Paying off mortgage early - Advice?

DeeCas

Hello,
I previously asked this and received some good feedback. I'm now in a position to look at this.

Current mortgage: £54,500
Redemption figure is £56,100
It was taken on a 5-yr fixed Oct 2023 at 4.84%
So I still have a few years left.

I currently have around £100,000 in the bank and zero other debts.
By paying this off I will still have a decent chunk of money aside and still working a full time job.

What are the cons against paying this off?
Would I be better off liaising with a financial advisor first?

Wonka_2

I’m in a similar position but at 1.89%

Far more clear cut for me that it’s not worth paying off given what I can earn on the savings plus the saving of redemption penalty. 

There’s still a psychological issue of wanting it paid off though 😂

Exodi

This question comes up and I think it's important to recognise there are two different aspects to it.

Financial - fundamentally, paying off your mortgage is a Maths problem. You currently pay 4.84% interest on the debt, while you earn X (you haven't said) on your savings. It's unlikely that your savings rate is that high and you may also be paying tax on the interest. When working out this equation, it's important to consider what the average mortgage rate is expected to be over the life of the mortgage (you haven't said how long the mortgage term is, only the fixed deal), as once you overpay a mortgage, you can't get the money back out.

There is however another angle to this. While effectively all savings accounts now pay less than your mortgage interest rate, for those looking to maximise returns, holding £100k in cash is not advised. Did you have a plan for the cash? Could you consider investing the money instead? What is your (and potentially your partners) ISA  allowance status this year? My investments have continued to return significantly more than I pay on my mortgage or achieve on my savings. I expect to maximise returns (and if you didn't need the cash in the short term and had appropriate emergency savings) the best option would be investing.

Emotional - Many times, the financial aspect is unimportant, and people pay off their mortgage for the feeling of 'security' or 'freedom'. While I don't fully understand this, I think it's from the comfort of knowing it's effectively impossible for them to ever be homeless, even if the worst happened and they lost their jobs, etc. Conversely, people also like the comfort of having a large amount in savings, and while this forum promotes having a good amount in case of an emergency (often 3-9 months of living expenses), very often people take this to the extreme and have crazy amounts of cash 'just in case' (the roof falls off, their car breaks down and needs a new everything and the boiler breaks I guess). 

It's a personal choice as much as anything, everyone is different. Personally I plan to let my mortgage run for its entire term, while diverting all surplus cash to my S&S ISA but I totally appreciate a significant amount of people strive to be mortgage-free as soon as possible.

If you did decide to pay it off early, it's unlikely that doing it in one lump sum (and paying ERC's) would be the best option. It's likely maxing out your overpayment allowance each year until the deal ends and you can pay the balance will be the best option - however this is again a Maths problem and depends on what you are getting on your savings, your tax status, ISA status, etc.

IOWJJBTM2025

Hello,
I would pay it off just to get rid of the monthly payment and feel better about myself.
Factor in that HMRC will want a cut of the interest you earn on your savings depending how you invest.
Also note that your credit score will verry likely reduce if you pay your mortgage off.

julicorn

Looks like there is a £1,600 fee to pay it off early. I personally wouldn't pay it off while there's still the early redemption fee, but rather stick amount needed to clear the mortgage into a savings account and wait until your term is over. You can get around 4.5% interest at the moment, so the difference in the interest you gain from your savings and the mortgage interest is not huge. 

singhini

Personally i would NOT bother with a financial advisor -----> in my mind your making a choice between having no mortgage and some savings versus having a mortgage and alot more savings.

2 observations: (1) you have zero other debts (2) you've managed to save £100k -----> seems like saving and having no debts is important to you ------> if so, paying off the mortgage would feed into this perfectly. 

i would pay off the mortgage and have £45k in savings bcoz the cost of borrowing is 4.84% (i assume savings are earning less)

The redemption is £1,600 above the mortgage and fag pack analysis suggests to me you will recoup that money in just over 7 months -----> 4.84% on £54.5k = £2,638 / 12 = £220 per month / £1,600 = 7.5 months).

Questions worth asking yourself:

How long would savings of £45k last you?

Could you add more savings to the £45k?

How quickly could you do this?

If you pay off the mortgage and have no debts, would you find it harder to get finance/borrowing in the future? 

Could you make overpayments and bring the mortgage down without penalties?

PS - Congratulations on reaching such a strong financial position 👍

DeeCas

Exodi said:

This question comes up and I think it's important to recognise there are two different aspects to it.

Financial - fundamentally, paying off your mortgage is a Maths problem. You currently pay 4.84% interest on the debt, while you earn X (you haven't said) on your savings. It's unlikely that your savings rate is that high and you may also be paying tax on the interest. When working out this equation, it's important to consider what the average mortgage rate is expected to be over the life of the mortgage (you haven't said how long the mortgage term is, only the fixed deal), as once you overpay a mortgage, you can't get the money back out.

There is however another angle to this. While effectively all savings accounts now pay less than your mortgage interest rate, for those looking to maximise returns, holding £100k in cash is not advised. Did you have a plan for the cash? Could you consider investing the money instead? What is your (and potentially your partners) ISA  allowance status this year? My investments have continued to return significantly more than I pay on my mortgage or achieve on my savings. I expect to maximise returns (and if you didn't need the cash in the short term and had appropriate emergency savings) the best option would be investing.

Emotional - Many times, the financial aspect is unimportant, and people pay off their mortgage for the feeling of 'security' or 'freedom'. While I don't fully understand this, I think it's from the comfort of knowing it's effectively impossible for them to ever be homeless, even if the worst happened and they lost their jobs, etc. Conversely, people also like the comfort of having a large amount in savings, and while this forum promotes having a good amount in case of an emergency (often 3-9 months of living expenses), very often people take this to the extreme and have crazy amounts of cash 'just in case' (the roof falls off, their car breaks down and needs a new everything and the boiler breaks I guess). 

It's a personal choice as much as anything, everyone is different. Personally I plan to let my mortgage run for its entire term, while diverting all surplus cash to my S&S ISA but I totally appreciate a significant amount of people strive to be mortgage-free as soon as possible.

If you did decide to pay it off early, it's unlikely that doing it in one lump sum (and paying ERC's) would be the best option. It's likely maxing out your overpayment allowance each year until the deal ends and you can pay the balance will be the best option - however this is again a Maths problem and depends on what you are getting on your savings, your tax status, ISA status, etc.

Very informative reply, thank you.
I still have 24 years left on my Mortgage as it stands.

I do not have an ISA only a Savings Account with Chase that has £20,000 sat there earning interest.
The rest is spread across my other normal bank accounts (My personal one, our joint one).
I am a single parent.

I honestly have no idea about savings accounts, ISA's, interest, investing etc. So maybe this is something I should really be looking into first?!

FWIW I have circa £110k in total. 
Mortgage as described
No other debts

If I leave some in the savings (Chase) earning interest, would it also be worthwhile having an ISA that is earning interest? The tax confuses me as I'm currently also receiving my wife's pension each month which has changed my tax code and therefore paying more in tax than I did before.

Exodi

I would park the mortgage idea then until you have a keen grasp on everything.

Any idea what interest rate you are earning on the money in these accounts? Some of them sound like current accounts which typically pay negligible interest.

You could be earning ~1% on your savings which are currently in current accounts (£1000 per year on £100k, or £83.33 per month) when you could be earning ~4.5% just moving them into a decent savings account (£4500 per year on £100k, £375.00 per month). Nearly £300 a month for nothing.

It's also worth remembering that you can pay tax on interest (and how much depends on your tax bracket). You can read more here: https://www.gov.uk/apply-tax-free-interest-on-savings but to give an example, if you were a 40% tax payer, you could only earn £500 in interest per year tax-free - meaning in the two examples above, you'd pay 40% tax on £500 if the money was in a 1% account (£200, meaning total interest for the year would be £800 - effectively making the interest rate 0.8%), or 40% tax on £4000 if the money was in a 4.5% account (£1600, meaning total interest for the year would be £2900 - effectively making the interest rate 2.9%). Sorry if that's a lot to digest and doesn't make sense, but summary is if you earn loads of interest and it's not in an ISA, HMRC will be chasing you next year for tax on the interest. It could make the overpaying mortgage idea more attractive.

An ISA is account where any interest or gains made are sheltered from tax. You can 'only' put £20k into one per year and there are several types, but the most common are Cash ISA (effectively a savings account where you are not taxed on the interest) and a Stocks & Shares ISA (an investment account where you are not taxed on the gains).

Investing is a whole-nother story. Really you should invest money you don't need for at least the next 10 years (hence asking about your longer term financial plan) - there's also no guarantees on returns, it can go up, it can also go down (but generally over time it goes up). With risk however, comes reward. My XIRR on my investments is ~14% (that is, to make the same returns, I'd need to have put the money into a savings account paying 14% for the last 7 years) - this is obviously significantly higher than what I'd pay on a mortgage or what I'd get from savings hence why I personally don't intend to overpay my mortgage and maximise my returns through investments.

There's also the pension angle which is usually the first people suggest to people with surplus cash (I should have to - especially if you're a higher rate tax payer).

Sorry, a lot of detail. I guess don't rush your decision and do a lot of research (and ask any questions to this forum who are are happy to help). You have a sizeable amount of cash, your future self will thank you for making smart decisions now.

DeeCas

Exodi said:

I would park the mortgage idea then until you have a keen grasp on everything.

Any idea what interest rate you are earning on the money in these accounts? Some of them sound like current accounts which typically pay negligible interest.

You could be earning ~1% on your savings which are currently in current accounts (£1000 per year on £100k, or £83.33 per month) when you could be earning ~4.5% just moving them into a decent savings account (£4500 per year on £100k, £375.00 per month). Nearly £300 a month for nothing.

It's also worth remembering that you can pay tax on interest (and how much depends on your tax bracket). You can read more here: https://www.gov.uk/apply-tax-free-interest-on-savings but to give an example, if you were a 40% tax payer, you could only earn £500 in interest per year tax-free - meaning in the two examples above, you'd pay 40% tax on £500 if the money was in a 1% account (£200, meaning total interest for the year would be £800 - effectively making the interest rate 0.8%), or 40% tax on £4000 if the money was in a 4.5% account (£1600, meaning total interest for the year would be £2900 - effectively making the interest rate 2.9%). Sorry if that's a lot to digest and doesn't make sense, but summary is if you earn loads of interest and it's not in an ISA, HMRC will be chasing you next year for tax on the interest. It could make the overpaying mortgage idea more attractive.

An ISA is account where any interest or gains made are sheltered from tax. You can 'only' put £20k into one per year and there are several types, but the most common are Cash ISA (effectively a savings account where you are not taxed on the interest) and a Stocks & Shares ISA (an investment account where you are not taxed on the gains).

Investing is a whole-nother story. Really you should invest money you don't need for at least the next 10 years (hence asking about your longer term financial plan) - there's also no guarantees on returns, it can go up, it can also go down (but generally over time it goes up). With risk however, comes reward. My XIRR on my investments is ~14% (that is, to make the same returns, I'd need to have put the money into a savings account paying 14% for the last 7 years) - this is obviously significantly higher than what I'd pay on a mortgage or what I'd get from savings hence why I personally don't intend to overpay my mortgage and maximise my returns through investments.

There's also the pension angle which is usually the first people suggest to people with surplus cash (I should have to - especially if you're a higher rate tax payer).

Sorry, a lot of detail. I guess don't rush your decision and do a lot of research (and ask any questions to this forum who are are happy to help). You have a sizeable amount of cash, your future self will thank you for making smart decisions now.

Thank you so much for such detailed information. It's all giving me a massive headache (A good one, I guess).

I'm on 20% tax band income wise (Salary). My "savings" have come from an unfortunate loss of my wife.
Because of this I also receive her pension each month which I believe is also taxed.
My "Chase" is a savings account that gets 4.75% but I have only £20,000 on there - I'm going to hazard a guess I'd be best chucking a bigger chunk in here whilst also setting up a Cash ISA with another £20k in there.

I have no "NEED" to pay off the mortgage as I can pay this and still live a comfortable life with my daughter (7 year old) whilst ever I'm working. I'm only in my late 30's, so plenty of working life to go.

I'm going to have to sit down and figure this all out, somehow. I guess lots of reading and research is required and I will reach out for any advice from this great community.

Exodi

Yes sorry, unfortunately a lot of this stuff is very hard to communicate in a short sentence, my condolences also for your wife. The good thing is it sounds like your mind is in the right place with regards to the money and thinking about your daughter.

How old was your wife? If she was under 75 there should be no tax payable, if over it would be taxed at your nominal rate: https://www.gov.uk/tax-on-pension-death-benefits

Good to hear you have a Chase savings account, 4.75% is higher than you'll get anywhere else on easy access savings. Assuming you moved all the £110k in there, you'd be earning £5,225 in interest per year (110000*0.0475). As a basic rate tax payer, the first £1,000 if interest is tax free, and the remainder would be taxable, meaning if you did this HMRC will want 20% of £4,225 (£845) from you, likely by updating your tax code next year to take it. This effectively makes the 4.75% rate 4%. Important to note as I wouldn't want you mistakenly thinking "I'm not putting my money a Trading 212 Cash ISA paying 4.53% when I'm currently getting 4.75%!"

The fact you are in your late 30's could be a stronger nod to consider your pension.

Yes lots of reading! The good bit is as you're in a fixed deal there's no 'rush' to clear your mortgage now (quite the opposite, you will be penalised by ERC If you do). The only thing I wouldn't dither on is moving what sounds like a singificant amount of money from current accounts (paying close to no interest) into something more productive - whether that's towards the mortgage at 4.84%, Chase at a real rate of 4%, a Cash ISA around ~4.5% or investing or pension at likely a higher rate but means you've allocated that money towards the future.

DeeCas

Exodi said:

Yes sorry, unfortunately a lot of this stuff is very hard to communicate in a short sentence, my condolences also for your wife. The good thing is it sounds like your mind is in the right place with regards to the money and thinking about your daughter.

How old was your wife? If she was under 75 there should be no tax payable, if over it would be taxed at your nominal rate: https://www.gov.uk/tax-on-pension-death-benefits

Good to hear you have a Chase savings account, 4.75% is higher than you'll get anywhere else on easy access savings. Assuming you moved all the £110k in there, you'd be earning £5,225 in interest per year (110000*0.0475). As a basic rate tax payer, the first £1,000 if interest is tax free, and the remainder would be taxable, meaning if you did this HMRC will want 20% of £4,225 (£845) from you, likely by updating your tax code next year to take it. This effectively makes the 4.75% rate 4%. Important to note as I wouldn't want you mistakenly thinking "I'm not putting my money a Trading 212 Cash ISA paying 4.53% when I'm currently getting 4.75%!"

The fact you are in your late 30's could be a stronger nod to consider your pension.

Yes lots of reading! The good bit is as you're in a fixed deal there's no 'rush' to clear your mortgage now (quite the opposite, you will be penalised by ERC If you do). The only thing I wouldn't dither on is moving what sounds like a singificant amount of money from current accounts (paying close to no interest) into something more productive - whether that's towards the mortgage at 4.84%, Chase at a real rate of 4%, a Cash ISA around ~4.5% or investing or pension at likely a higher rate but means you've allocated that money towards the future.

In regards to age she was 33. 
I received a lump sum (Death in service) and a lump pensions sum, followed by monthly payments (For as long as I live...?!).
My tax code has changed to a "K" tax code since I received this month and from what I can gather it's to tax me on the pension...

It's all a mine field with no real guidance (I'm doing all of this alone) and as you can imagine my head is a bit all over at the moment too.

I appreciate all of your feedback and I will put some time aside to re-evaluate before I jump into paying off the mortgage. I think first step is to look at an ISA and get some money tied up there, as it's money I can afford to put to one side.