Psychological (and economic) benefits of investing/saving vs overpaying mortgage

anxiousnow

stuart746 said:

anxiousnow said:

We decided our current strategy (given poor interest rates and a potential future hike in mortgage interest rates) is to plough as much as we can into mortgage overpayments (while keeping an emergency fund). My view is that the interest benefits of overpaying outweigh the potential wins in stocks and shares, but of course, that's a personal decision and depends if you know what you're doing investment-wise and your appetite to risk. 

Thanks for the response, I think I have a low tolerance for risk, or at least quite a conservative one.
As a matter of interest, how did you decide what needed to go into the your emergency fund? I find this interesting as if you read these boards the EF varies considerably depending on what people count as an emergency.

I consider it to be between 6 and 12 months' expenses (not salary - just need to be able to pay the mortgage and the bills if we were both temporarily out of work). 
We are also investing in Stocks and Shares LISAs and I consider our pensions to be S&S type investments too, so the overpayments provide us with a bit of a mixed profile.

jimjames

There was a similar thread a few weeks ago that might make useful reading

https://forums.moneysavingexpert.com/discussion/6249666/do-i-save-or-do-i-pay-off-my-mortgage#latest

I have invested rather than paying off the mortgage early. Logically and financially the longer you have for investments to grow the larger that pot will be and the wider the difference between the mortgage amount and investments. Psychologically  it really depends on your personal mindset. I find it far more reassuring to have sufficient money invested that could clear the mortgage several times over and give some spare than being in the situation of no mortgage and no investments either.

strawb_shortcake

We don't earn anywhere near what you do, but we did find ourselves in a position whereby we could have paid the mortgage off, and we really thought that's what we'd do, until my Husband said that's maybe not the best option. On weighing up our options we realised: 

- we were unlikely to ever have this amount of savings again 
- we would have to be very disciplined in our finances going forward if paying off the mortgage aged 36/41 to see a real benefit 
- our mortgage was actually quite affordable
- having substantial savings gave us better flexibility than having no mortgage.

We did make some overpayments, and we should be mortgage free at 50. 
We haven't been too smart with the money since, in part due to my Husband not being well enough to make and contribute towards a better decision.
But we do now have a healthy EF, £50k in Premium bonds that will most likely finance a house move in 5 years - this will have any winnings added to it so roughly £51k now.

I have a good DB pension, both state pensions are on target. My Husband has been a stay at home Dad and now a student so he has no occupational pension, and won't contribute to one just yet as he's not yet convinced he'll see 60. 
I'm just about to start my investment journey, but i honestly don't think we'd be that better off without a mortgage whether that's financial or psychological 

stuart746

anxiousnow said:

stuart746 said:

anxiousnow said:

We decided our current strategy (given poor interest rates and a potential future hike in mortgage interest rates) is to plough as much as we can into mortgage overpayments (while keeping an emergency fund). My view is that the interest benefits of overpaying outweigh the potential wins in stocks and shares, but of course, that's a personal decision and depends if you know what you're doing investment-wise and your appetite to risk. 

Thanks for the response, I think I have a low tolerance for risk, or at least quite a conservative one.
As a matter of interest, how did you decide what needed to go into the your emergency fund? I find this interesting as if you read these boards the EF varies considerably depending on what people count as an emergency.

I consider it to be between 6 and 12 months' expenses (not salary - just need to be able to pay the mortgage and the bills if we were both temporarily out of work). 
We are also investing in Stocks and Shares LISAs and I consider our pensions to be S&S type investments too, so the overpayments provide us with a bit of a mixed profile.

Sounds like a sensible plan. I wish LISAs were available to people over 40, they seem like a brilliant product, I would have snapped one up if it had been available years ago. 

ratechaser

Apodemus said:

You are quite right about the psychology issue - while it certainly seems logical to invest rather than pay off the mortgage, the peace of mind from paying it off and being completely debt-free is a huge benefit.  I paid mine off about ten years ago and have no regrets, even if the cash might have done better if it had been invested.   

Seconded. Barring a socialist revolution, act of God, or divorce (those last 2 could be linked...) no one will ever take the roof from over my head. There's no accurate way to quantify the value of that feeling.

May actually have got lucky on the timing as well - looking at the FTSE as a guide, from the point of us taking the mortgage in 2005, to paying it off in 2010, it doesn't look like there would have been much or any growth from investing the money instead, at least not in a typical mainstream tracker. 

Yes we could pull it back out again to invest (it's an offset with 9 more years to run), but borrowing to invest is rarely a good strategy...

MovingForwards

Slightly different circumstances to you, income rather than age. I decided to overpay my mortgage, save cash savings and put money into a SIPP; I've a few small old DB pensions and currently working for a company who offered a DB pension. Full disclosure I'm also with a sub-prime lender so have a higher mortgage apr, for now.

It is psychological the decision as the freedom being mortgage free opens up options of working less hours, taking a totally different job with lower salary and probably a million and one other benefits.

You need to weigh up if your pensions will be enough, with state pension (don't forget to check that's on track for a full one), to meet your intended lifestyle. 

stuart746

jimjames said:

There was a similar thread a few weeks ago that might make useful reading

https://forums.moneysavingexpert.com/discussion/6249666/do-i-save-or-do-i-pay-off-my-mortgage#latest

I have invested rather than paying off the mortgage early. Logically and financially the longer you have for investments to grow the larger that pot will be and the wider the difference between the mortgage amount and investments. Psychologically  it really depends on your personal mindset. I find it far more reassuring to have sufficient money invested that could clear the mortgage several times over and give some spare than being in the situation of no mortgage and no investments either.

Thanks, I had a good look at that. I know this is a topic that has been 'overdone', but my question was also about the trade-off  between decisions that feel good, over decisions that are likely to be economically beneficial in the longer-term. It sounds like the good feeling can come from both paying off the mortgage (as some have suggested) as well as having a significant investment nest-egg - as you suggest. I think I may take a middle path.

stuart746

MovingForwards said:

Slightly different circumstances to you, income rather than age. I decided to overpay my mortgage, save cash savings and put money into a SIPP; I've a few small old DB pensions and currently working for a company who offered a DB pension. Full disclosure I'm also with a sub-prime lender so have a higher mortgage apr, for now.

It is psychological the decision as the freedom being mortgage free opens up options of working less hours, taking a totally different job with lower salary and probably a million and one other benefits.

You need to weigh up if your pensions will be enough, with state pension (don't forget to check that's on track for a full one), to meet your intended lifestyle. 

Thanks for this. Yes, I agree about the issue of opening up options, though some have also suggested having higher level of savings and investments also gives you some flexibility - it seems like there are two ways of looking at it. I'm quite lucky perhaps in that I like my job, it gives me high levels of autonomy, and for now I cannot see not wanting to do it, but I agree that I may not always feel like that.
I've established that my pension (and my wife's) will be more than enough for us with our lifestyle, but there is always uncertainty. I think what is interesting about paying off a mortgage is that it gives you a degree of financial certainty, whereas investing/saving/pensions do not always do that. That certainly, or feeling of security is perhaps what makes people feel happy about the decision.

stuart746

ratechaser said:

Apodemus said:

You are quite right about the psychology issue - while it certainly seems logical to invest rather than pay off the mortgage, the peace of mind from paying it off and being completely debt-free is a huge benefit.  I paid mine off about ten years ago and have no regrets, even if the cash might have done better if it had been invested.   

Seconded. Barring a socialist revolution, act of God, or divorce (those last 2 could be linked...) no one will ever take the roof from over my head. There's no accurate way to quantify the value of that feeling.

May actually have got lucky on the timing as well - looking at the FTSE as a guide, from the point of us taking the mortgage in 2005, to paying it off in 2010, it doesn't look like there would have been much or any growth from investing the money instead, at least not in a typical mainstream tracker. 

Yes we could pull it back out again to invest (it's an offset with 9 more years to run), but borrowing to invest is rarely a good strategy...

Yes, there is no way to quantify the value of that feeling, but I bet someone could! This gets to the heart of my question, the extent to which the debate about what is rationally a better decision (e.g. investing) does (or does not) offset the positive feelings that may come from paying down debt.
Agree totally that borrowing to invest is not wise.

steampowered

ratechaser said:

Seconded. Barring a socialist revolution, act of God, or divorce (those last 2 could be linked...) no one will ever take the roof from over my head. There's no accurate way to quantify the value of that feeling.

You can't quantify the feeling, but you can quantify the cost

If we assume the following:
- comparing £200k of mortgage vs. £200k in a stocks & shares ISA
- interest rate of 1.5% on the mortgage (about average for low LTV mortgages at the moment)
- 7.5% annual return on the investments (about average long term return of the stock markets)

The cost of the "nice feeling" of being mortgage free is £12,000 per year. Personally I'd rather have the money.