Concentrate on paying off my mortgage or other options?

[matlee]

Bit of background im 31yrs old with 23yrs left on my mortgage, outstanding cost approx £85k. I started bashing some figures into the mortgage calculator and at the moment, as income stands, i could comfortabley make over payments which would reduce the term left down to 10yrs.

I've been considering buying another property to rent out as a long term plan or possibly buying another to do up as i have done with this one but then got thinking about the amount id save on interest if i could pay off my mortgage as early as possible. I haven't looked into this in depth just yet but wanted to see what the general consensus is.

Would it be woser to pay off the mortgage as soon as possible or continue with the payments as they are for the next 22yrs and look at investing into something else?

[ReallyReallyGood]

I am in a similar position to yourself.

My current thinking is that given the inevitable rise in interest rates in the near/medium future, I am overpaying now.

[gaz1234]

Both

[rog007]

Pay off any debt as fast as you can is the perceived wisdom.

[walm]

Rog - I am not sure who is perceiving such "wisdom".

My perceived wisdom is to maximise my fully taxed risk-weighted returns.
Since the return on paying off the mortgage is usually quite low and for young people with a higher risk appetite there might be plenty of options to earn greater returns in other investments.

In other words: if you can generate say 5-6% returns in your ISA (for example) - then put money in that - don't pay off the mortgage since you only "make" 4% or whatever saving there.
And yes - it is saving.

On the other hand if you have debt with a truly HIGH rate of interest (credit cards or overdraft) then YES - you should pay that off first.


To the OP there is plenty of advice out there but here are a few things to consider (and these are typical but may not apply in your particular case).

Interest rates on BTL are generally higher than on your primary residence.
A large deposit on a BTL will give you MUCH better rates.
- So keep a higher mortgage on your home and concentrate on building a deposit for the BTL.

BUT - you want to have SOME sort of mortgage on the BTL since the interest payments can offset some/all of the tax due on the income from letting.

So - balancing act - as ever!

[pacoryan]

My mortgage debt effectively reduces in real terms value by the rate of inflation each year and costs less than 2.5% to service. Why would I pay it off?

Agree that most unsecured debt is poor value by comparison.

[walm]

pacoryan said:

My mortgage debt effectively reduces in real terms value by the rate of inflation each year and costs less than 2.5% to service. Why would I pay it off?

Agree that most unsecured debt is poor value by comparison.

Well if you had say £50k sitting in a bank account earning you 1% interest which you then paid 40% income tax on - it would be better to put that into paying off the mortgage.

But I guess you are agreeing - find the best return you can and adjust for your risk appetite and tax situation.

Currently my own "perceived wisdom" is to lever up like a bandit - we have never had such access to cheap money! Sure rates will rise and I will need to adjust then - so build in some flexibility - but for now deciding that 2.5% is the best return you can get seems very narrow minded.

[rog007]

walm said:

Rog - I am not sure who is perceiving such "wisdom".

Those of us who have paid off their mortgages I guess, but each to their own of course.

Where can you find a guaranteed greater return on your savings, even with the low mortgage rates available today? If you have found an investment that's absolutely, positively going to pay off and you have a low mortgage rate, then you may want to roll the dice.

Some further opinions on options here:

http://www.thisismoney.co.uk/money/mortgageshome/a...

http://www.investopedia.com/articles/pf/05/payoffm...

http://monevator.com/pay-off-mortgage-or-invest/

http://www.theguardian.com/money/2013/feb/12/payin...

[BoRED S2upid]

Get it paid off, imagine the feeling once its gone and you have all that extra money in your back pocket. Its the biggest debt your likely to have in your life and interest rates are only going one way in the future.

[walm]

rog007 said:

Where can you find a guaranteed greater return on your savings, even with the low mortgage rates available today? If you have found an investment that's absolutely, positively going to pay off and you have a low mortgage rate, then you may want to roll the dice.

I haven't read all the links but I will.

The fact the return is guaranteed does absolutely make it very attractive.
But I mentioned risk.

For someone younger who naturally might be more risk tolerant a 2-4% return is appropriate for SOME of his savings but most likely not ALL.

This is a terrible example but year to date the FTSE is up 11%.
Equities on the very very long term tend to return 6-7%.
Of course, not guaranteed but with time on your side "rolling the dice" for some of your savings is generally seen as a good idea.

At 2.5% say, you are only just keeping up with inflation.

It is all to do with risk appetite because for someone who is thinking about BTL - it would strongly suggest they have an appetite well above ZERO!!

[jdw1234]

pacoryan said:

My mortgage debt effectively reduces in real terms value by the rate of inflation each year

This helps assuming you get a pay rise every year in excess of inflation (basket relevant to you).

Otherwise, cost inflation is just reducing your disposable income.

[jdw1234]

Plus I personally would put a premium on paying off the roof over my head above other investments and a discount on BTL due to the massive hassle it can cause.

[walm]

jdw1234 said:

This helps assuming you get a pay rise every year in excess of inflation (basket relevant to you).
Otherwise, cost inflation is just reducing your disposable income.

No - it depends on how much of your income goes to paying off the mortgage.

£2,000 a month net income.
- Say £667 on interest on the mortgage and £333 on principal repayments/other saving.
- Leaves £1,000 spent on other stuff. (Some call this "disposable income".)

Your pay rise can be half the rate of inflation and you still break even.

Inflation on "other" stuff - say 6%. That £1,000 now costs £1,060.
Your pay goes up 3% = £2,060.
Your mortgage interest and principal repayments stay the same: £2,060 - £1,000 = £1,060 - so you can buy the same stuff.

This is why we are all screwed if interest rates ever climb again.

[jdw1234]

walm said:

jdw1234 said:

This helps assuming you get a pay rise every year in excess of inflation (basket relevant to you).
Otherwise, cost inflation is just reducing your disposable income.

No - it depends on how much of your income goes to paying off the mortgage.

£2,000 a month net income.
- Say £667 on interest on the mortgage and £333 on principal repayments/other saving.
- Leaves £1,000 spent on other stuff. (Some call this "disposable income".)

Your pay rise can be half the rate of inflation and you still break even.

Inflation on "other" stuff - say 6%. That £1,000 now costs £1,060.
Your pay goes up 3% = £2,060.
Your mortgage interest and principal repayments stay the same: £2,060 - £1,000 = £1,060 - so you can buy the same stuff.

This is why we are all screwed if interest rates ever climb again.

Yep, agreed.

You still need some sort of payrise though. Not the case for everyone.

[DonkeyApple]

walm said:

pacoryan said:

My mortgage debt effectively reduces in real terms value by the rate of inflation each year and costs less than 2.5% to service. Why would I pay it off?

Agree that most unsecured debt is poor value by comparison.

Well if you had say £50k sitting in a bank account earning you 1% interest which you then paid 40% income tax on - it would be better to put that into paying off the mortgage.

But I guess you are agreeing - find the best return you can and adjust for your risk appetite and tax situation.

Currently my own "perceived wisdom" is to lever up like a bandit - we have never had such access to cheap money! Sure rates will rise and I will need to adjust then - so build in some flexibility - but for now deciding that 2.5% is the best return you can get seems very narrow minded.

The simplest route so as to avoid excess tax or financial risk is to pay down the mortgage.

However, I would personally pay the excess cash into a separate legal structure and offset because it gives an extra safety net. By this I mean that in the event of your circumstances changing the lender doesn't care that you've been over paying they will just want their monthly payment. By storing the offset separately you retain this capacity.

The key though is how to hold this money. A tax wrapper is a starter but equity investment has downside risk. Especially in a climate of rising rates.

[pacoryan]

walm said:

pacoryan said:

My mortgage debt effectively reduces in real terms value by the rate of inflation each year and costs less than 2.5% to service. Why would I pay it off?

Agree that most unsecured debt is poor value by comparison.

Well if you had say £50k sitting in a bank account earning you 1% interest which you then paid 40% income tax on - it would be better to put that into paying off the mortgage.

But I guess you are agreeing - find the best return you can and adjust for your risk appetite and tax situation.

Currently my own "perceived wisdom" is to lever up like a bandit - we have never had such access to cheap money! Sure rates will rise and I will need to adjust then - so build in some flexibility - but for now deciding that 2.5% is the best return you can get seems very narrow minded.

I am absolutely agreeing. I can't say £50k ever sits in my bank for long, I am not at the age or of the risk appetite where accumulating cash on deposit is a priority, accumulating assets with a long term view however, certainly is. (appreciating assets, with luck...!)