Pay mortgage off or keep / invest savings?

MrBates

Hi all,

I have just joined but have been lurking for years, very good forum here.

I appologise in advance for the long winded post but feel I need to explain a little. I owned a property with a family member for many years which has just sold leaving me enough with my savings to pay my the mortgage off for my and my wife's family home (About £185k). Our 2 year fixed deal is coming to an end in 2 months and and I really don't know what to do with the funds.
As much as wiping the mortgage out would be brilliant, we unfortunately don't have a great deal in other savings to fall back on due to paying into the 1st property and renovating our family property over the last 2 years (It was very much a wreck but bought at a sensible price). We have 2 children under 2 and we would very much like my wife to stay off work until they are at school age thus leaving me with the only income. I am in the property business and things are looking rather bleak for this coming year so far, a slush fund would very much take the stress out of things if the worst happened and I ended up without a wage for some time.

Any advice or ideas would be greatly appreciated, many thanks! :beer:

MaxiRobriguez

It doesn't have to be one or other. You could part pay off the mortgage and use the rest to invest.

You may also want to consider an offset mortgage when your fixed term ends. An offset mortgage means that you only pay interest on the mortgage outstanding less savings to a linked bank account. In your case, your mortgage less your savings would be zero, so you don't pay any interest as long as the money doesn't leave the linked bank account. It would give you a bit more flexibility as you still have instant access to the £185k (and can use this for emergencies), but you're still paying your mortgage off monthly (100% off the capital), unlike if you pay off in one lump sum where you'll be left with no monthly payments.

For what it's worth I'm in a similar situation in terms of outstanding mortgage and cash in the bank and I've chosen that route, with the intention of reallocating some of the money should stocks fall significantly in a recession.

System

From a purely monetary point of view making your money work the hardest for you it is a very simple question: Will my investments give me a higher return than the mortgage interest? If the answer is yes then you invest, if the answer is no then you repay the mortgage.

However many people despite the above still choose to pay off the mortgage for the security. If you do choose to repay the mortgage in full then you just put away what you would have paid for the mortgage and you'll have an emergency fund fairly quickly. It would also help at that time to give your entire personal finances a make over to make sure you're getting the best deals on all your utilities and insurances, that you don't waste money buying just for the hell of it and use the MSE Mantra: "Will you use it? Is it worth it?"

El_Torro

I would say your priority is to have an emergency fund (slush fund as you call it). It's always wise to have one, even more so if you think your job is at risk.


I imagine your emergency fund won't be worth £185k. The remaining money you can put in your mortgage, or invest it. Either in ISAs or pensions, or even unwrapped.

There are many threads on MSE about whether it's better to invest or pay off a mortgage. In summary investing will probably give you better long term returns, paying off the mortgage might make you sleep better though.


Also, even though your emergency fund is there to give you security that doesn't mean you shouldn't be looking for the best available interest rate on it. Savings accounts, current accounts, regular savers and premium bonds should all be considered. Just remember that you don't want to risk your capital and the account should allow for instant access.

jimjames

If your deal is coming to an end soon then it's also worth looking at the LTV bandings. If using your savings to clear some of your mortgage will get you into a better LTV band with lower rate then that might be worthwhile. There is a certain point beyond which when the LTV makes no difference to the rate (50%?)

Personally I've invested money in S&S ISAs rather than paying off the mortgage which has been a great option over the last 10 years but who knows if it would be such a good one over the next 10. It now means I could clear my mortgage if I so wished but I prefer the security of having the investments there to use if I want and the reassurance I could pay mortgage if required.

Depending on your age and situation you may also want to look at pensions for part of the money which could get an uplift with tax relief

atush

If it were me, i'd do as Jim says above, check your LTV. Start checking the latest deals on a new mtg.

Then i'd set up your slush fund of 6-12 months outgoings, i'd boost your pensions (incl the wife) set up at least one S&S isa if not 2, then use the rest to lower the mtg.

ian1246

If you worried about loosing your job & your partner does not work, surely paying off your mortgage would be best? Investing is a great long term strategy, but if you need to draw on the money in the short to medium run you could make losses if your not in a position to ride out a period when the markets are down.

Instead, if i were you i'd allocate a chunk of it for an emergency fund & then throw the rest of it at your mortgage. Then with the mortgage payments you've saved on, start investing them - effectively drip feeding your investments to maximise the chances of getting a decent return, regardless of what the markets do.

Yes, its entirely possible you ll be worse off investing in your mortgage vs investing, but your still going to make a decentish return on your £185,000 (i.e annual savings equivilant to whatever your mortgage interest is). However, this is a guaranteed return, removing the financial commitment of your mortgage and therefore removing what will probably be a big amount of pressure should the worse case scenario happen (loosing your job/ reduced hours). Its the *secure* option, with the added advantage it frees your mortgage payments up for elsewhere (i.e. if you want, investing).

Alternatively you could invest it. Its entirely possible you make a far grester return vs. If you pay off your mortgage. Alternatively, you invest, Brexit happens, the markets crash and your jobs negatively impacted. Your then forced to pull your money out of the investment, which in the subdued markets is woryh less than you paid....

MrBates

Just a quick post to say many thanks, some great advice and suggestions.
I'm going to go though all the options with an IFA, and see what I feel best would suit us.
In reality I should be over the moon to have the options here, I suppose it is the uncertainty in the future with brexit that is really knocking my confidence in the business I am in, that doesn't help matters!

Thanks again all :T

enthusiasticsaver

I think if you are looking at insecure employment, have two young children and reduced income and are looking at essential home improvements in the near future then having a savings buffer is a good idea. I would explore the option of making a lump sum off the mortgage as surely you do not need £185k of savings. I would set aside an emergency fund of say 3-6 months expenses in case your work does dry up. Cost up the essential work that needs doing.

Re your wife giving up work I think I would hesitate on that given your own job is a bit insecure. You have a great opportunity here to reduce your mortgage drastically or even pay it off and wasting it by having to use the money to live off because you are both unemployed seems a little risky to me. I know staying at home to look after children is not a holiday, believe me as I had 17 months between my two but getting completely out of the workplace unless she is on minimum wage and not breaking even due to childcare costs is something to think about.

enthusiasticsaver

I think I would hesitate over investing. That is a long term strategy.