Mortgage pay off advice

tsvp · 24 June 2018 at 10:05PM

I was looking to get advice on what people thought was my best option on my current circumstance
We are very lucky enough to pay off our mortgage in full but don!!!8217;t know if I have any benefit paying the mortgage off now or waiting until next year or even later.

Current mortgage standing at £83k (2.59% interest rate, 17 years 11 months)
Early repayment fee is £4.1k
We have overpaid as much as possible this year fee free.

I guess it!!!8217;s just reassurance I am doing the correct thing as this is years upon years of savings / inheritance money I have had sitting in a fixed ISA that has come to an end. Would hate to be caught out by something I haven!!!8217;t considered or find out I have made a mistake paying off the mortgage.
Any words of advice greatly appreciated.

TrickyDicky101 · 25 June 2018 at 9:22AM

When does the fixed rate end? Presumably if you waited until then you could repay with no ERC due?

Have you looked at alternative investments for what is held in your maturing fixed rate ISA? eg is a rollover with the current provider a possibility and what rate might you get?

tsvp · 25 June 2018 at 10:30AM

Thank you so much for your reply
The fixed rate ends on the mortgage in about 2 years. I never thought about that to be honest, I will need to look into that with Santander if the fee is ignored if paying off mortgage at the very end of current mortgage deal.

I have looked into transferring to other ISA’s but nothing appears to have a that good return these days. I always had in my head that if your debt interest % (mortgage in my case) was greater than the savings rate then use money to clear the debt rather than save. I wouldn’t want anything risky in terms of investing as this is my “life” savings I guess that I have had for a good while. However, open to suggestions.

TrickyDicky101 · 25 June 2018 at 11:46AM

Things to check would be:

1. Is the ERC % fixed up until the end of the fixed rate payment period (rather than say decreasing in a stepped manner 5%>4%>3%>2%>1% as the years' of the product's term expires)? This is unusual but not unheard of. If so, a 5% penalty is expensive if you repay early.

2. If the ERC does decrease over the term what exactly is it now (is it less than the quoted £4.1k)?

3. If you have 2 years to go until the fixed rate term ends (and the ERC drops away) could you improve the returns on your ISA if you agreed to fix it for those 2 years?

MEM62 · 25 June 2018 at 12:43PM

tsvp wrote: »

Thank you so much for your reply
The fixed rate ends on the mortgage in about 2 years. I never thought about that to be honest, I will need to look into that with Santander if the fee is ignored if paying off mortgage at the very end of current mortgage deal.

I have looked into transferring to other ISA!!!8217;s but nothing appears to have a that good return these days. I always had in my head that if your debt interest % (mortgage in my case) was greater than the savings rate then use money to clear the debt rather than save. I wouldn!!!8217;t want anything risky in terms of investing as this is my !!!8220;life!!!8221; savings I guess that I have had for a good while. However, open to suggestions.

Your post suggest that you are only thinking cash ISA's. With that sum why are you not thinking S&S?

If you invest the money is a S&S ISA it should return an average of 5%+ in the long term. Use the money to pay off your mortgage and you will save 2.59% interest. Unless your motivation to clear the mortgage is something other than financial you will be better off leaving the money invested.

dunstonh · 25 June 2018 at 1:06PM

How about your retirement planning. How is that going?

Pension returns on typical medium risk investments return around double your interest rate on the mortgage. The tax relief on contributions, tax free growth and providing for you in retirement.

People have multiple needs in life. It isnt just about your mortgage. You need to look at all your financial needs.

tsvp · 25 June 2018 at 6:17PM

MEM62 wrote: »

Your post suggest that you are only thinking cash ISA's. With that sum why are you not thinking S&S?

If you invest the money is a S&S ISA it should return an average of 5%+ in the long term. Use the money to pay off your mortgage and you will save 2.59% interest. Unless your motivation to clear the mortgage is something other than financial you will be better off leaving the money invested.

I always just thought S&S ISA’s contained risk that you might lose it all - something I wouldn’t like to do with this savings.
Paying off the mortgage is purely financia in that I have a lump sum of money and want to do something beneficial with it for life as likely won’t have this sum of money again for a very long time.

tsvp · 25 June 2018 at 6:21PM

dunstonh wrote: »

How about your retirement planning. How is that going?

Pension returns on typical medium risk investments return around double your interest rate on the mortgage. The tax relief on contributions, tax free growth and providing for you in retirement.

People have multiple needs in life. It isnt just about your mortgage. You need to look at all your financial needs.

Pension wise I think I’m ok, I have always paid into a pension since working, with my current employer pension being very good in terms of what they pay in. I’m 30 so have a long time to go for pension pay ins but it’s something to consider and look into.

I guess I just don’t want to pay off my mortgage and think it was a big mistake.

dunstonh · 25 June 2018 at 7:38PM

I!!!8217;m 30 so have a long time to go for pension pay ins but it!!!8217;s something to consider and look into.

You are already around a quarter of your working life gone. You will be in your 40s before you know it. So, "thinking" you are ok is not enough. You need to know you are ok before it is too late to be able to afford to do anything about it.

There have been other threads from people who repaid their mortgage early indicating regrets they did not consider S&S ISAs and pensions before paying the mortgage off. Especially for the higher rate taxpayers.

I always just thought S&S ISA!!!8217;s contained risk that you might lose it all - something I wouldn!!!8217;t like to do with this savings.

Yes. If you bought some obscure share that went on to fail then you could lose the lot. If you invested sensibly (as most do) then you will have around less than 1% in any one company or area (as S& ISAs are not all about shares. Property and fixed interest can be held in them too). There is also the LISA which basically gives you a 25% gain straight away (and a typical stockmarket crash is around 20-25% effectively buying you a free crash).

So, if you think you can lose the lot, then your understanding needs a boost.

Paying off the mortgage is purely financia in that I have a lump sum of money and want to do something beneficial with it for life as likely won!!!8217;t have this sum of money again for a very long time.

Actually, paying off the mortgage is almost certainly not the most financially sensible option. It may be an emotional decision but from a numbers point of view it is not likely to be the best.

As it happens, the best overall option is not usually either the most emotional one or best financial but a combination. e..g a bit into mortgage (when ERC has gone or you are below their annual allowance), a bit into pension and a bit into S&S ISA/LISA.

MEM62 · 26 June 2018 at 9:18AM

tsvp wrote: »

I always just thought S&S ISA!!!8217;s contained risk that you might lose it all - something I wouldn!!!8217;t like to do with this savings.
Paying off the mortgage is purely financia in that I have a lump sum of money and want to do something beneficial with it for life as likely won!!!8217;t have this sum of money again for a very long time.

With that amount of money it pays to know rather than think.

There is no return without risk. Whatever you do with your money you are exposed to risk. Your cash investments will be exposed to inflation risk - in fact, it is almost certain that they are suffering losses against inflation. You need to understand these risks better. Your opinion of S&S for example, is not realistic.

I understand you motivation for making the best of the money that you have. However, you have fallen into the trap of being blinkered towards the fact that getting rid of your mortgage is automatically the best option. In many cases it is far from it.

With the sums you are talking about you should consider consulting an IFA. There would be considerable benefit for you, not least of all in understanding all the options you have to make your money work for you.

AnotherJoe · 26 June 2018 at 9:49AM

tsvp wrote: »

I always just thought S&S ISA’s contained risk that you might lose it all - something I wouldn’t like to do with this savings.
Paying off the mortgage is purely financial in that I have a lump sum of money and want to do something beneficial with it for life as likely won’t have this sum of money again for a very long time.

They dont unless you stupidly invest in something stupid like storage pods, student lets, cape verde forests, vineyards in Spain as opposed to standard stock market funds.

Currently with your money in cash ISAs, then over the next 20 years you will likely lose roughly half of the money in there, in real terms, when you compare interest rates to inflation.

In contrast, invested over the next 20 years in a boring global stock market and bond fund, you'd probably see it double to treble in real terms.

So, your "safe" account will lose you 50% of your money and the "risky" one gain you double. Not what you were thinking i guess?

In your case however, as you are super cautious and inexperienced, probably best plan is pay off the mortgage once the ERC period is over and then start putting what was your mortgage payments into monthly investments, like say Vanguard Life Strategy 40 within an ISA.

Mortgage pay off advice

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