Pay off mortgage now or wait??

si_74

Hi all

Due to an inheritance we are in a position where we could pay off our mortgage and I am looking for advice and thoughts as to whether we should do that or wait until our fixed term ends. I will try to provide as much information as I can:

Amount outstanding on Mortgage - £73,912.01 (approx £640/month)
Rate - 3.5%
Fixed until - 30/11/2027
Early Repayment Charge - £1,478.24 (So a total settlement of £75,390.25)
Covers and Insurances on Mortgage that will also stop - £81/month

We have no other debts.

The appeal of going mortgage free is strong, but I want to make sure whatever I do is sensible.

Thoughts appreciated.

Thank you

edinburgher

Is your ERC in place until 30/11/27, or does it expire before then?

si_74

edinburgher said:

Is your ERC in place until 30/11/27, or does it expire before then?

I believe it is 2% of the outstanding balance and so reduces by a small amount each month, I also believe that it is in place until 30/11/27.

BikingBud

si_74 said:

Hi all

Due to an inheritance we are in a position where we could pay off our mortgage and I am looking for advice and thoughts as to whether we should do that or wait until our fixed term ends. I will try to provide as much information as I can:

Amount outstanding on Mortgage - £73,912.01 (approx £640/month)
Rate - 3.5%
Fixed until - 30/11/2027
Early Repayment Charge - £1,478.24 (So a total settlement of £75,390.25)
Covers and Insurances on Mortgage that will also stop - £81/month

We have no other debts.

The appeal of going mortgage free is strong, but I want to make sure whatever I do is sensible.

Thoughts appreciated.

Thank you

I make it that you have somewhere between 11-12 years remaining so could allow significant changes in your life if you are relieved of the debt.

What age and are you still working? If only working to pay the mortgage and clearing the mortgage would allow you to retire or reduce working hours that might be worth considering.

Bear in mind as a standard rate taxpayer generally 20% of your working time will be to cover PAYE and NI therefore if you can reduce that because you have no mortgage you get a win by generating some freedom, a priceless commodity.

If you consider 28  month @81/month you appear to save £2268 which more than offsets the ERC.

Is the insurance life or buildings as well as you should continue to pay building and possibly contents insurance so the offset might not be as large.

What else have you considered doing with the cash? The worst thing you might do is squander it on day to day costs, however a holiday or investing to get more return than the interest might be worthwhile considering.

Also if you do not already have one, consider setting some aside as a buffer for future costs.

I feel a blend of the above, pay some off, pay for a treat and enjoy something, keep some for potential costs, might suit best.

si_74

BikingBud said:

I make it that you have somewhere between 11-12 years remaining so could allow significant changes in your life if you are relieved of the debt.

What age and are you still working? If only working to pay the mortgage and clearing the mortgage would allow you to retire or reduce working hours that might be worth considering.

Bear in mind as a standard rate taxpayer generally 20% of your working time will be to cover PAYE and NI therefore if you can reduce that because you have no mortgage you get a win by generating some freedom, a priceless commodity.

If you consider 28  month @81/month you appear to save £2268 which more than offsets the ERC.

Is the insurance life or buildings as well as you should continue to pay building and possibly contents insurance so the offset might not be as large.

What else have you considered doing with the cash? The worst thing you might do is squander it on day to day costs, however a holiday or investing to get more return than the interest might be worthwhile considering.

Also if you do not already have one, consider setting some aside as a buffer for future costs.

I feel a blend of the above, pay some off, pay for a treat and enjoy something, keep some for potential costs, might suit best.

Thanks for the reply. I am 51 and my wife is 50. Not having the mortgage opens up options for us in the coming years for sure, I am considering a career change....basically leaving my current job and doing something less stressful and with less responsibility, but inevitably less money also.

My wife is a 20% tax payer, I am a higher rate. This was part of my reasoning also, ISA's aside a portion of any gains on the money will be taken by HMRC and investing it into the house removes that burden.

The £81 is life insurance for the mortgage, buildings and contents was not included in my numbers so the £81 is definitely an additional saving.

Agreed on not squandering the inheritance, it was from my Dad and he would definitely approve of a treat or two....but he was also thrifty so paying off the mortgage would also get a thumbs up! We are lucky that we are solvent without this money (although my job is not overly secure right now), so it would be saved/invested and used to bolster pensions. I have already removed some for treats for us and our kids.

My primary uncertainty is whether it financially makes sense to do this now....

BikingBud

Financial sense is different for different people, only you know what you value and what store you put in those values. 

Perhaps if you have not already thought about it, check your state pension forecast

check-state-pension

And consider other sources of income and think about what you might need to sustain that level if you were to give up work. The pensions board has lots of discussion but redistributing the mortgage payment into a salary sacrifice pension, especially as a higher rate taxpayer, would most likely be the best saving you could ever achieve.

Less headline rate of pay doesn't always mean less disposable (fun) money. Costs associated with mortgages and children do end at some point so then setting yourself up to enjoy life later is wholly reasonable.

si_74

BikingBud said:

Financial sense is different for different people, only you know what you value and what store you put in those values. 

Perhaps if you have not already thought about it, check your state pension forecast

check-state-pension

And consider other sources of income and think about what you might need to sustain that level if you were to give up work. The pensions board has lots of discussion but redistributing the mortgage payment into a salary sacrifice pension, especially as a higher rate taxpayer, would most likely be the best saving you could ever achieve.

Less headline rate of pay doesn't always mean less disposable (fun) money. Costs associated with mortgages and children do end at some point so then setting yourself up to enjoy life later is wholly reasonable.

Wise words and exactly my thoughts.

My state pension forecast is that I have already made the payments I need to get the full amount, my wife will have done so within the next year or two.

From a choice and value level I want to pay the mortgage off. However being a little analytical minded I need to consider the numbers as well to make sure I am not losing out in a significant way. e.g. look at the costs of paying the mortgage off now (saving £721/month immediately, but paying the ERC) vs the costs of doing it in two years (lower capital sum, but having paid £640+£81/month) and investing the cash until then.

si_74

Here are my sums (earlier posts had my monthly repayment at £640, it is actually £661):

Months remaining of fix	Amount	Total
26 Mortgage	£661.45	£17,197.70
26 Covers	£81.47	£2,118.22
26		£19,315.92

So the costs until the end of my fix are £19,315.92
.
My mortgage is currently £73,912+£1,478 ERC = £75,390.
At the end of my fix it will be approximately £61,500.
A reduction of £13,890.

The cost of this reduction (interest plus insurance covers) is £19,315.92 - £13,890 = £5,425.92.

So i would need the investment in the money between now and November 2027 to be £5,425.92 or more to make it worthwhile holding out on paying off the mortgage.

Very roughly that would require an annual 4% return for 2 years, and that does not take into account any tax on the savings. With the ISA limit being £20k, and looking at current rates, I am not sure a net 4% return on the full amount is easily achievable. (I do not want to risk stocks and shares with this money).

This has hurt my head, so if anyone spots any errors or incorrect assumptions then feel free to correct me! :-)

South_coast

You seem to have got a lot of answers to questions you didn't ask! So, to answer the question you did ask, I would pay it off. Yes, you'll pay an ERC, but what's £1500 in the grand scheme of things? If you don't pay it off, you'll be paying £2.5k in interest each year. Being MF is priceless 😀

si_74

South_coast said:

You seem to have got a lot of answers to questions you didn't ask! So, to answer the question you did ask, I would pay it off. Yes, you'll pay an ERC, but what's £1500 in the grand scheme of things? If you don't pay it off, you'll be paying £2.5k in interest each year. Being MF is priceless 😀

Ha!

Thank you for your answer, although I was quite happy to talk around the subject a little bit. That fell within the realms of making sure I'd thought of every angle.

The plan is to sit down tonight and discuss it, I suspect we will take the leap and pay it off. The thought of no mortgage is liberating! I found an article saying that paying off the mortgage is as much about how it makes you feel as the finances, and that resonated with me.

si_74

Thanks for the responses. We discussed, we decided and we did it. After a little last minute wobble we are now mortgage free!