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

beachbeth

Can I ask a hypothetical question:

If you knew for definite you were going to receive say £300,000 by the time you were 60 how would this alter your mortgage-paying plans now? Or would it?

InMyDreams

FC_United_Fan wrote: »

sorry, i must not have been clear enough in my post . my point wasnt whether you get a better return if you put your money onto your mortgage or into a bank account (or indeed into shares) but was simply correcting your assertion that paying off your mortgage doesnt increase your net worth. clearly it does.

obviously, if you just cash in some savings and put them onto your mortgage then your net worth stays the same because you are just moving your rmoney around. i was thinking more about new income, say a 20k inheritance, or more likely monthly income from salary.

Sorry… it’s me being unclear. I shouldn’t have mentioned ‘returns’ at this point; it was merely an afterthought. My point is simply that if you were to receive, say, £20k inheritance, the point at which you receive it is when your net worth will jump by £20k, regardless of what you do with it tomorrow (debt or savings). As you correctly say, that’s just moving money around. Whether you pay off a debt or add it to savings, your net worth will not change further. In other words, do not confuse the act of receiving £20k with paying off £20k of your debt (or paying £20K into your savings account). The £300 spare after bills is the same. If it’s already in your account then paying down a bit of your mortgage with it is just moving money around as far as net worth is concerned. When you earned it is the point at which your net worth was affected. Does that make it clearer? Or maybe we'll just have to agree to disagree.

FC_United_Fan wrote: »

i'm a little confused, i get the impression that you feel that direct payments onto your mortgage are a mistake (hence your interest only mortgage and S&S ISAs) because you get better returns from the stockmarket or savings accounts,

I feel that for me, in my particular circumstances at this moment in time, I can definitely do a bit better by using savings accounts (although I appreciate I may be in a minority here), and I hope to do much better with investment funds.

FC_United_Fan wrote: »

surely it follows that you will never pay off your mortgage because as soon as you cash in your higher returning investments to put onto the mortgage you will be placing them into what you consider to be an inferior investment and one that is doing nothing for your net worth?

I never say never. I will keep reassessing my circumstances. I want to be able to pay off my mortgage. As I’ve said before, I don’t think that paying money into my mortgage is an investment, inferior or otherwise. Paying off your mortgage is servicing a debt. This may or may not be the rightthing to do, it depends on your circumstances. Sorry if I sound a bit like a broken record.

FC_United_Fan wrote: »

am i incorrect in thinking that if someone feels that paying down the capital of their mortgage is a bad idea, then they cant be a MFW? sorry of this is a daft question

I suspect you are not alone in that feeling, so it's not a daft question, but I most definitely consider myself a MFW. I am striving for that goal like everyone else on this board. What I decide to do at that point will depend on my circumstances. I'm leaving my options open.

FC_United_Fan wrote: »

sorry, i missed your ps when i first responded. unfortunately, it's left me in a bit of a muddle . you say that it doesnt matter if you lose all your S&S isa money

It’s not that it wouldn’t matter; as I said, I’d be gutted! It would indeed mean that I wouldn’t be able to pay my mortgage off ahead of time, and all that extra saving would have been futile. But I think that with careful investing I can minimise that risk and actually I’ll be on target for paying off my mortgage much sooner which is by far the more likely outcome (IMHO). Weighing it up, I’m happy I understand the risks and am happy to take them so long as I know that my mortgage will end up being paid off eventually.

FC_United_Fan wrote: »

also, if i then understand you correctly, you are putting your mortgage repayments into a savings account, that as you are a non-tax payer allows you to get better interest rates than those available to people who do pay tax?

Yes. For example I’m currently getting 8.25% on an indefinite regular saver (guaranteed 2.5% above base for another year and a half, but it’s closed now). Tax payers would get the same rate, but they’d have to pay tax on the interest.

FC_United_Fan wrote: »

the trouble with others adopting this approach is that if they pay tax, there are few options open for them to get savings rates that will beat their mortgage rate - one of these is a cash isa but it only allows them to put in 3k.

Indeed. Well said. Everyone has to look at their own circumstances and work out what to do. There is no one path that will be right for everyone.

FC_United_Fan wrote: »

if you advise against capital repayments but a MFW has more than 3k each year to invest and is a tax payer, where would you advise they put this money?

I don’t advise anything! I’m simply, for the benefit of the discussion, explaining what I do. As I’m not in the position of using up our isa allowances (both mine and dh’s) I haven’t looked into this.

FC_United_Fan wrote: »

I'm sorry, i feel like i'm hogging beachbeths thread, but its been just great for a newbie like me to be able to get financial ideas from such established experts like yourself, beth and GTD. I hope no one minds

I'm sure beachbeth was intending it to be hogged but "such established experts"? LOL. I'm very flattered, but what gave you that idea? Actually I will give you a piece of advice… don’t assume anyone here is an expert, no matter what their sig says. It’s imperative that you always DYOR. (Do your own research.) What's right for one won't necessarily be right for the next person. If you want real advice, go see a financial advisor.

All the best, IMD x

InMyDreams

beachbeth wrote: »

Can I ask a hypothetical question:

If you knew for definite you were going to receive say £300,000 by the time you were 60 how would this alter your mortgage-paying plans now? Or would it?

Hmm... Good question! I think it probably wouldn't because I don't want to wait until I'm 60

Actually, maybe it would. I think we'd probably go on a skiing holiday every year and not worry about the mortgage. What if I didn't make it to 60 though? Would my family get the £300,000?

Oh, I don't know! Will have to think some.

beachbeth

InMyDreams wrote: »

I'm sure beachbeth was intending it to be hogged but "such established experts"? LOL. I'm very flattered, but what gave you that idea? Actually I will give you a piece of advice… don’t assume anyone here is an expert, no matter what their sig says. It’s imperative that you always DYOR. (Do your own research.) What's right for one won't necessarily be right for the next person. If you want real advice, go see a financial advisor.

This is what I wanted to say but you put it much better!

GettingThingsDone

final example: a person with a 100k house with 50k mortgage & 10k in cash and 40k in Investments has the same net worth as a person with a 100k house and zero mortgage. i.e. 100k.

But, FC - is it wiser to hold the former or latter? As I was trying to point out to DD earlier, obviously the former position is generally more desirable, as I believe you'll agree.

Paying your mortgage off early doesn't affect your net worth in itself. It is the reduction in interest (servicing the loan) that is where the net worth change happens which is why there is a mix of judgements about future prices and personal/family circumstances.

This is why I think there should be something to help people understand this - i.e. there may be people embarking on the MFW journey without understanding this 'basic MFW housekeeping'

gtd

G'Meister

beachbeth wrote: »

Another thing is that my husband's basic wage is very low and he only earns a decent wage by earning overtime and bonus. This causes him a lot of stress. Its hard to know what to do for the best really.

Sorry, I have only read the thread up to this point (I know there's a few further pages and I haven't even glanced at).

Please please please, if he is on low earnings, rather than doing overtime I would recommend so so strongly that he looks at what he'd need to learn to move into a better job on which you could live comfortably, without the constant stress about trying to hit the targets he's given or having to do extra hours.
Look at it this way; for every hour invested into bettering himself, the return on that time will be absolutely fantastic - it's the best investment anyone can ever make.
I give the same advice to everyone here btw, don't work work work unless the work you're doing is gaining you the experience and skills you need to progress your career - education (and self-improvement generally) will pay (in the long term) far more than that overtime!

setmefree2

Hi,

Well that's a whole new twist isn't it? Can't say I agree with you on this one. Education is great (I have 2 degrees myself - one of them is a degree in money aka accounting and finance). But just being educated won't actually make you rich. There is no substitute for hard work and being business/money savy. Have you read The Millionaire Next Door? Basically, it's an actual study of the habits & attributes of Rich Americans. The link between Education and wealth is not a direct one. I'M NOT SAYING EDUCATION IS NOT IMPORTANT ( before anyone shoots me down in flames) - I'm just saying that being educated won't make you rich. You could study till the cows came home and never get rich. But I do agree that sometimes working clever is better than working harder.

P.s. I'm definitely not trying to offend anyone, just taking part in the debate.:o

djbd1973

setmefree2 wrote: »

Hi,

Well that's a whole new twist isn't it? Can't say I agree with you on this one. Education is great (I have 2 degrees myself - one of them is a degree in money aka accounting and finance). But just being educated won't actually make you rich. There is no substitute for hard work and being business/money savy. Have you read The Millionaire Next Door? Basically, it's an actual study of the habits & attributes of Rich Americans. The link between Education and wealth is not a direct one. I'M NOT SAYING EDUCATION IS NOT IMPORTANT ( before anyone shoots me down in flames) - I'm just saying that being educated won't make you rich. You could study till the cows came home and never get rich. But I do agree that sometimes working clever is better than working harder.

P.s. I'm definitely not trying to offend anyone, just taking part in the debate.:o

I understand what you are saying setmefree2and agree. The way I understand the previous post is that having the right qualifications gets you through the doors to better paid jobs. Without the qualifications, it can be hard for people to get picked for an interview. I also have a degree and a multitude of qualifications but I wouldn't employ a similarly well qualified person if they didn't have a certain 'light on upstairs' or 'can do attitude', which would make the company more successful.

People with the right attitude to working smart at work may be, and I use that tentatively, better equipped to make more money personally. I would pay someone more money if I knew I could leave them to do a job for me, and they did it well and could cope and find a solution on their own when jobs don't go to plan.

Education doesn't give you initiative is what I am trying to say.

beachbeth

I don't entirely agree, djbd. I went to college and passed Business Studies and then went on to do Secretarial Studies. I left college armed with all these qualifications and then, in my first job, I was paid the minimum they could get away with (why did I take that job???) The fact that I had qualifications seemed to make no difference because they thought experience more important. Not all employees think like this but a lot do. I soon left there and got a much better paid job at the NatWest because they did value my qualifications.

djbd1973

beachbeth wrote: »

I don't entirely agree, djbd. I went to college and passed Business Studies and then went on to do Secretarial Studies. I left college armed with all these qualifications and then, in my first job, I was paid the minimum they could get away with (why did I take that job???) The fact that I had qualifications seemed to make no difference because they thought experience more important. Not all employees think like this but a lot do. I soon left there and got a much better paid job at the NatWest because they did value my qualifications.

Good point Beachbeth. I know in the print that to get your foot in the door, it was/is preferable to have the qualifications as opposed to not having them. I personally look at qualifications as showing a discipline to learning something so if I showed a new member of staff how to do a task, I would hope they would be able to learn it quickly and practice where they weren't sure.

I personally take academic qualifications with a pinch of salt (despite my own) because experience is better in my view but certain companies would definitely look at it in other ways. I know of certain companies that rely on a pool of qualifications as part of their public image, and there is also the industry of academically furthering yourself whilst at work and investors in people etc. One of my previous employers paid for most of my qualifications, and as the resource was there, I took advantage.