Pay mortgage off early, or invest the money instead?

[stevesuk]

Hi all,

We've got some money saved away (although not invested optimally at present). Now interest rates are rising, we need to sort something out, and we're looking at 2 options:

1. Investing it in savings accounts/ISAs
2. Using the bulk of it to pay off our mortgage

Mortgage has 3 years to go, we're on the standard variable rate, which I think is currently 6%. We don't have a massive amount left to pay, but our monthly repayments amount to approx £350.

I did some sums, and just 6 weeks of mortgage repayments saved by paying off the mortgage, would equate to 12 months of interest earnt by investing the same amount in an ISA. Which seemed like a no-brainer.

However, if we invest it in an ISA, we end up still having the money we invested at the end of the term. I did some more sums and we'd save approximately £1,000 by paying off the mortgage early, compared to carrying on paying the monthly repayments for the next 3 years.

With that in mind, the two options seem a lot closer in terms of the end result.

Any tips?

[AllyM]

Mortgage rate at 6% is likely to be 2-3% greater than any cash ISA, therefore paying off the mortgage is financially advantageous.

[stevesuk]

This is what I couldn't work out though. Investing the money in an ISA at 4% would appear to earn slightly more in interest over 3 years, than what we'd save by paying off the mortgage early. Is there some kind of tax benefit on mortgage repayments which might explain it?

Although on the other hand, it would feel good to have paid it off, and it would be nice to have that £350 a month back.

[stevesuk]

That's a good idea.

Just checked our current lender (Nationwide), and it doesn't look like we'd pay much less each month by moving to a different product, and they also want to charge us £700 fee. But I guess we could look elsewhere too.

[stevesuk]

Thank you, will have a look

[AllyM]

stevesuk said:

This is what I couldn't work out though. Investing the money in an ISA at 4% would appear to earn slightly more in interest over 3 years, than what we'd save by paying off the mortgage early. Is there some kind of tax benefit on mortgage repayments which might explain it?

Although on the other hand, it would feel good to have paid it off, and it would be nice to have that £350 a month back.

Do you have a redemption statement or similar? I think your calcs are wrong somewhere.

That said, given we are talking about a difference of a couple of % on just £12.6k, isn’t this just splitting hairs?