you to specify that certain over-payments can be 'clawed' back. You have got one of those yes?

When you pay your mortgage each month and a *lot* of money disappears from your current account...

(my *'s)

As I said, everybody's situation is different - for example, my mortgage is deliberately small; my council tax and utilities combined are my major out-goings. But I wouldn't advise people to follow what I have done (which I haven't posted on here anyway ) as it is a highly risky route to making a lot of money.

Philosophically, the 'problem' with paying off your mortgage early is related to the fact that, as time only flows in one direction, the order in which actions are done in your life lead to different outcomes which you can't go back and re-order.

A simple example

Person A: Overpays their mortgage 100% for 1 year. Result: Lower capital balance and therefore lower interest payments.

Person B: Saves mortgage equivalent each month for 1 year. Uses savings to cross-train to SAP; becomes an IT contractor and earns several times more than they did before.

I know plenty of people (IT contractors, funnily enough) who have done the above, especially when MS qualifications used to be more valuable.


At the end of the day, it's an investment decision and as such people should be warned about the implications. It's generally a low-risk, high-reward strategy, which is why it's not a big problem.

However, what are you going to tell the people who haven't got other investments, they've been over-paying their mortgage (because of MFW), they've lost their job, house prices are falling, they can't re-mortgage at a reasonable rate, interest rates are rising, they need to find work elsewhere in the country, and they now need the money to be able to pay for their children's school fees?

Or what about if you pay your mortgage off, but the effects of global warming (e.g. flooding?) mean that nobody wants to buy your house so you can't realise your asset once you get to 60?

BTW - When I say 'you' I am referring to everybody reading this - not you, DD

Also, when I was talking about 'rational' and 'irrational' in my OP, I was deliberately trying to stir things. It is not rational for me to drive an Audi S5, but I'll still want to buy one. It's not rational for me want a 5 bedroom house with a massive garden and a house in Spain, but I still want those things. Over the term of my life it is not rational to pay my current mortgage off right now, but I want to...

Take a step back DD, and remember that there are people reading these posts that have never really experienced a serious recession, that have only seen house-prices rise relentlessly, may have huge debts (have you seen how much graduates owe these days :eek:) and have taken on large mortgages relative to their earnings. Due to the reputation of financial advisors, they may not seek financial advice (apart from on here ) and MFW is such a seductive forum. Before I dive in, as it were, I would like people to know that there are implications.

gtd

comping_cat

Originally Posted by GettingThingsDone
Or what about if you pay your mortgage off, but the effects of global warming (e.g. flooding?) mean that nobody wants to buy your house so you can't realise your asset once you get to 60?

I just wanted to add here, im not paying off my mortgage ASAP so that i can sell my house and release any assets - i want to pay off my mortgage so that i always have a roof over my head, and its my biggest bill, so without that payment each month, i will be a lot better off, and be able to either live better/cut down on work/save more etc, the posibilities could be endless!!!

There is nothing anyone can do about 'acts of God' or 'global warming' if its going to happen, it will happen whether you have a mortgage or not!!!!