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

Tropically

I strongly disagree that not overpaying is the 'correct' decision and that overpaying is not 'financially sound'. Overpaying the mortgage is part of asset allocation according my personal risk profile.

I've got:

• Very high risk/very high reward - investments in startups via equities;
• High risk/high reward - stocks including my pension;
• Low risk/low reward - overpaying the mortgage;
• Very low risk/very low reward - cash.

Overpaying the mortgage is 'future proofing' my finances because yes, interest rates are low right now but they will go up. Mortgages are held for such a long term and I only have fixed for 2 years. I am saving 1.79% on interest in 2019, but I might be saving 25% on interest in 2039 from that same overpayment. The long-term average of interest rates for mortgages is around 8% and so it is not a fair comparison to come interest rates right now against long-term average rates in the market.

You might say that I could be putting my overpayments into the market, and then when interest rates go up on mortgages, I can make a big OP there. But that relies on timing the market going in and out. It might not be there when I need it to make an OP. There is no guarantee that the stock market will just go up over the next two years before I need to fix my interest rate again.

Plus, there are nearly always upper limits on the savings accounts which look better than overpaying. I max out my Regular Saver of 5% at 200 quid per month.

Retter

Zero_Sum wrote: »

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.

Thanks. Gives me a different perspective on things. I’m too risk averse for P2P lending. Got a regular saver with NW and could do more on these but I don’t want to have 4 or 5 bank accounts. I’m holding 27k (new car money+) in easy access places at the minute with the majority in premium bonds. Until I decide on a better plan I think that’s probably the best place for it. I like the idea of staggering fixed term deposits as I could have them coincide with my mortgage anniversary which would provide the annual 10% overpayment. Come December my mortgage interest will be under £100 p/m so I’d like to get to the point where I’m generating close to that.

enthusiasticsaver

I completely disagree that overpaying a mortgage is not financially sound and whilst investing for growth in stocks and shares and a pension is sensible if you have a retirement plan reducing liabilities is also usually part of that.

Investment returns are not guaranteed but at some point the mortgage will need to be repaid. There is also no guarantee interest rates will remain low.

We had a three part plan for FIRE. First part was overpay the mortgage to get it repaid before we needed to help our daughters with uni costs and then take early retirement.

Second part was overpay into pensions to gain the tax relief and employer contributions.

Third part was invest in stocks and shares isas as an alternative to the pensions and take advantage of investment growth. We did all three, sometimes simultaneously but clearing the mortgage and overpaying pensions were the priority.

Anyone who is risk averse and does not have much money would be better off overpaying the mortgage as repaying that gives you certainty your outgoings will reduce. Investing willonly "potentially" give you more money. No guarantees on that and if you lost your job at the same time as the stock market was low and accessing investments would be a bad idea I know having a low or no mortgage would be a big plus in those circumstances.

Science_mum

I am also overpaying as part of a wider saving strategy; driven by 3 specific goals rather than just a plan to make the maximum return possible.

Goal 1 retirement by 60... DH and I are both in the same public sector pension scheme; which gives us a reasonable DB pension age 68... We are AVC 12% by salary sacrifice. This on top of our standard 8% and employers current 18% contribution. We are increasing our AVCs at every promotion/increment and plan to be contributing 20% within 3 Years. AVC are invested into our employers pension scheme fund... which looks and performs remarkably like a index tracker and all fees are paid by our employers. Because of NI savings (salary sacrifice) and lack of fees this seems a better deal than a SIPP.

Goal 2 saving in cash for school fees. DS has SENs and is currently in mainstream primary. We are saving £500/month specifically in a school fees fund (regular savers then fixed term bonds to mature every year of his secondary education). The we anticipate needing cash in 3.5 years time. This is too short a time scale for investment to be a sensible option; as there is clearly no flexibility in when we will need this cash. Once DD has finished nursery we will be doubling our monthly savings rate.

Goal 3 redundancy proofing our mortgage. Four years ago we started off with a scary 250k mortgage (expensive south east university town with eye-watering house prices). We are now down to 205k. My job is relatively insecure, I was up for redundancy 18 months ago and will be again in about 3 years ( basically the nature of my role means I have to be reassessed every 5 years or so to determine if I am doing well enough professionally to refund). We require 2 incomes to pay the mortgage at it’s current level. I want to get our debt down to sub 150k before I am up for redundancy again; so if I have to leave my current occupation and retrain we can pay the mortgage on just DHs salary. I also have a chronic health condition which could deteriorate at any time leaving me unable to work- I should be entitled to my pension early should I be forced to leave work on health grounds.... but there are no guarantees... We have 2 young kids and a massive mortgage; and to be honest - our MOPs are really to help me stop worrying!

We also have a sizeable emergency fund; held in cash ISAs which doubles as our car replacement fund.

dave23

I also do both paying 20% into pension by salary sacrifice , £100 month to S&S ISA and £55 month mortgage overpayment. Today made the final mortgage payment 3 1/2 years early:j:beer:

badmemory

Anyone who has been at threat of redundancy with a mortgage & then again after the mortgage has been paid off (early) will know the difference. There is the OMG OMG OMG factor of the first & the well I know it will be alright of the second. That feeling confirmed that I had made the right decision to overpay. So thank you Northern Rock for buying Lancastrian, the payout for which gave me the idea to overpay!


It isn't often you have someone thanking Northern Rock for anything is it?

LeighofMar

I overpay because I've already lived it. During the recession, our portfolio dropped by half and its not like we could have used our retirement money anyway. Our income dropped by 90% as we are in construction. Yet we still had to pay the labor and materials on jobs that stopped midconstruction. Therefore, we couldnt pay ourselves. And our healthy savings account paid not only for the mortgage but all our other expenses that never stopped coming just because we had no work. It came time to decide when we had 900.00 for the month, would we pay the mortgage and have nothing left, or use the money to eat, have lights and gas to look for work? Decision was clear and we lost the house. So no. I never ever want to be in that position again. We will own this house by the time im 45 and my husband is 60 in four more years, live a simple life and enjoy our semi-retirement on our terms knowing the roof over our head is secure, non negotiable.

fresh_cotton

the advantage of overpaying your mortgage over investments is that the savings are both guaranteed and fixed. You can do an exact forecast in terms of how much interest you save and when you will reach your goal.

Whilst you can have this with fixed savings - obviously the rates are very poor and in most cases its better to pay off the mortgage.

Also, anyone can overpay a mortgage, whilst investments require a level of skill/knowledge and courage I suppose.

I have no doubt, that I wiser man/women could have made my money work a lot harder over the last 5 years whilst I have been overpaying the mortgage. But then again, 'self acclaimed financial experts' also have a habit of losing money too.

But on the whole, zzzt makes a very valid point.