Pay off mortgage & invest instead?

LifeIsGood8 wrote: »

I reckon you should pay off the mortgage and then begin investing the £600 left each month.
Paying off the house will ensure you won't be worrying if you did lose your job later.

Well, he wouldn't be worrying about the mortgage payments, but he'd still be worrying about the running costs of his £0.8-0.9 million house and the various bits of lifestyle that go with that and whatever other financial commitments or expectations he has.

With already having a year's net salary in the bank (or in PBs) - enough to cover mortgage payments for nearly all the years he has left on it - he's not really buying himself much extra "safety" if he burns up his £50k cash or premium bonds to clear the rest of his mortgage (which is only 6% loan-to-value) and then leaves himself with no cash for emergencies. Entirely depleting the £50k of PBs or cash to kill the mortgage and then starting again to build the savings up from nothing, puts him much much closer to needing to liquidate a chunk of his investment ISAs in a case where he's beset by hard times -which could be at a bad time in the markets, leading to unnecessary investment losses.

So I wouldn't entertain the idea of clearing the entire mortgage if it was my money. Not when it would leave me with no cash and everything locked in pensions or investment ISAs. It does of course make sense to try to improve the mortgage rate from 3% to under 2%, which could be done on something like a five year fix pretty easily if his credit rating isn't terrible; and in some circumstances it might even be worth paying an early redemption penalty to get out of a fixed deal if he's on one at the moment

Even if you left the £600 in a bank account (I'm sure you won't) that earned nothing for the next 10 years you'd have £70k+ and no interest paid on the mortgage.

Yes, but starting again and building up at £600pm, it would take him the first three and a half of those ten years to get his cash float / emergency buffer back up to six months of net pay which is something he has already got if he holds back something like £25k of the £50k and doesn't plough the whole £50k into clearing the mortgage unnecessarily.

Without that spare cash as a safety net, the investment ISAs become the safety net, which can't be too clever given that every man and his dog can tell you that investments can go down as well as up, and that being forced into selling Investments at relative low points can have a really bad impact on your total wealth compared to a scenario in which you're not forced to sell out and can just wait for them to go back up with the general market.

So although it sounds nice and cautious and a happy achievement to clear your mortgage earlier, using the last of your cash to do it is not really a very cautious thing to do. Because being stuck without a big cash float can mean you are caught between a rock and a hard place when you need serious cash - your only options might be selling investments in a poor market, or trying to obtain borrowings when unemployed.