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

stuart746

steampowered said:

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.

Interesting. The opportunity cost may be considerable then, but I don't think this will necessarily change the way people think and act.
Yes, I would rather have the money too, but I would possibly sacrifice a small % of that money to feel ok/happy about the decision I was making. I guess both decisions are about predicting how your future self would react.

edgex

Why not do both?

Lets assume your starting point is that your maxing out pension contributions, & that you've got 6-12 months easy access savings, no other debts, & that there's nothing you need or want to do to the property.

Spare income - max mortgage overpayment = regular investment/saving amount

strawb_shortcake

I suppose the other view is your current financial stability and access to savings, I have a very stable and secure job (as far as one can say that). 
In the last 12 months, we've had to buy a new car, a new oil tank and about to pay out for work to the roof which in total came to around £14k, admittedly we didn't need to spend £9k on a car but I'm glad to have something more reliable and newer. 
Had we have paid off the mortgage when we had the chance our savings would probably be close to zero now and we'd have to start from scratch. 

stuart746

edgex said:

Why not do both?

Lets assume your starting point is that your maxing out pension contributions, & that you've got 6-12 months easy access savings, no other debts, & that there's nothing you need or want to do to the property.

Spare income - max mortgage overpayment = regular investment/saving amount

Exactly, this is most likely to be my approach as I like finding a middle way.
It satisfies my need to find some financial benefit longer-term but at the same time making me feel like I do not have a large millstone around my neck.

Thrugelmir

stuart746 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.   

Paying off the mortgage was the norm to people of my parents generation, but today less so I think as we have historically low interest rates and fewer limits on mortgage age restrictions. Increased home equity also plays a part, if house prices fell considerably, perhaps that confidence would change. 

There's a generation that have never experienced inflation nor a sudden sharp rise in interest rates. Easy to be become complacent and believe that circumstances today are now the norm. Like a rollercoaster in the dark. Change happens when you least expect it. 

stuart746

annabanana82 said:

I suppose the other view is your current financial stability and access to savings, I have a very stable and secure job (as far as one can say that). 
In the last 12 months, we've had to buy a new car, a new oil tank and about to pay out for work to the roof which in total came to around £14k, admittedly we didn't need to spend £9k on a car but I'm glad to have something more reliable and newer. 
Had we have paid off the mortgage when we had the chance our savings would probably be close to zero now and we'd have to start from scratch. 

That is another good way of looking at it, yes I am financially obsessive about having enough savings for expenses/life happens moments. I budget every month for the worse case scenario.
My parents were both terrible with money, I was too in my 20s, but now it has made me quite controlling over my finances and I do not want to worry about money. 

stuart746

Thrugelmir said:

stuart746 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.   

Paying off the mortgage was the norm to people of my parents generation, but today less so I think as we have historically low interest rates and fewer limits on mortgage age restrictions. Increased home equity also plays a part, if house prices fell considerably, perhaps that confidence would change. 

There's a generation that have never experienced inflation nor a sudden sharp rise in interest rates. Easy to be become complacent and believe that circumstances today are now the norm. Like a rollercoaster in the dark. Change happens when you least expect it. 

You're right. I didn't experience the big inflation during the 70s, but my parents did along with huge interest rates of 17% on their mortgage. We no longer subscribe to the same Keynsian economics, so rises like that are rarer, and BoE and central bank policy is about controlling inflation. But, I'm aware that the post-Covid economy will be somewhat precarious. Govt is running a huge deficit, which will get worse before it gets better, eventually raising taxes (though they won't call it that!) and inflation later down the line.

ratechaser

steampowered said:

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.

Well ok, you can quantify it based on some general assumptions, and I won't question that. But as I mentioned, in our specific case I don't actually think we missed out due to the timing of the market cycle over which we paid the mortgage off. In fact the events of 2008 made it even more of a focus for us to become mortgage free. Guess we were the lucky ones that got our cake and ate it...

All that said, I'd still not trade the security I feel right now for £12k a year. But it's a personal thing...

Thrugelmir

stuart746 said:

Thrugelmir said:

stuart746 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.   

Paying off the mortgage was the norm to people of my parents generation, but today less so I think as we have historically low interest rates and fewer limits on mortgage age restrictions. Increased home equity also plays a part, if house prices fell considerably, perhaps that confidence would change. 

There's a generation that have never experienced inflation nor a sudden sharp rise in interest rates. Easy to be become complacent and believe that circumstances today are now the norm. Like a rollercoaster in the dark. Change happens when you least expect it. 

You're right. I didn't experience the big inflation during the 70s, but my parents did along with huge interest rates of 17% on their mortgage. We no longer subscribe to the same Keynsian economics, so rises like that are rarer, and BoE and central bank policy is about controlling inflation. But, I'm aware that the post-Covid economy will be somewhat precarious. Govt is running a huge deficit, which will get worse before it gets better, eventually raising taxes (though they won't call it that!) and inflation later down the line.

Experience is what shapes our personal investment outlooks. The tee shirts only accumulate with  time. Much depends on your risk appetite. A few strike it lucky. The majority at some point experience some disappointment. Complacency and lack of understanding of the broader risks in the real world do seem to prevail currently. 

Alexland

ratechaser said:

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. 

Obviously the exact dates will matter but if you look at the FTSE100 which you might have invested in around that time (I did back then) between 1/Jan 2005 and 1/Jan 2010 then yes the index only rose by 10% but then if you add dividend reinvestment it's more like a 35% return. Still you probably would have paid around 1% pa in fees so nearer 30% return. In terms of mortgage rates about 6% was the norm so yes it would have been about break even on a lump sum but you are picking a time period covering a particularly bad crash without allowing for the full recovery period. Also your return would have been different as with dollar cost averaging some of the money would have been invested higher and lower than at the start.