Are people here aware that it is not usually financially sound to repay your mortgage early?

vacheron

There are pros and cons, but most of the pros are negated if you focus purely on long term financial advantage.

"Peace of mind" / "weight lifted" / "would just spend the money otherwise" are all psychological issues not financial, which is fine if that is what you want.


There are people who go in without thinking though. For example, I know of 2 guys at work:

• One is overpaying his mortgage, but has just taken out a car loan at 14.9%
  
  
• The other is 3 years from retirement but decided to overpay his mortgage at 2.5% rather than put the money into our salary sacrifice pension scheme which would have given him an instant 67.5% return into a fund he can draw down in 3 years!

If you are looking to boost the LTV in preparation for a better deal or trading up in the near future, then overpaying is a good option.

A repayment mortgage payment is a pretty good way of enforced "saving" without having to think about it are incapable of saving or have a spouse or partner who is, however, if you do have the discipline there can be far better options. It's all a question of stepping back and going with the maths rather than your instincts.

danm

I actually disagree with the opening statement. Paying off your liabilities is a totally sound financial decision.


if we are talking about the marginal difference in interest rates between the mortgage rate and a FSCS protected saving account then I agree that essentially 'offsetting' via a saving account is better.


if we are talking about the long term gains attached to investing, then it is a matter of personal attitude to risk and financial security. There are no guarantees and while historically you would statistically be better off, there are periods of time where you would also be much worse off


its like saying that someone who is mortgage free should re-mortgage their property to 95% and invest the whole lot in the stock market - is that a sound financial decision..... it may turn out to be profitable but not sure I would have the stomach for it.

ChipAway

Simplistically, over the long term, you are almost certain to make more money from putting money into a SIPP (because of tax relief most people get and investment growth), but it's not guaranteed. Capital at risk and all that. A Stocks & Shares ISA over 5+ years you could reasonably expect to grow more than the interest you're paying on that part of your mortgage too.

However, it's often cited that you should invest in a timescale of at least 5 years to smooth out any potential falls in the market. So let's say someone had £500 a month spare cash to invest or overpay and that they have no other debts and ample rainy-day funds.

If they overpay their mortgage, depending on the flexibility of their lender they may be able to take a break from payments. Say they lost their job in 3 years time. If the money is invested, it might not have grown in value in this relatively short space of time, and it might cost money to sell the shares & funds it is invested in, (assuming they can access it from a Stocks & Shares ISA - a SIPP is locked away until you are 55)... but if they had used the money to overpay they would have an instant guaranteed buffer of £18,000 which might mean they could take a mortgage payment break.

So I think it depends on your level of debt, attitude to debt, how your mortgage works and the timescales you are working to. For me, it's why I both invest and overpay my mortgage in fairly equal amounts.

I am not a financial adviser, so this isn't advice, it's just how I see it.

taka

For me trying to overpay my mortgage started out as trying to get myself back into the same positions as I would have been had I not sold my flat (in a much cheaper city) and bought a (smaller) flat in my (much more expensive) home city. I had to extend the length of my mortgage by a third to be able to even afford it.

Since the "credit crunch" my work field had become much more unstable jobs wise - much shorter fixed term funding is now the norm. Since 2011 I've been made redundant several times and have spent two thirds of that time "at risk of redundancy" (ie 6 months or less from the end of my fixed term grant funding). Making sure my job loss / emergency savings were optimal and reducing my outgoings (of which my mortgage was by far the largest) were key to surviving it all, while still remaining in a field I enjoy working in. For me overpaying my mortgage (while also saving too!) over the last decade means my mortgage is now just over £100 a month and I could now live on the minimum wage without cutting back. I have also almost completely renovated my flat in that time too. For me (with only my wage to pay for everything), being able to sleep at night and not stress about my outgoings when I am (yet again!) at risk of redundancy has been worth every single penny it may have cost me.

I chose a repayment mortgage at a time that endowment mortgages were all the rage in the 90s and I do not regret it. I would rather not take those sorts of risks with my home (or the funds set aside to pay it off - what if you need them at a real low point in the financial cycle?). Overpaying my mortgage also means I have the option of a mortgage payment holiday and / or borrow back my overpayments so it seemed like another part of a potential back up plan if things got really, really bad.

I could just pay off my mortgage now (less than 10k to go) but its not a priority now. Now I'm using things like the 2019 mortgage free wannabe challenge (£500 for me for 2019) to "encourage" myself do some of the more tedious (to me) small things like phoning up to save a couple of quid negotiating my broadband package & arranging direct debits to continue collecting £2/month current account rewards etc. It is just another tool to help me to squeeze a little more out of my budget without cutting my fun money and without adversely affecting my other higher priority goals (eg pension / investments etc).

I suspect most here on MFW are overpaying as part of an overall strategy to increase their financial resilience and to hopefully open up more options financially in the future. Being able to pay for everything from 1 salary (eg to allow room to retrain / get qualifications, cope with job loss or to allow parents more time at home while kids are young etc), early retirement, lower stress more enjoyable jobs (with lower pay), part time working and paying off their mortgage before retirement (and income drop) are all things I've come across here as reasons for overpaying. Many are also adding to pensions and saving / investing in addition to any mortgage overpaying too!

harshitguptaiitr

Unless you don't borrow more on your mortgage, the amount of mortgage will go down with time (through monthly payments) plus the "value" of loan will also decrease due to inflation. A 100k mortgage today is as good as a 110k mortgage (few years later) due to decreasing purchasing power of money due to inflation.

If your current interest rate is 2.5% for 3 years, then any overpayment is giving you a return of 2.5% for 3 years and then when you switch to a better deal of say 1.84%, the overpayment money is only giving you 1.84% now.

While money under S&S ISA will grow over time - due to investment returns and also due to inflation.

So a good strategy will be to do a mix of both S&S ISA plus some overpayments.

Retter

This debate all depends on your attitude to debt. I have overpaid my mortgage by around 15-20k over the past 3 years. I do this because I can see the light at the end of the tunnel i.e. the day the mortgage is cleared and I’m in the black. I don’t look upon it as paying a debt, rather as buying my freedom. I was inspired by some of my colleagues (and subsequently people on this forum) who cleared their mortgages ahead of time and they all described it as a game changer. I work in the public sector with an excellent pension (which I have to pay a good chunk into every month) so my retirement income is assured. Overpaying my mortgage makes sense to me as I’m on track to be mortgage free by 43 and will still have 19 years until I retire. I figure that’s plenty of time to invest. I did consider a LISA but I don’t want to lock it away until I’m 60 as I’ll be in receipt of my pension a short time later anyway.

Feel free to dispute/discuss, I’m interested to know if anyone thinks there’s a better way to do things.

Zero_Sum

Retter wrote: »

This debate all depends on your attitude to debt. I have overpaid my mortgage by around 15-20k over the past 3 years. I do this because I can see the light at the end of the tunnel i.e. the day the mortgage is cleared and I’m in the black. I don’t look upon it as paying a debt, rather as buying my freedom. I was inspired by some of my colleagues (and subsequently people on this forum) who cleared their mortgages ahead of time and they all described it as a game changer. I work in the public sector with an excellent pension (which I have to pay a good chunk into every month) so my retirement income is assured. Overpaying my mortgage makes sense to me as I’m on track to be mortgage free by 43 and will still have 19 years until I retire. I figure that’s plenty of time to invest. I did consider a LISA but I don’t want to lock it away until I’m 60 as I’ll be in receipt of my pension a short time later anyway.

Feel free to dispute/discuss, I’m interested to know if anyone thinks there’s a better way to do things.

From a purely admin PoV just overpaying is the easiest option. But there are other options aside from investing in the markets.

The simplest would be, instead of overpaying directly to mortgage put money into regular then overpay mortgage upon RS maturity. It wont save you megabucks, but could be worth £50 a year.

Then you could combine the regular savers with a rolling stock of 5 year fixed rate bonds, whilst taking your mortgage on 2 year deals. There is of course the risk of rates going up, but currently the difference is just over 0.5% so it does give the flexibility of 2 rate increases. This option will require a bit of managing your cashflow.

If you wanted a bit more risk you could look at P2P. Capital is at risk, but even after defaults you should be getting about 5% from the 2 'safer' options of ratesetter & zopa. And some of them offer signing up bonuses which can earn you a little bonus.

Im probably im a similar situation as yourself. Public sector pension, looking to retire in 20 years, expecting to be mortgage neutral by 42. Up until i signed up for new mortgage deal last year was overpaying quite a bit as my 5 year fix was a bit higher than now. Now ive got a better rate & knocked about 40% off my original mortgage I think i can afford a bit of risk & do better with rates from a combination of above. This should result in the mortgage just ticking over paying for itself & earning me a little bit of profit. Those profits will then be invested into a S&S ISA

Scrimps

I overpay for the same reason I don't invest 100% in equities.

I don't understand why this message of overpaying not being financially sound keeps getting trotted out.

I understand the maths but would the same people honestly advocate taking on a 40 year mortgage and investing it, how about taking a 100% mortgage and investing it? Why not just get a low rate loan and invest it, that would be even better as it would be unsecured. You could use the same logic to leverage yourself to the hilt, lots of people have done it and made money, lots of people have done it and lost everything, didn't the bank's do that and then get found out not that long ago?. Financial decisions are, and should be much more nuanced that maths alone, especially based on historical returns, otherwise we could all just take out loans stick it in stocks then we'd all get rich ... Right?

I have money in a work place pension and a sipp and cash to last about 5 months of expenses. We overpay because we're able to use it as an overpayment reserve if we need to stop making payments, at the moment we could not make a payment for a year and still be up to date. This is also because we took the loan out at the longest possible term to keep required payments low in case anything bad happened, if we stopped making overpayments now our usual term would still be 24 years.

These decisions are based on, if we lost our jobs, if one of us got sick, if one or both of our 2 children under 2 years old needed one of us to give up work to stay home with them we could without too much bother. If any of those things happened and our money was in a sipp it would be no use to us, if it were in a s&s ISA and there had been another 30% reduction in the value of what we put in there, it again would be very little use to us.

Where it is, we've taken the possibility of a loss of earning but we have guaranteed ourselves more security.

VDOT47

Same here - although we are looking to move within 2 years. Whilst putting money in pensions or long term investments makes sense financially in the long term, we need as much equity and easily accessible savings as possible to move and fund the costs of moving.


Also, with a long term goal of early retirement, it would be no good having all our money tied up in pensions that can (largely) not be realised until 57, or more realistically later. Better to be mortgage free and have some cash in ISAs to tide over the period from, say 55-60. Then let pensions kick in.

Magnus91

I've always been reluctant to take risks when it comes to my money, so I only ever put money into savings accounts where you have a guaranteed, albeit low, return.

My mortgage rate is 2.19%, so there's not a lot of savings accounts that will beat it. I've put some money into 5% savers, but these have quite a low limit, so the rest of my emergency fund is in a 1.5% account. I would have to lock my money away for at least 2 years to beat my mortgage rate.

My job also is not the most stable, I'm on fixed term contracts so can often be at risk of redundancy when they come to an end. I like being able to pay off as much of my mortgage as I can whilst I'm financially able to.

Also, the idea that if I make my 10% overpayment each year then my mortgage will be half the size after my 5 year fixed term is great motivation!

So although I'm usually very financially minded and try to get the best deals, the relatively small bonus I would get from putting my excess money into savings is mitigated by the peace of mind and enjoyment of overpaying!

I am currently in my late 20s and paying the minimum pension contribution, not sure if I should start thinking about increasing that yet....:think: