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

edgex

Thrugelmir said:

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. 

Endowment mortgages
Interest-only mortgages
>95% LTV mortgages

IamWood

It is a very interesting topic.

Sometimes life and feelings of security cannot be measured in monetary terms.

Personally, I chose to pay off my mortgage (for two) when I could. I am now enjoying my freedom and the security I can have, which has also shaped the way I view my work. I'm not afraid of being fired or made redundant. I have started investing more now when I have spare cash and look forward to my earlier retirement as soon as possible.

Thrugelmir

edgex said:

Thrugelmir said:

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. 

Endowment mortgages
Interest-only mortgages
>95% LTV mortgages

Nikkei Crash

What often gets overlooked is the fact the Dot Com crash also ended an 18 year bull run for the S&P 500. Which grew at an annualised rate of 18% over that time frame. Wasn't just the "tech" stocks that suffered. 

stuart746

IamWood said:

It is a very interesting topic.

Sometimes life and feelings of security cannot be measured in monetary terms.

Personally, I chose to pay off my mortgage (for two) when I could. I am now enjoying my freedom and the security I can have, which has also shaped the way I view my work. I'm not afraid of being fired or made redundant. I have started investing more now when I have spare cash and look forward to my earlier retirement as soon as possible.

Thanks, I was hoping that, in addition to helping it shape my direction and thinking, it would also spark some debate.
I was thinking in a similar way, in that overpaying my mortgage earlier may help me to change my relationship to my work and benefit me psychologically and in terms of my wellbeing by taking some of the pressure off. I can see there is some value in that. I suppose saving/investing for wealth can have a similar impact, so there may be more than one way of going about this.

ratechaser

Alexland said:

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.

...but nevertheless (and while appreciating the efforts you have made in drilling down into the detail here), I really couldn't give a fig 

stuart746

I love that often used quote from Keynes: 'The market can stay irrational longer than you can stay solvent'.
Investing is clearly not rational short-term, and only gets to be rational the longer you can stay invested. For me, 10 years seems like long-term, but slumps have lasted longer than this (Japan 95-07?)

MX5huggy

I think we’re similar with less money and I little more time. Paying off the mortgage is attractive but when you add the tax relief on pension contributions you really are better to go with pension even if you only invested in cash in the pension. I’ve the option is Salary Sacrifice AVC’s so I can either pay off £100 of mortgage or have £147 put in the pension. 

Having said that the mortgage is a repayment mortgage.  2 years in to a 10 year fix with 7 years after that. So the pension is not earmarked to pay off the mortgage but given a fair wind will enable an early retirement. Where as paying off the mortgage early does not really give this chance.

Thrugelmir

stuart746 said:

For me, 10 years seems like long-term, 

For equities the minimum outlook. Drill into statistics and a UK investor would have to be invested for 12 years. To guarantee a positive return on a lump sum investment. While century plus average returns are 4%-5% above inflation with income reinvested and before fees. This disguises a multitude of peaks and throughs. 

LHW99

We have paid our mortgage down quite a lot over the last 10 years because:

We had a significant cut in income, such that with the revised affordability rules we could not remortgage to a lower rate, despite being able to afford payments.

We could afford payments at the time because it was interest only - we would have had much increase monthly payments if it had been transferred to a repayment, and no one offered interest only mortgages any more.

We wanted it to end around the time of retirement, so there would be no need to carry it on at that time.

However, we didn't put all our available money into it, we also added to pensions and savings to try and "hedge our bets"

stuart746

MX5huggy said:

I think we’re similar with less money and I little more time. Paying off the mortgage is attractive but when you add the tax relief on pension contributions you really are better to go with pension even if you only invested in cash in the pension. I’ve the option is Salary Sacrifice AVC’s so I can either pay off £100 of mortgage or have £147 put in the pension. 

Having said that the mortgage is a repayment mortgage.  2 years in to a 10 year fix with 7 years after that. So the pension is not earmarked to pay off the mortgage but given a fair wind will enable an early retirement. Where as paying off the mortgage early does not really give this chance.

Thanks, yes this is a similar situation. We also have a repayment mortgage and I recently fixed for 5 years at a very low rate. My wife and I also add money to an AVC and although it is not a great return, it is better than inflation and has tax benefits.