[Closed] Pay off mortgage early or build savings?

Mortgage. We cleared ours in our mid 40s, enabled us to use the money for other things and reduce our working hours.

You are £15k away from having enough to pay off your mortgage and have £20k savings?

So you could pay off your mortgage and have £5k?

At the end of the day arranging a new mortgage doesn't take long if you need to release equity.

What interest are you paying on your mortgage and what interest are you getting on your savings? Do you have any other big purchases/spends planned?

Mortgage. Interest rates will only go up in future which will then benefit savings.

I have assets greater than the value of my mortgage. While Im earning 5-6% on my assets and paying 1.79% on my mortgage I'll keep the mortgage going & let inflation nibble away at it. Im fortunate my salary goes up circa 3% each year, so my debt is shrinking each year in real terms, regardless of capital repayment.
Like you my monthly payment is entirely affordable so i don't see the point in paying it off just to be "mortgage free". I consider myself "net" mortgage free anyway (and very fortunate)

Should add, we now look at our friends still paying their mortgages, worrying about repayments, job uncertainty, house price crashes, and I'm so glad those days are behind us.

Get an offset mortgage from the likes of First Direct - you will not pay interest on the amount of savings you have to offset but the cash is available if you need it.

If you are regularly saving and paying mortgage payments, you are in a great position. Personally, I'd concentrate on keeping the total amount you are able to save / repay at the level it's at - or increasing it. You will have the double benefit of low personal spending habits and the choice of how to use the savings / capital that you are building.

So long as the mortgage debt is at a low rate, being paid off at a reasonable speed *and* you are getting a decent return on the savings (e.g. equities), then there's not likely to be a financial advantage in paying off the mortgage. There might be an emotional one, though.

I used to think that mortgage rates could only go up, but I am increasingly thinking that I was wrong. We may well be in a new "normal" of low rates (debt) for the longer term.

In answer to the original question: yes, I have done similar. My mortgage is down to a much smaller sum than savings, which have been building over 14 years (saving 25% of my post-tax, post-pension income).

With a mortgage / payments that low I’d be putting my savings into a SIPP.  You need to think what need after retirement to live on e.g. £20k per annum for 20 years post retirement is £400k required.  A carefully chosen SIPP will grow in time and you get 25/40% tax back on what you put in.  With a SIPP you can take 25% of it at 57 to pay what’s left of the mortgage at that age.

Its all very well owning a house but you need to pay the bills to stay alive when you stop working also. You can’t necessarily rely on equity to provide that.

Split the risk. And pensions, invested how you like to split the risk.

Depends on how much tax you pay, as to how good the pension advantage is.

I’d keep paying some extra off your mortgage, like you are, up your pension contribution, invest some of the 15k in higher risk/return stuff, some in cash, probably within an ISA.

Don’t be fixated on paying off your mortgage if it’s long term income you’re after, and pensions will be good.

If you want to go another way and have lower levels of cash, and lowers levels of income/work and lowers levels of long term security (it’s a choice some make), then pay off every penny now!

I do what Cletus suggested, but pay the mortgage payment out of the offset side of the account and put the savings into a better investment.

With a SIPP you can take 25% of it at 57 to pay what’s left of the mortgage at that age.

Depends how long to go till 57 ..... In my case 25 years. I don't believe that 25% tax free will be an option to me by then. So I'm not reliant on it. That's not to say I don't have a pension....but I have been smashing my mortgage because I cannot live in a pension but I can always live in my house if it's paid off. Life is actually as expensive as you want it to be so long as you have a roof over your head.

Fair point.  I’m doing as Sockpuppet says as I only have 9.5 years to 57 and the same time to the end of my mortgage, so a 50/50 split it is soon to fix on a 10yr interest rate.

Have you considered an offset mortgage? Means you can reduce your interest paid on the mortgage to 0%, but still gives you access to the savings if you need them, or decide to invest them somewhere else.

Thanks all. Here's some answers, apologies if I've omitted anyone:

- I'm 15k off having enough savings to pay the reamining mortgage off but that'd leave me at zero savings or maybe a few thousand ay best.

- pension wise I've bought added pension for years which equates to annual estimated pension of £20k if taken at 65.

- I'm in middle of a ten year fixed at approx 3%. Appreciate its not super low but at the time and still now, I just wanted to know how much I had to pay for the next decade.

Thanks again.

If you have debt, you're owned.

Pay it off asap.

As always in this place the fixation that borrowing is bad. It’s about making the most effective use of the money in which ever form.

I was going to say keep mortgage and use money elsewhere as more cost effective. But 3% rate is very high (depending on size of mortgage)

OP just needs to work out what makes best use of his money

You cannot beat the feeling of being debt free so I would clear off the debt. I remember having a mortgage and the lender asking for stupid money to allow the house to be let, so i paid the debt off.

Even now, we just bought the freehold of an investment flat. The lending banks wanted a fee to change the type of ownership. Debt free you don't have to do anything.

Banks are businesses they have to make money and borrowers are seen as a magic money tree.

Yes I know I'm in a priveledged position being able to.

What you need to calculate is total payments remaining on the mortgage, not how much it would cost to redeem today. Compare this with the hardest you could make the money work in savings and investments.

My instinct would be that you'll not find a better return than paying off the mortgage, at least not without a bit more risk, even if it leaves you without a rainy day fund for six months or so.

We had an offset mortgage in the early 2000s. It worked well, but one of the main benefits was that not being paid savings interest meant you didn't lose anything in tax. At that time interest rates were higher and there was no tax-free allowance on savings interest, so it was more significant.

I follow the logic that you can get a higher rate of return on investments than the mortgage interest you're avoiding, but investing in equities isn't risk free. So maybe split the risk; keep some as savings and pay off some mortgage.

My advice would be to chuck some in a SIPP, especially if you are a 40% tax payer. The 40% tax break will probably go soon so make the most of it.

As an example, if you want to boost your pension pot by £10k put £8k in a SIPP and the government will throw in another £2k. At the end of the tax year if you are a 40% tax payer you claim back £2k so it's only cost you £6k to boost your pot by £10k.

What are you saving for?

If it's not urgent or a massive investment/purchase then get the mortgage cleared; that monthly income can go at your SIPP and/or savings. Getting shot of your mortgage releases you of the risk of an unexpected change in your circumstances putting pressure on you meeting that mortgage payment when there is money locked away in a SIPP that you'd be penalised for accessing.

Also +1 poolman and MartinHutch

Also (not to be a Jonah but this is a question financial advisers pose when doing an assessment) what is your attitude to risk? if the thing that you are saving for means that you can't afford to lose cash and are prepared to take a lower % return on savings then that may indicate if you are happy to ride the mortgage out or get rid.

Also... worst case scenario, Brexit no-deal causes the housing market to tank and your income is reduced for whatever reason, can you still afford to cover the mortgage and bills etc? if you had to sell would you be in negative equity ?

Interest rates will only go up in future which will then benefit savings.

They may go down, even negative first. Depends how much stimulus UK PLC needs after Johnson & co have dashed it on the rocks of Brexit....

Getting the 20% (not 25%) or 40% instant tax relief can also be achieved through a conventional pension plan, doesn't have to be a SIPP. OP you might be able to start using it at 55 if that's before 2028.

Keeping a mortgage can be a very good idea, which may make far better financial sense than paying it off, it all depends on fiscal position, particularly in relation to the above.

Being mortgage free may feel good to some but it may also be an opportunity cost. I am glad I took one again after having been mortgage free for a few years. It basically means I can retire at 55 rather than 60 or worse.

Absolute and sweeping statements/opinions are to be ignored. OP, I would get professional advice at some point regarding pension/retirement/inheritance tax.

Depends on the interest rate on your mortgage and the interest you will receive on your savings. I have a low rate mortgage and have been getting good returns on investments so I will let the mortgage run its course (another 3 yrs) and keep investing instead.
Also depends on your work situation and how you feel about paying it off. Many want it paid off and have an irrational obsession about being mortgage free IMO but its up to you.

Interest rates will only go up in future which will then benefit savings.

Crystal ball gazing.....

True, getting rid of a 2% mortgage rather than getting an instant 40% return would be bonkers as part of a balanced strategy.

3% is quite a high rate but if you've still got 5 years left on the fixed rate i'm assuming that you'll have early repayment charges.

I'd just be overpaying as much as I could without getting hit with charges and whack the rest in savings, then see where you are in 5 years when your rate comes to an end.

I paid mine off as soon as I could (about 10 years ago) as I just wanted to be debt free. No big deal if I loose my job etc etc.

I guess your viewpoint depends if you've ever experienced rapidly increasing interest rate. I did, so paid mine off about 10 years ago. I can see that now, with 'cheap' money it may not make sense, but it is good to know that whatever happens, I've got somewhere to keep me dry.

True, getting rid of a 2% mortgage rather than getting an instant 40% return would be bonkers

Risk reward isn't it. 2% now Vs 40% you may never see.

It's not like your punishing your future self by having a flash car when paying off your mortgage.

It's all about balance.

But it is worth tying it up in pensions or equity in your house.....when it comes to things like uni fees that are means tested as oppose to cash in the bank

40% you may never see

Unlikely that a sipp value evaporates to Zero, but I guess it’s possible. But, if the 40% goes to HMRC he never sees it anyway, so worst case it’s currently invested and hopefully making some money for him.

Risk reward isn’t it. 2% now Vs 40% you may never see.

It’s not like your punishing your future self by having a flash car when paying off your mortgage.

It’s all about balance.

But it is worth tying it up in pensions or equity in your house…..when it comes to things like uni fees that are means tested as oppose to cash in the bank

Yes it is about balance and that what I said but you cut that bit off my quote. You can choose where the 40% goes, it doesn't have to be risky. Can be cash, gold, bonds or a mix.

Your all assuming I'm talking about investments going up in smoke.

I'm more on about if you croke it 3 years into retirement.

Depending on your job and lifestyle or in my case family bistlry that is a reality for many folk

It totally depends on your attitude to risk. I'd be paying the mortgage off asap then investing in highly risky things - I don't mind risk about things that don't matter much, but the roof over my head matters.

A decent investment should do better than the rates you should be paying on your mortgage, but there is a risk it won't, you'll end up stretched financially and unable to pay the mortgage etc. If you're happy with that risk, invest it.

I can't see that there'd be much benefit in it being in most savings accounts.

I knew what you're on about t_r. I think pensions may be inheritable but could be wrong.

As it happens just had meeting with financial advisor this am about risk, reward, cover for eventualities and how best to lead a decent life now versus trying to assist the children through studies and beyond. My brain hurts. It was all OK a couple of years ago, then mum died and we have a house and a handful of savings to throw into the mix and its all suddenly complex.

Some.are some arnt and if you go onto annuities etc again some are some aren't.

Some are. %age to spouse only etc etc

Your paying for the 40% with lack of flexibility I don't think it's as bonkers as some would make out not to maximise pension. But when it comes to burying extra money to get a tax break fair enough but given a choice if get rid of my debts first as then it's gone and you have a comparatively flexible asset that's also a cornerstone of your pension/care/inheritance portfolio

That's not to say like I said earlier I don't have one i do have a pension. simply to get the matched company input (the tax break on all that is a bonus but the company jnput is a reasonable sum due to length of service)

Your paying for the 40% with lack of flexibility

That lack of flexibility reduced massively a few years back when they dropped the requirement to buy an annuity. Still not as flexible as cash in the bank, but post 55 it's getting much closer.

Agreed. I think if the *only* focus / benefit of any action is "tax free" / "minimise tax" then that rings alarm bells for me, used to be a guy would come into our office, tout friendly society savings as tax free, bit of research and fees (and commission, natch) would outweigh any savings on tax. Scam.

Not so say some tax efficient measures are good, but depends on circumstances, what's a valid risk for one person or couple is several steps too far and inappropriate for others.

Leave your savings where they are and make max overpayments on your mortgage. That way you've still got your rainy day fund and (edit my crappy maths was very wrong)you'll motor through the remainder, comparatively.

That lack of flexibility reduced massively a few years back when they dropped the requirement to buy an annuity. Still not as flexible as cash in the bank, but post 55 it’s getting much closer.

Again time to 55 matters.

Enough folk will make a pigs ear of the cash draw down thing I could see it going full circle before I get there.

Agreed. I think if the *only* focus / benefit of any action is “tax free” / “minimise tax” then that rings alarm bells for me, used to be a guy would come into our office, tout friendly society savings as tax free, bit of research and fees (and commission, natch) would outweigh any savings on tax. Scam.

No one said it's the only focus. The money comes from HMRC directly, not from a dodgy geezer down the pub. It's not a scam. It's not even a scheme. It's basic financial planning either through any pension arrangements or through a yearly form with HMRC. Unless of course you know a better return than an instant 20%/40%. As I said, if you're in your 40s you would be insane not to grab it whilst it's there (again as part as a balanced strategy).

@nickfrog, should have been clearer, I did feel that the guy touting Friendly Society bonds 'because they were tax free' was really doing it for his benefit, rather than the punters, and that particular case was a scam really - each product has to be appropriate, obviously, and some degree of critical thinking needs to be applied as well.

Obviously there are options, some are more tax efficient and some are financially efficient. I'd opt for what suits you, enjoy the day to day and clear what you can when you can. Don't wish to repay a low interest loan at the cost of missing out on something. Life happens quickly and can change quickly too. Enjoy it while you can 🙂

Mental health is a huge factor and "keep it simple-stupid" is not a bad self motto.
If paying off mortgage makes you feel happy, secure and life becomes more fun- do it.

It’s basic financial planning either through any pension arrangements or through a yearly form with HMRC.

If you're a higher rate tax payer, you can only get the extra 20% back via your tax return unless your company pays in gross (salary sacrifice).

Unless of course you know a better return than an instant 20%/40%.

Not quite that simple. It's really tax deferral. You get to pay into a pension tax free, but the money taken from the pension is then subject to tax at the time when you take it (and various key crystallisation stages). Currently you can take 25% (of up to just over £1m) tax free at 55. Given most higher rate tax payers probably won't be higher rate payers from their pension, you are still likely to pay less tax using a pension; but it's not guarenteed e.g. tax rates / thresholds could easily change etc.

Yes you get half the 40% via tax return every year. Its still 40%.

As for it being a tax deferral, yes partially, hence the need to a balanced strategy to maximise the fiscal incentive beyond the 0% on 25%. It is still a brilliant investment that easily beats paying off a 2% mortgage.

Footflaps is also forgetting that the extra 40% invested shoud be growing with the investment.  40% extra money working for me for a few years at little cost sounds ok to me.

Been overpaying for years now, come may we'll be into the last 2 years of our mortgage.

Having almost a grand a month to save will be worth the hard work. Granted, we could've invested and paid less and done better maybe, but I think the freedom of not having this round our necks will be so refreshing.

40% extra money working for me for a few years at little cost sounds ok to me.

All depends on the final tax rate when you draw it. Thanks to the falling pound, my SIPP is now over the lifetime allowance, so any gains will be taxed at over 55%. However, if we get a big stock market correction, that problem will go away.

If you are over the lifetime allowance why are you still in high risk investments such as equities?