Do higher interest rates change your thinking on investing vs paying down mortgage debt

jimexbox

My attitude to money has changed as I've gotten older (mid 50's). I've paid the mortgage off and took redundancy from a very well paid but incredibly stressful job.

I now peddle to work and live stress free. Essentially chilling until I retire. Not attainable with a mortgage.

boingy

I have to say that paying off the mortgage is a fantastic feeling but don't neglect your pension and keep at least 6 months salary in an accessible form (savings and/or investments). 

EthicsGradient

jimexbox said:

My attitude to money has changed as I've gotten older (mid 50's). I've paid the mortgage off and took redundancy from a very well paid but incredibly stressful job.

I now peddle to work and live stress free. Essentially chilling until I retire. Not attainable with a mortgage.

'Peddle' (small scale selling of goods) or 'pedal' (ride a bike)?

dmc88

My attitude was (still is, sort of, not sure!?) the same as OP - sack off the overpayments and smash the S&S ISA with the knowledge/hope market performance beats mortgage - I'm 100% FTSE Global AllCap for both ISA & Pensions. Makes clearer sense when fixed at 2.34%, now I'm 4.14% for 4.5 years the risk free return has bridged a significant gap, plus the fact food, energy and other household stuff feels a lot more than it used to, there is less disposable left over. For reference in 2022 I contributed £250/wk to my S&S ISA by DD.

We've had a few bits done round the house in the last 6 months so paused contributions prior to cashflow that and to rebuild some liquid savings back up - I haven't restarted them again yet for reasons above but instead I've started a £155/m overpayment to make sure I'm still doing something - this apparently knocks 9 years off my 30 remaining, feels like a good deal. My boss retires in 9 months so if their replacement turns out to be a Hitler I also want the FU pot ready for a quick decision!

I personally value the liquidity of cash (either EF or ISA) - dropping it into the pension or the mortgage removes that liquidity. I am very conscious I am foregoing the tax break even at BR level - SalSac not available to me, if I could knock off NI as well that would probably tip the balance because 31% is difficult to turn away from. Similar to other comments, if I cashed in right now I could more than halve my mortgage balance, but I'd be left with EF fund only.

Context: I'm 35, with 2 young-ish kids, partner works part time. Plan 2 student loan. I contribute minimum to pensions to get employer uplift, BR tax but if I end up in HR and into HICBC then I contribute to pension to bring me back down again.

chockydavid1983

dmc88 said:

My attitude was (still is, sort of, not sure!?) the same as OP - sack off the overpayments and smash the S&S ISA with the knowledge/hope market performance beats mortgage

Haha yeah this pretty much summarises my thoughts! It's definitely a balance between pension contributions for retirement and tax reduction, S&S ISA for the future part retire early fund and EF and other cash to deal with short term shocks. I do still think S&S ISA and pension will do better in the long run and it's just a case of making sure I can afford the repayments. I'll probably fix again when my current fix ends September, probably for another 3 years but let's see how the market looks at that point.

GeoffTF

chockydavid1983 said:

I've always invested (in global equity and index funds) over paying down my mortgage quicker as it should give you a better return over the longer term. But does the logic change at all if we are entering a period of much higher interest rates than has been the case in recent years (as long as you can afford the repayments of course)? I would guess not but would be interested to hear others' thoughts on this.

If we are entering a period of higher interest rates, you will have to pay more for your mortgage. Other things being equal, equity prices will go down. The are valued as the net present value of future earnings, and the discount rate will have gone up. The higher interest rates will also depress future earnings (except perhaps for banks). So yes, given that premise, it is better to pay off your mortgage. What will happen to interest rates? They will certainly be higher for some time. After that nobody knows.

Sg28

Im paying mine off once the fixed terms ends. Mortgage rates of 5%+ are too beat with any certainty. 

GeoffTF

Sg28 said:

Im paying mine off once the fixed terms ends. Mortgage rates of 5%+ are too beat with any certainty.

There is never any certainty with equity investment. Equity valuations are currently high (particularly for the US), so returns are likely to be lower than the past long term average.

Albermarle

Zopa_Trooper said:

I was given the advice when young to pay off my mortgage at the earliest opportunity. This I did, the money on my endowment was all mine when it matured, house already paid off, and I've been comfortable ever since. When you don't owe anybody any money nobody has any power over you.

Not necessarily true. You could be in a position where you have no debts/mortgage, but you still have a family to support and no significant savings.
In which case you will be very dependent on your employer for your job to pay for food, clothes, school trips, bills, holidays, car  etc etc 
In fact if you have prioritised paying debts over building up a big retirement pot, then you may not be able to retire early, or at all.

Basically to get to Financial Independence , you need to pay off debts, support day to day living and build up a big retirement war chest all at the same time. Not easy to do all three unless you are a high earner, and hence the regular discussions on here about how to prioritise and keep a balance between the competing needs.

Albermarle

I guess I'm lucky that I've only ever known sub 2% mortgage rates. I've never been obsessive about paying the mortgage off - I've been more focused on pension contributions to get the tax relief

If you get higher rate tax relief on pension contributions, I think this will still tend to tip the balance squarely towards pension rather than mortgage.