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

noh

GettingThingsDone wrote: »

And there's more...

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As you can probably tell by now, all I am saying is getting to MF isn't necessarily a case of simply overpaying the mortgage!

This we all know but overpaying is the only guaranteed way to become mortgage free early.

Nigel

angelavdavis

Going back to the original thread subject: my primary reasons for overpaying my mortgage are as follows:

a) Provide my family with the security of having a completely owned home
b) Effectively free up £1k per month of our outgoings to invest in other ways
c) Give my OH and I the opportunity of doing jobs we want to do rather than have to do to earn the salary needed to cover outgoings.
d) Allow us to take more risks with income/lifestyle (such as taking three months off to do underwater photography for an ecology charity monitoring sealife in the Seychelles).

We don't live like paupers to achieve this goal, although I have changed jobs and work away more so have made some sacrifices, we are also fortunate enough to have the capacity to earn a high salary to allow this.

I use my ISA allowance and also invest when possible into NS&I bonds. I also hold shares, pensions (which I am not currently paying into) and have PEPs.

Personally, I don't wish to risk losing money on the stock market, other than the amount in my tax-free investments and I don't see any benefit putting savings into an account that will attract tax while I can offset them tax-free against my mortgage.

My house is a huge 7 bedroomed place by the sea which we love. I am unlikely to ever upsize - I will almost certainly downsize at some stage when the housework gets too much! It has increased in value by £150k in 5 years - far more than a pension would have increased in that timescale and we get the benefit of actually living in the house too. If we need to do work on it after we are MF, we will use cash or unsecured loans to do this. I don't ever wish to have secured debt of any sort again after this point.

I aim to be mortgage free during my 40th year which is 2010 but won't collapse into a heap in the corner if I don't make it!

beachbeth

Hi FC. Thanks for your input. I agree with what you say and, if you are financially challenged, then you have to be careful what you do with your money. However, if you can buy a more expensive property and do it easily then this could be a good thing to do. I don't think you should stretch yourself to do this because many people become unstuck when they do this (it happened to a relative of mine). The trouble is that we could all do with a crystal ball so that we know what to do for the best!

I have another question for all the financially savvy people here:

We live in a nice 3-bedroomed semi. If we saw a nice end terraced, for example and decided to buy it because it was £50 cheaper than ours (Im just picking any old figure out of my head to make the point!), then we could buy it and have no mortgage because we only owe £44,000. Do you think this would make financial sense because an end terraced is, in effect, really a semi and we would be mortgage free?

The thing is though, once we get to retirement age we will have paid the mortgage off on a cheaper house than we are in now and therefore not have so much money behind us.

beachbeth

Thanks FC. I was just thinking about all that interest I wouldn't be paying if I were to do this!

GettingThingsDone

This we all know but overpaying is the only guaranteed way to become mortgage free early.

Nigel

:rotfl:

Yes good point. I mean the only way to overpay is to have the money in the first place. How you get that money is up to you...

gtd

GettingThingsDone

Yes, thanks FC - sound advice

gtd

InMyDreams

I think for me, the key is not to think of your mortgage as an investment. Paying money into your mortgage, is not ‘investing’ in your house. Whilst the house and the mortgage are connected (i.e. if you don’t make your payments you could lose your house), the investment (house) is actually a different matter to the debt (mortgage). Your investment can go up and down in value but it doesn’t effect what you owe the bank.

As said before by someone else, it’s also impossible (for me anyway) to see my house in the same way as other investments because it’s my home too. Even if I had a crystal ball and knew that it’s value would halve or worse in the next year, I wouldn’t sell it to rent because it’s my home. But maybe that’s just me. I guess the negative equity spectre might force me to be a bit more rational.

I prefer to take a bigger picture and look at our ‘net worth’ and how we can improve that. At the moment it is healthy because house prices are so high and we first bought 7 years ago. I appreciate that this is risky because a lot of this net worth is capital in my house, after debts (i.e. mortgage) have been deducted. But if we pay more into the mortgage, the net worth does not change… our equity will increase in line with our debt reduction but this has no bearing on the value of our house. We made the investment when we bought the house. The fact that we borrowed to do so is another issue. It makes our financial position more precarious in that if the ‘investment’ performs poorly we don’t have as many options.

I suppose for me, it’s not the actually being mortgage free that’s important, it’s the knowing that I could be if I wanted to be. It’s the being able to completely omit the value of my house from my ‘net worth’ equation (and hence the precarious nature of our financial position). At the moment that’s what I’m working towards, which essentially means getting to the position where I *could* pay off the mortgage if I wanted/had to. At that point I will have to reassess my plan. That will be quite a long time in the future and my circumstances will be very different then, no doubt.

At the moment I’m keeping options open. Most of our mortgage is actually interest only, but I’ve made sure that I’ve been putting at least the equivalent of what a repayment would have been into cash accounts making more interest than I would have paid had it been used to reduce the mortgage debt. We’ve used cash isa’s mainly, but also regular savers in my name as I don’t pay tax at the moment. I suppose that’s essentially stoozing the mortgage money in higher paying cash accounts, but currently the difference in interest rates is almost 3% (I grab the bargains when I see them) and as that pot is growing quite nicely now, that all really adds up. We did have a small endowment which I have now converted into a S&S isa, which represents our true ‘overpayments’. Even if this lost all it’s value, we would only be left in the same position as if we had been just paying a regular repayment mortgage all along. I’d be gutted if this happened, obviously, but I feel this is worth doing as it’s more likely that over the long term we will actually see more return than savings accounts. (Some great advice over on the savings and investments boards.) Over time I will have to keep reassessing how much is in cash and how much in investments. As we get closer to being able to pay off our mortgage with ‘real’ assets (as opposed to the equity in our house) this will make a difference to my saving/investing strategy too. Essentially I'm doing a DIY offset mortgage which also means that I don't have to accept any higher rates in return for a more flexible mortgage product because I am supplying a certain amount of flexibility myself. I am striving to be able to put myself into a mortgage free position with all the MSE ideas, and keep reassessing our circumstances along the way.

Crumbs, I’ve gone on a bit! Wish I could be around more this week to join in these paying off your mortgage discussions but frustratingly it’s a particular busy one for me (and as you can see, once I sit down at the computer, it’s hard to get up )

beachbeth

FC_United_Fan wrote: »

thanks gtd, i was worried that i may have been 'butting into' your discussion with beachbeth, but thought that i'd mention the downside of property speculation just to balance the discussion. hope this was ok

Please 'butt' in all you like!:p Its nice to hear all perspectives on this discussion.

InMyDreams

FC_United_Fan wrote: »

hi inmydreams, a very interesting post, but i'm not sure i agree with your statement that overpaying your mortgage does not change your net worth.

I use microsoft money to keep track of my net worth, it adds up the contents of my bank accounts and isas and also the value of my house to give me my gross worth and then subtracts off the contents of my credit cards, loans and mortgage to give my net worth.

surely then if i pay off credit cards, loans or overpay the mortgage then there is a smaller amount to deduct from your gross worth and so my net worth goes up?

as an example, if i had no savings or investment and just my home as an asset. if this was worth £100k and I had a mortgage of £50k, then my net worth would be £50k. if i then pay off £20k of the mortgage then my net worth would be £70k. obviously if you paid off all of the mortgage, then the net worth would be £100k.

i hope you dont mind me just pointing this out

Hi FC Fan,
I think this is a really interesting concept. But taking your own example, where have you got this £20k from? If it’s not from savings or realising other assets, (in which case as your net debt goes down my £20k, so do your net assets therefore no change in net worth) then it most be from some other outside income. If so, then you have the choice to *either* reduce your debts *or* increase your assets, which will cancel each other out in your net worth calculation. The question is, which will bring better overall returns on that £20k. The one thing we can say for certain that won’t bring the best returns is frittering it away on stuff we can’t even remember. This, in my mind, is the essence of what this site is all about. Whichever gives the best returns will bring you to MF status fastest (which is what all MFWers want). The problem is, the better the returns, the higher the risk you lose out too.

FC_United_Fan wrote: »

hi, i just thought i would also comment on this, i hope no one minds. i am just finding this whole subject very interesting.

from what i have read in this thread, the whole point of MFW people paying off their mortgages directly is that they do not want the risk of paying there mortgage overpayments into a stocks&shares isa as you have done, because as you rightly say, this money could all be lost - i have friends who's Northern Rock shares are now almost worthless.

as you say, you would be gutted if it lost all its value but it wouldnt have an impact because you would still be paying your repayment mortgage. if i understand what the mfw's are saying, is that it would have an impact on your mortgage because you no longer have the money available to repay your mortgage and will have to find it from somewhere else. and that if instead you paid this isa money directly onto your mortgage, there would be no risk at all of not repaying your mortgage. i suppose its a bit like the endowment problems people have had where those with repayment mortgages know they will repay there mortgages and those with interest only mortgages and endowments are facing shortfalls and will have to find a big chunk of money from somewhere.

sorry to rattle on and sorry if I am putting words into the mfw's mouths

Sorry... hope you don't mind me condensing to one post, but do ask away... questions and discussion are great. It's only when people get unpleasant that people get upset. But here are my thoughts...


I, also, don’t want to speak for other MFWs, but I think what you will find if you hang around long enough is that the MFW crew is a real mixed bag, and are following all sorts of avenues to reach their aim of being mortgage free. I’m sure I’m not the only MFW with investments. It’s all about looking at the bigger picture. (We haven’t even mentioned pensions yet.)
As for your poor friends with Northern Rock shares, I suggest they head over to the savings and investments board. I have learned over there that not all investments are the same. It’s not black and white; safe or risk. Investing in single shares (especially if you’re a newbie investor) is incredibly risky. (Northern Rock especially over recent weeks was likened to playing roulette.) There are safer ways to invest. Nothing is guaranteed, obviously, and you are not going to double your money overnight like you could in the casino (or people were hoping for a chance to with NR shares) if you chose safeER investments, but you have to strike your own balance. Yes, I’m taking a bit of a risk with my overpayments by putting them in S&S isa’s, but I’m going to be no worse off than if I never made the overpayments and frittered them away on rubbish instead, and I’ve a much better chance of being in a position to be able to pay off my mortgage earlier than I would otherwise with the proceeds.

Whilst I can see the similarity with endowment mortgages, there are huge differences too. With endowments you are tied in. With funds you can customise to suit your own risk profile, and even get out all together if you want. Endowments were about paying as little as possible with the hope that your mortgage would be covered. I’m paying more than the minimum amount. I won’t have a shortfall as I'm covering that with cash savings. Also, with an endowment, you have no choice over when to bail out. It’s all a huge learning curve for me and I'm sure I will make some mistakes along the way, but hopefully when I do become mortgage free, the experience will also have been valuable for future saving and investing with the mortgage cleared.

InMyDreams x

Argh... why is this site so addictive? Really MUST turn computer off.

PS (yes, I know, I know, computer is going off in a sec....) just for clarity and to answer your specific question... if I did lose all my S&S isa money, I would no longer have the *extra* money to pay off my mortgage sooner, but the money for actually paying it off would be found from the same place it always is... it's only the *extra* money that I've put into funds. The endowment we cashed in was not connected to our current mortgage. It was from our first house and had been left in place as a savings scheme and is still very small in comparison to our mortgage.

beachbeth

Im certainly no expert! I just wanted a discussion about paying your mortgage off and why people should do this. I don't mind how many people come onto this thread to discuss. People can disagree with my point of view as long as Im not being misquoted in what I have said!

Of course the very best thing anyone can do is pay your mortgage off as quickly as they can afford and I certainly am not saying otherwise. What we all need is a crystal ball because if you knew you were going to live to be 105:o then paying off your mortgage quickly and getting some retirement planning in place would be sensible. However, if you knew you were going to die by the age of 55-60:eek: then it may be better to spread the mortgage as long as possible so that you can enjoy life now!

My hubby and I are taking a middle ground approach and are paying our mortgage at the usual pace but are putting in place an overpayment of £100 per month. Because its an 'overpayment' this means that should money become short that we can stop paying this if need be. It will be up to us. But whilst things are ok moneywise we can pay this without worry.