Should I pay off my mortgage??? 15 January 2020 at 12:10PM edited 30 November -1 at 12:00AM in Mortgages & Endowments 9 replies 906 views

JohnBlack

I know this question might come up regularly but we all have different circumstances. I'll detail mine here and would be grateful to hear people's opinions about what I should do. I know that I am in a fortunate position and wouldn't have dreamed I'd be worrying about such a luxurious choice 10 years ago.

I’m 38, married with two primary school aged children. My wife and I have a combined income of £130k - £150k (depending on variable bonuses). We have a house valued at £625k with £175k remaining on the mortgage. My current fixed rate mortgage deal is about to end and I’m trying to make the best move with the cash that I have. We already have £100k in a diverse set of investments and an extra £275k in cash from a recent inheritance. I’m trying to decide if I should:
a) Use £175k of that inheritance to wipe out the mortgage and invest the remaining £100k.
b) Keep paying the mortgage for the next 25 years and use the full £275k as an investment fund.

Note: we have no other debts, no credit cards, student loans etc.

foxy-stoat

If your income is well into 6 figures then I doubt the £600-£700 a month for your mortgage repayments will make a lot of difference in your monthly budgeting.

If you have £275,000 cash + £100,000 invested then you will of paid someone at some point for financial advice - best ask them to crunch the numbers for you.

JohnBlack

Thank you for the reply. I agree with you - the existing £850 mortgage payment is only about 25% of our average monthly outgoings. Being mortgage-free doesn't seem to equate to financial freedom!

I'm wondering whether I'd get better returns by paying off the mortgage which will free-up £850 per month of potential investment money and also avoid future mortgage interest costs or if it is better to keep hold of that £175k and do something with it that will grow the money faster or pay me an income that will move me closer to early retirement. My job pays me a decent salary but, by Christ, I don't want to do it any longer than I have to.

The professional financial advice that I have received so far has been to go ahead and pay off the mortgage, I'm here for a second opinion.

zx81

What about pensions?

JohnBlack

Thanks, that's a good point about pensions, I should have included that in my original post.

I currently pay around £11k annually into mine (including employer contributions) and my wife pays about half of that into hers. We have both set our contributions to the max that our employers will match. Clearly we are nowhere near the £40k annual limit. Do you think I should look at that before considering paying off the mortgage?

Linton

Provided you invest prudently you can pay off the mortgage at any time. It would make sense to get the best return you can from your money - either by not paying the x% interest on your mortgage or by receiving y% in investment returns. Normally y is significantly higher than x. You should have experience of this from your existing investments.



Do you have an emergency cash fund of at least 6 months living expenses? If not take that from your £275K first. This will significantly reduce the chance of you having to cash in your investments, possibly at a loss, if for example either of you lost lost your job.


If you want to retire early it maybe sensible to put at least some of the money into his & hers S&S ISAs. If either of you are paying higher rate tax after your current pension contributions, then increasing the contributions is very tax beneficial - you get 40% tax relief when you pay in but probably only pay 20% tax when taking the pension.


This is often discussed on the Savings and Retirement boards.

dimbo61

1 Not sure how long you have on current deal with residental mortgage but consider an Offset mortgage and use savings to fully offset.
2 If you can increase Pension contributions and Employer will match go for it.
Will you have more than the £1,055,000 in your pension when you retire??
Consider other Investments?
Maybe a BTL property, Holiday Let you can also use for Family holidays?
Will your kids go to Uni? Maybe a suitable property for them while at UNI.
Invest money in Children accounts to help with Uni costs ??
Premium bonds for You and the wife ?

foxy-stoat

dimbo61 wrote: »

Premium bonds for You and the wife ?

No no no, it will reduce my chances of winning.....;)

Delius

One thing I would do is, rather than paying off my mortgage (it's very cheap money at the moment), use some of that inheritance to make a 10% overpayment on the mortgage, annually. The rest can be making significantly more than the mortgage is costing you, plus the mortgage will be paid off years earlier than it otherwise would. There's a calculator on this site that illustrates how overpayments affect the term and overall cost of a mortgage.

getmore4less

With joint income of £130-£150k you are well into 40% tax for at least one of you if not both depending on the split.

also have a fairly healthy net income(£6k+) to work with even with pension contributions taken off that.

I would focus first on the TAX position and use ways to mitigate that, although not at the expense of the tax tail/dog scenario

Maxing out the pension with 40% money is often the first thing to do, if you can afford it, which you clearly can currently.
(might be able to get the child allowance back if you put enough in)

Then make sure your ISA allowance are used to keep another chunk tax free as likely you could be in 40% tax on retirement.
If current investments not IAS you can move them in.

Company share schemes are often useful low risk investment some come with tax benefits.

Even after all those, I think you should have spare income unless you have got into a habit of spending*

LTV <50% should be on mortgage rates below 1.5% investments should have no problem beating that.

Also consider contingency for job loss.
Can you live on one income?
What's the risk of loosing both incomes(eg both work in the same company)?


* early retirement is more about spending than earning if you cap your spending at a comfortable level, you can put more towards the future even with pay rises

Any idea how early?

A fairly reasonable guess is you need a pot of 25 times spending to retire more is better.

the existing £850 mortgage payment is only about 25% of our average monthly outgoings

In today's money £3.4kpm needs a pot of £1million+ depending how tax efficient you can get it.