Should I pay off mortgage

lacroix500

Hi there, I am hoping for some advice on whether I should pay off my mortgage or not. I have 9 and a half years remaining on a mortgage for a property I used to live in, but have rented out for the past 6 years. I am now living with my partner in a property he owns. I have around £29K remaining on the mortgage and have managed to save this amount in ISAs for which I am not getting the best return in (around 1-1.5%) Some of the money will be released from April and I am considering a) Pay off the mortgage for the rented flat which gives me an income of £400 per month once fees come off (the flat is worth around £55-60K) I am currently paying a mortgage with an interest rate of 3.99% for this. The property may struggle to sell but has been a good rental flat with it only being vacant for one month over the past 5 years. or b) I use the money as a deposit to buy another property to rent out, although I am concerned I would now struggle to get another mortgage as I am no longer an owner occupier as not on the mortgage for my partner's property. I have considered buying a place on a 15 year mortgage which would leave 2 properties generating income for retirement. Or c) I keep the money in savings and carry on saving despite the low interest rates. Any advice is greatly appreciated!!

Mahsroh

There will be people far more qualified than me along to give better, more informed advice. But just on the suggestion of a 2nd BTL. Don't forget that you'll need a 25% deposit (which it looks like you'll have), you'll pay 3% extra stamp duty and the tax relief on the mortgage interest will be restricted in light of recent changes. If you're looking at another property worth £60k then you may decide that all of this is of little consequence / concern to you, but certainly something to consider.


Personally, in your position, I'd use the savings to pay off the mortgage. Purely because the interest you're being charged on the mortgage is greater than the interest you are gaining from your savings. The only negative would be your tax liability would increase as your 'profits' would be greater.


That's just my personal opinion though. Other more qualified people may tell you otherwise.

Tropically

Option A: Pay off current mortgage

Pros:
* Owning something outright is better than someone else owning it and lending it to you.
* Not paying interest on 3.99% is better than getting interest of 1%.

Cons
* Opportunity cost of not buying a second property.

Option B: Buy another property

Pros:
* Potential income

Cons:
* Stamp duty at a higher rate due to owning two properties
* Additional effort required to rent out property, as well as burdens of having a BTL
* Having to take on a second mortgage, increasing total debt, and probably not getting great rates
* Losing the tax benefits of keeping the income in an ISA wrapper

Option C: Keep the money in savings

Pros:
* Low risk
* Cash is king - money could be used for something else in the future

Cons:
* Low return
* Losing money each month due to paying 3.99% and getting 1%
* Opportunity cost of not buying a second property

My opinion is that you should pay off your mortgage. It is both safe and sensible.

lacroix500

Thanks to you for your speedy replies. It is good to talk about this, as do not divulge my finances with friends or family. I pay £100 in interest in the mortgage payment every month and aware I am only getting a few hundred a year in savings interest. I am just worried about tying all my money up in a flat, but realise I would save several thousand in paying it off early.

Mahsroh

lacroix500 wrote: »

Thanks to you for your speedy replies. It is good to talk about this, as do not divulge my finances with friends or family. I pay £100 in interest in the mortgage payment every month and aware I am only getting a few hundred a year in savings interest. I am just worried about tying all my money up in a flat, but realise I would save several thousand in paying it off early.

Fair point. As Tropically said, cash is king, but based on the timeframe and balance on the mortgage that you gave in your original post, I'm guessing it's £275 - £300 month? You would soon rebuild a good chunk in savings, but would not be paying £100/month interest.


If you don't want to use up all of your savings an alternative may be to lump, say £10k, onto the mortgage (assuming you can make overpayments without being penalised) to reduce your interest by 1/3rd straightaway then try and make regular overpayments (if you've saved £29k I'm guessing you can afford to do so) to try and get the mortgage down as quickly as you can, whilst still maintaining a savings pot of nearly £20k.

lacroix500

Thanks, I am currently paying £314/month, but actually overpaying at £374. I have occasionally made overpayments of a few hundred here and there. I re-mortgaged twice in my twenties to pay for in hindsight quite foolish things and feel now I am paying back the silly financial decisions I made when I was younger. I have an ISA cashing in in April so think I will aim to pay £10K off the mortgage and pay more each month to get the balance down considerably throughout the year with the aim of it being gone over next 2 years. I will just be turning 40 then so hope I can consider a future property after that to give more income for retirement.

User1489

Read Dave Dave Ramseys baby steps.

First, pay off all short-mid term debt and never g er in debt again.

Second, get 6 months of living costs in easy access savings as an emergency fund.

Then throw everything st the mortgage.

Then save for retirement.

Try not to do 8 things at once - achieve them step by step.

Interest rates don’t matter loads here on the amounts being talked about. They won’t make massive differences to your retirement lifestyle.

Hope that helps x