Are people here aware that it is not usually financially sound to repay your mortgage early?

zzzt · 23 March 2019 at 4:15PM

Because interest rates are at such a historic low, the correct decision to maximise returns is to not overpay on your mortgage, and instead to put the money into an index tracking fund, or any savings account which gives more interest than your mortgage, or even P2P lending would be a better choice.

I've been wondering about this forum for a while, and I assume you all know this, but made the decision to overpay anyway. Why? Is it just about peace of mind?

The idea of being mortgage free is appealing to me, but then I have to remind myself, in 10 years I will be more well off by paying the minimum and getting growth on my money that is higher than the interest on the mortgage.

The only bonus I can think of for overpaying is that most mortgages have limits on what you can overpay, so if interest rates go up and you hadn't overpaid, you can't then decide to suddenly pay it off because you'd be limited to 10% per year, whereas if you had been consistently overpaying every year, when interest rates go up you would be closer to paying the mortgage off and ultimately pay less interest.

But you would have lost out on potential exponential growth on your money higher than the interest rate of your mortgage. It might still have been better to be wealthier and still paying the mortgage.

Another potential bonus is that if you pay off your mortgage quickly then you make yourself more safe against unexpected events such as unemployment. The idea that you'll always have your home and not need to make payments would be nice if you lost your job a few years after you paid the mortgage off.

On the other hand, if you had saved and invested you would be sitting on potentially more money and probably be able to make repayments until you get another job, and again, end up with a higher net worth in the long term.

So I am just curious about whether you all thought about these kind of decisions or not? Did you calculate the risks and benefits of paying off your mortgage early, or was it just something that you 'felt' you wanted to do?

edinburgher · 23 March 2019 at 4:21PM

1) A lot of risk averse people in here
2) Behavioural finance - people don't always do what's 'logical'
3) Investment returns are not guaranteed
4) Unemployment is crap regardless of whether you're paying off the mortgage early, or investing. Paying off the mortgage early = you get benefits, and your reduced outgoings are easier to cope with. Investing = no benefits, but you'll likely be in a better position to wait for another job
5) Why not do both?

Full disclosure, I largely agree with you.

Trina90 · 23 March 2019 at 4:52PM

We aren't necessarily trying to pay it off early but we are overpaying. My main reasoning is because we want children and I want to be a stay at home mum for a few years, if we can manage on one income. In order to do this, we need a lower monthly payment, which we will when our fixed rate ends, thanks to all our overpayments.

Lomcevak · 23 March 2019 at 5:21PM

Part of a balanced FIRE plan that also includes fully utilizing my pension and S&S ISA allowances.

A_Frayed_Knot · 23 March 2019 at 8:50PM

It was a race against time with me, scared the sh** out of me to think I would still have a mortgage when I was 70 yrs old :eek: so no time to lose. Overpay is what I wanted to do, and became addictive with my 00.00's

.

I know most of my downfalls, hindsight is a great thing, if I knew then, what I know now

however, as most will say on here . . .

I did it my way

YBR · 23 March 2019 at 9:21PM

It's part of wider plan.
Before starting to overpay the mortgage there were no other debts.
I have built up savings to cover 6 months income plus (and could squeeze outgoings to make that last longer).
The interest I could earn on savings is lower than the interest rate we're paying on the mortgage, partly because I'm reluctant to invest were the capital is at risk.

When we bought the house the mortgage was due to last well past when I'd like to be retired (I'm putting enough into pensions to make early retirement possible) so i definitely aim to have paid off before then.

I don't need to "maximise returns", I only need a good-enough return at a risk I'm comfortable with, using a product I understand..

POPPYOSCAR · 23 March 2019 at 9:22PM

Yes fully aware.

It is a wonderful feeling to be mortgage free.

greent · 24 March 2019 at 9:27AM

Yep. Knew what we were doing. However, redundancies, 2 longer-periods of unemployment and the MH benefits of being MF still meant that it was the best way for us and we became MF in 2015. Now (slowly) paying off our BTL - whilst also saving in S&S ISAs, increased current pension contributions (although also both have decent old DB pensions) - and saving for a big family hol (expected cost c 20k) That's our version of a balanced approach

miss_undastood · 24 March 2019 at 10:13AM

I’m doing a combination of everything - I’m effectively offsetting myself - if you have 40k on a mortgage and 20k in savings at the same (or better) rate it is the same as having a 25k mortgage and 5k savings

However when your mortgage is over 300k and you have 2 children under 5 there is a value in reducing the risk. I want my mortgage to be around 150k, it’s currentky 225k and I have 35-40k invested in other pots

At the moment we both need to work to pay the mortgage and to me that is a huge risk. I think it depends on everyone’s circumstances. Both me and hubby are also contributing to our pension funds too and have just finished paying off our student loans - so that money is money we have never had to spend so may as well just be diverted across.

Zero_Sum · 24 March 2019 at 10:33AM

Think it is mainly the psychological idea of being mortgage free. Plus there a bit of work involved in having different accounts so its just easier to overpay.

Also as above you have to take into account size of mortgage. Mines only £50k so i am playing about with reg savers, P2P & longer term cash bonds to make a bit of money on it. However if it was 2 or 3 times that i'd want to be looking at reducing debt more.

AnotherJoe · 24 March 2019 at 10:41AM

zzzt wrote: »

Because interest rates are at such a historic low, the correct decision to maximise returns is to not overpay on your mortgage, and instead to put the money into an index tracking fund, or any savings account which gives more interest than your mortgage, or even P2P lending would be a better choice.

You missed pension, which provides the biggest potential return because of the tax benefits and also is likely to be on a similar timescale to mortgage.

Are people here aware that it is not usually financially sound to repay your mortgage early?

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