Pay off mortgage vs deposit on new place

GaryTheSparrow

Hi!
We have about £250k left on our mortgage, and have been overpaying on it each month.
We're looking to move in the next 1-2 years and have just received some inheritance which could pay most of the remaining balance off.

Are there any negatives to paying all/most of the mortgage off if we're planning to sell in the next two years and move somewhere else? If the new place is more expensive could this affect our ability to borrow more from the lender?

Thanks for any help!

Lucky_Duck_2

The potential snag with having all your money invested in the house is that it might be a struggle to find the 10 percent deposit usually requested on exchange of contracts.

That said I was in a similar position a couple of years back and managed to get the deposit reduced but others might not be so accommodating!

jamesperrett

While it may seem counter intuitive when you are trying to repay a mortgage, you may get a better return on the money by investing it - especially if you can invest it into a pension where the government will give you an extra 20% (or even 40% for a higher rate tax payer). I would suggest that you maybe pay off enough to get you below 60% LTV and then think about investing the rest.

ThePants999

Totally agree with jamesperrett. Never mind negatives - unless you're extremely risk averse, I consider there to be very few positives to paying off the mortgage.

Your net worth is the same whether you have £X in your name and also owe £X, or if you're debt-free but also have no savings. The key differences are:

- With money plus a mortgage, you're paying mortgage interest, and earning interest on the money. This could be a good thing or a bad thing, depending on how much mortgage interest you're paying, and what you're earning on the money. Right now, with mortgage rates so low, it's easy to earn more than you pay, so you're actually making money by not paying off the mortgage.

- With money plus a mortgage, you have flexibility. If you find yourself suddenly in need of cash, you simply need to withdraw/liquidate, and you have it. If you already used it to repay debt, you now need to take on more debt instead - which might be fine, or might be difficult.

That's the simplistic view. There's always devil in the detail, though.
- If you currently have a high LTV, reducing it will get you a better interest rate. If repaying £50K can knock a significant chunk off the interest rate you're paying on the remaining £200K, the effective return on that £50K is greatly amplified.
- If you're currently on a fixed rate and subject to an early repayment charge, repaying early is an even WORSE proposition.
- If you're planning to move in less than two years, the flexibility argument is even stronger.
- If you're expecting to have significant mortgage debt in the long term (because you're going to buy a more expensive house), and you think that interest rates will spike soon, you might want to lock in a rate now (though obviously make sure your product is portable).