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

katejo

Sg28 said:

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

My Dad told me not so long ago that, in all his years of having a mortgage (roughly early 60's to late 90's), his mortgage interest never dropped below 5% and was often quite a bit more. I have been lucky. Mine was 6% in 2006 but of course dropped substantially after the crash. I was then on a tracker of 1% or less until I paid it off in 2021. In the 90's it ranged from about 4% to 6%.

ader42

Average BOE base rate from 1971 to 2023 was 7.11%

Anyhow, from my perspective it depends on your age and future plans. If you are young and only buy a small starter home, then overpaying will allow you to get a nicer, bigger home before you retire. If you are alreaady in your forever home then invest.

Looking back I should have borrowed more and moved up the ladder sooner - using more mortgage debt leverage.

But from a purely numbers perspective stock market does win long-term.

So yes it is a balance. If investing outside a pension (so no tax relief or matched contributions) then I’d say mortgage overpayments would swing it for me instead - and I say that as someone who feels he has done really well in his investments. 

That said, when I hit 55 I’ll have the option of a new mortgage fix of 6%+ (less than 30% LTV) or pay it off entirely. I suspect I’ll take the easy de-stressing route of paying it off and sacrifice some future growth for it. 

Pat38493

Albermarle said:

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.

If you have access to enough tax free cash from your pension pot to pay off your mortgage, you have already received tax relief on that so should you then ignore the tax relief bit?  Paying off the mortgage from TFC might even allow you to increase pension contributions a bit as long as you don’t fall foul of pension recycling guidelines?

Also what would be the methodology to compare and decide at a given point in time?  You would somehow need to know:
- current best available mortgage rate and estimated rates over future term
- trailing long term returns of your investments over roughly the same period as remaining mortgage term.
- average inflation over same period to get net returns?
- what else?

Even then you might have to run some historical simulations on the scenarios - paying off the mortgage from pension pot is a bit like causing a sequence of return event on the pot.

jackieblack

Albermarle said:

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.

Or have low outgoings 😉
I’ve done the first two (mortgage neutral) and am now working on the third.
I work part time and my income has always been well below the national average, but I have simple tastes.

Albermarle

jackieblack said:

Albermarle said:

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.

Or have low outgoings 😉
I’ve done the first two (mortgage neutral) and am now working on the third.
I work part time and my income has always been well below the national average, but I have simple tastes.

Yes of course, and the good thing about low outgoings, is you need less of a retirement pot to be built up!

Khaderbhai

jackieblack said:

Albermarle said:

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.

Or have low outgoings 😉
I’ve done the first two (mortgage neutral) and am now working on the third.
I work part time and my income has always been well below the national average, but I have simple tastes.

Agree with this. We don’t all want to go on soulless cruises in retirement. 

simon_or

Interesting to see the wide variety of approaches outlined in this thread.

I'm pumping as much as I can into my pension and s&s ISA. Like the original post in the thread I'm a bit torn about whether instead of the s&s ISA I should consider putting money in a 5 (or even 7 years if available) year fix at close to 5%.

As for my mortgage, I carry an interest only mortgage by deliberate choice, currently at 60% LTV. The aim is to slowly (or when I can access my SIPP) get it down to 40-50% LTV by the time my wife turns 55-60 and then convert it to a later life lending product that will be paid off on death. No intention to leave the property to my kids.

Zopa_Trooper

Albermarle said:

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.

You've got me down to a tee.

ispookie666

Its become really complex, normally we would keep some overpayments and rest into S&S ISA.  We need to build up 24K by next April to pay off the additional borrowing (its currently on 2.54%).  We'll plough these into ISA's and pull the money next April, investing in the market for a short term seems way too risky.  I'm not keen on Money market funds either.  

In addition to this, we are continuing to overpay by £900, i'm hoping come next April, the repayment amount can remain the same and adjust to avoid hitting the 20% repayment limit (not sure why Natwest changed it!).  I'm glad we only took out mortgage for 1.5 times our joint income after seeing how much the repayments would be if the rates hit 5-8%!

Any additional money will be ploughed into S&S ISA, unless the rates top 7%

housebuyer143

simon_or said:

Interesting to see the wide variety of approaches outlined in this thread.

I'm pumping as much as I can into my pension and s&s ISA. Like the original post in the thread I'm a bit torn about whether instead of the s&s ISA I should consider putting money in a 5 (or even 7 years if available) year fix at close to 5%.

As for my mortgage, I carry an interest only mortgage by deliberate choice, currently at 60% LTV. The aim is to slowly (or when I can access my SIPP) get it down to 40-50% LTV by the time my wife turns 55-60 and then convert it to a later life lending product that will be paid off on death. No intention to leave the property to my kids.

In terms of housing that's the same mentality I see. I have interest only by choice and plan either to downsize or like you a lifetime mortgage or something similar at the end. 
I like interest only because it enables you to get a larger house than you otherwise might feel comfortable paying for when you are young and need it due to a family etc and then get something smaller with the equity built up when you retire. 

Interest only isn't bad if you go into it with knowing what you are doing and plan to stick to your repayment strategy.