Paying off the mortgage.

[didds]

We (wife and I) have approximately four years and four months left on our interest only mortgage.

I have realised that with ISAs (set up to back up that mortgage) and savings we could pay that off early. The B/S have confirmed there are no early exit charges etc.

The plan once paid off would be to then pay the amounts we have been paying monthly towards the investments plus interest etc into another savings vehicle for the future (that may be another thread on another day).

The investments payments currently made also include an element of life assurance would would obviously also end when we pay off etc - but that's to back the interest only mortgage anyway and other life cover is in place already.


Are there any other considerations we should have to let the current mortgage instead run its course until December 2023?


didds

[DrFfybes]

One thing to consider is are the investments (if left alone) likely to grow faster than the interest on the mortgage? If so then you get a (tax free for the ISAs) gain by leaving them.

Another option is to cash in some of the investments to pay a chunk off, but keep the repayments the same to reduce your remaining balance (and add in any payments you currently make in to the cashed-in investments). That way you still keep some of you assets within an ISA.

Paul

[Itsallaguess]

Are there any other considerations we should have to let the current mortgage instead run its course until December 2023?

Any 'pure' financial costs or savings should be able to be calculated fairly easily, so why I'm posting isn't really about the financial side of things...

I think the final act of 'paying the mortgage off' is a huge personal step for the vast majority of us, and speaking as someone who paid theirs off some years ago now, I would just like to suggest that not all the benefits of doing so can be calculated with a pencil and paper...

The psychological benefits of paying off what for many of us will be the single largest financial outlay of our lives has been, for me at least, simply amazing. I don't even think about the money side of things any more when it comes to the house - I just get a massive amount of ongoing personal satisfaction to simply know that it's legally mine....

To know that finally, you really do 'own' the roof over your own head, and often that of your family, is just great, and the sooner you pay it off, the sooner you'll be able to benefit from that feeling.

Perhaps this isn't something that everyone can get worked up about, but it's been a great comfort to me for many years now, and as I'm still working, it's relieved a great deal of potential work-related stress to at least know that there's one less bill that I'd have to pay, and a very important one at that, should the worst come to the worst with regards to my job...

We sometimes forget on an investment forum like this, but not everything is about pounds and pence - some real personal benefits just can't be counted or quantified like that, and I think paying your mortgage off is one of those cases....

Cheers,

Itsallaguess

[Maroochydore]

I think the final act of 'paying the mortgage off' is a huge personal step for the vast majority of us, and speaking as someone who paid theirs off some years ago now, I would just like to suggest that not all the benefits of doing so can be calculated with a pencil and paper...

The psychological benefits of paying off what for many of us will be the single largest financial outlay of our lives has been, for me at least, simply amazing. I don't even think about the money side of things any more when it comes to the house - I just get a massive amount of ongoing personal satisfaction to simply know that it's legally mine....

To know that finally, you really do 'own' the roof over your own head, and often that of your family, is just great, and the sooner you pay it off, the sooner you'll be able to benefit from that feeling.

Perhaps this isn't something that everyone can get worked up about, but it's been a great comfort to me for many years now, and as I'm still working, it's relieved a great deal of potential work-related stress to at least know that there's one less bill that I'd have to pay, and a very important one at that, should the worst come to the worst with regards to my job...

We sometimes forget on an investment forum like this, but not everything is about pounds and pence - some real personal benefits just can't be counted or quantified like that, and I think paying your mortgage off is one of those cases....

Itsallaguess

I have to agree with everything Itsallaguess has written. The security of owning your own home, knowing you can't get thrown out come what may, is financially incalculable. The euphoric feeling of not being at the boss or the mortgage lenders whim is immeasurable.

I used the money saved to pay into our three children's student loan accounts before they graduated and this saved a fantastic amount of money in interest payments for them.

[UncleEbenezer]

Having just bought a house without a mortgage[1], I don't feel that sense of security. Instead I have a bunch of new expenses for things that need fixing (and a wishlist of the non-urgent things), and a cash buffer that's just vanished.

There are always two sides to a question!

[1] My adult life has gone through three phases. Young grad in London - couldn't afford to live there, neither rent nor buy. Nomadic phase as refugee from London following wherever my next job came - too mobile to buy a house. Settled phase (had enough of being Nowhere) - too financially insecure to qualify for a mortgage.

[Slarti]

I was getting to the stage where paying off was an option and realised that I needed to replace my car.
The cheapest way of doing it was to draw down the needed funds by increasing the mortgage from almost zero for a year.

Mind you, with interest rates as they are now, that may no longer be the case.

Slarti

[dealtn]

You don't state the interest rate, and that would have a bearing on the decision to me. I still have a six-figure interest only mortgage on my property, that is exceeded (comfortably) by my investment portfolio, but I am happy to let things continue. One of the reasons is the differential between the interest cost of borrowing and the investment return.

Another factor is I have no wish to "cash in" my ISA portfolio and give up the tax benefits. Outside of that portfolio I have other capital gains losses I don't need to utilise yet. Depending on what is available when the mortgage is due for repayment I might roll it over into a new mortgage also.

[didds]

current rate is 2.2% on 134K.
currently paying 228.82 interest payment and £310 investments (which include a premium for life assurance on me and my wife for £134K)

I confess Im not actually that bothered about "gaming" it all... I'm looking at a clean breeak with a view to then starting to save those amounts going forward in a suitable vehicle.

With some checks with the B/S & the ISAs, we'd have to cough circa 24.5K from savings on top of what is in the ISAs. If we follow through to December 2023, that seems to be 51 x 540 = ~27,540. So on a basic net balance it seems "cheaper" to clear the morgage now anyway. Notwoirthstanding of course the investmehts MAY pay out more than the 134K that we actually need, but that's a tad of guesswork regarding future interest rates and investments returns etc.

Im more interested in any "ah buts...." that Im not aware of rather than the gaming of the situation

cheers

didds

didds

[pochisoldi]

current rate is 2.2% on 134K.
currently paying 228.82 interest payment and £310 investments (which include a premium for life assurance on me and my wife for £134K)

I confess Im not actually that bothered about "gaming" it all... I'm looking at a clean breeak with a view to then starting to save those amounts going forward in a suitable vehicle.

With some checks with the B/S & the ISAs, we'd have to cough circa 24.5K from savings on top of what is in the ISAs. If we follow through to December 2023, that seems to be 51 x 540 = ~27,540. So on a basic net balance it seems "cheaper" to clear the morgage now anyway. Notwoirthstanding of course the investmehts MAY pay out more than the 134K that we actually need, but that's a tad of guesswork regarding future interest rates and investments returns etc.

Im more interested in any "ah buts...." that Im not aware of rather than the gaming of the situation

cheers

didds

didds

I would look at what you are doing at the moment with your £310/month investment plan. I understand that some of that amount is for life assurance, and can be take out of the equation.

The length of mortgage term remaining, IMHO, falls into the short to medium term, which risk/return wise may not be compatible with continuing to invest in the ISA to pay the mortgage.

As far as your current outgoings are concerned...

You may want to consider either (a) changing your investment objectives with respect to (what I assume) are stocks and shares ISAs or (b) use some of the "investment" money to pay down the mortgage as you go along.

by (a) I mean continuing to invest in the ISA (e.g. long term savings towards the retirement pot/kids/grandkids etc, rather than just the mortgage), but planning to use cash savings at some point to pay off any remaining amount.
by (b) I mean instead of paying "mortgage" money into the ISA, chisel away at the mortgage each month.

As far as paying off the mortgage is concerned...

Consider the risk to your current ISA pot if markets shifted the wrong way. Rather than "picking your time" or "keeping fingers crossed for Dec 2023", you could consider cashing in the ISA in smaller lumps to pay the mortgage down.

For your current cash savings, I would look at how low I could allow my cash savings to get and still feel comfortable. Anything over that figure that I can't earn 2.2%pa on would be a candidate for paying down the mortgage.

These three alternatives (switching regular investment into paying off the mortgage, cashing in the ISA pot or using cash savings to pay down the mortgage (in one go, or in dribs and drabs) can be mixed and matched to suit how you both feel with respect to risk, what you think the prospective returns might be, and whether you need that "operational flexibility" you get by not paying down the mortgage early.

HTH
PochiSoldi

[Alaric]

As far as paying off the mortgage is concerned...

If there are enough funds to pay off the mortgage without cashing the ISA, leaving your wealth in a tax free shelter would be desirable. Even if there aren't, it should be worth maximising what's left to have as much as possible ring fenced in the ISA.

[AsleepInYorkshire]

Are there any other considerations we should have to let the current mortgage instead run its course until December 2023?

Any 'pure' financial costs or savings should be able to be calculated fairly easily, so why I'm posting isn't really about the financial side of things...

I think the final act of 'paying the mortgage off' is a huge personal step for the vast majority of us, and speaking as someone who paid theirs off some years ago now, I would just like to suggest that not all the benefits of doing so can be calculated with a pencil and paper...

The psychological benefits of paying off what for many of us will be the single largest financial outlay of our lives has been, for me at least, simply amazing. I don't even think about the money side of things any more when it comes to the house - I just get a massive amount of ongoing personal satisfaction to simply know that it's legally mine....

To know that finally, you really do 'own' the roof over your own head, and often that of your family, is just great, and the sooner you pay it off, the sooner you'll be able to benefit from that feeling.

Perhaps this isn't something that everyone can get worked up about, but it's been a great comfort to me for many years now, and as I'm still working, it's relieved a great deal of potential work-related stress to at least know that there's one less bill that I'd have to pay, and a very important one at that, should the worst come to the worst with regards to my job...

We sometimes forget on an investment forum like this, but not everything is about pounds and pence - some real personal benefits just can't be counted or quantified like that, and I think paying your mortgage off is one of those cases....

Cheers,

Itsallaguess

Hmmm ... I'm not sure where I should begin. I have to say that IAAG's post is spot on. It really is superb. We should all consider our own appetite for debt and reconcile that in a way that augments our emotional welfare. And it is entirely correct that this should rank pari passu with any and all financial strategies.

I cannot and will not disagree with anything IAAG has said. It really is an excellent post.

I took out an interest only mortgage 25 years ago. I haven't paid it off. The funds to pay it off currently reside in a pension policy. I have a problem. For every £1 I pay in interest on my mortgage (interest only) I actually make £6 in my pension. That's comparing apples with apples. I am not point scoring. Hell no. That's not my style. I am merely presenting fact. It's honest. I hasten to add I did not manufacture these results. They are more by luck than judgement - and trust me I needed some luck in my life.

You are in a super place regarding your mortgage. And only you can know your own comforts and tolerances regarding how to move forward with your financial plans. Above all IAAG made a far better point than I did. You need to consider more than just the spreadsheet. This really is your decision.

Well done. Good luck.

AiY

[vrdiver]

Another +1 to the points IAAG made. We paid off our mortgage quite a few years ago and it really did lift a huge psychological burden.

But you asked about "gotcha's". If you completely pay off the mortgage, you may find you are classified as a "first time buyer" but with all the penalties and none of the benefits. Should you need another mortgage, for whatever reason, this may work against you. Worth just checking your plans and if necessary, with your BS as to how they would treat you in the event of a new application. (I appreciate you wouldn't necessarily go back to the same BS, but it's a frame of reference).

The "gotcha" for NOT paying off the mortgage now has already been mentioned. If your house-money is invested, it risks going down with the market. If it's cash, then you're likely earning less in interest than you're paying. I'd be nervous of essentially borrowing against the house to invest in the market and I'd be dissed-off to be paying more in mortgage interest than I was earning in savings interest... However, if you were to lose your job, would your remaining savings be sufficient to tide you over for a reasonable length of time, or would you be in a position that you needed a new mortgage, but applying from a position of weakness? You know your job situation and the market - what is a "reasonable period out of work" and how would you deal with it?

The last point, is to consider what happens if the unthinkable occurs: does converting your savings into property and no mortgage have any impact on IHT / wills etc. Not necessarily big issue if you were going to do this in four years time anyway, but worth checking.

Anyhow - congratulations on being in a position to hit what is, for many, THE financial milestone of a lifetime...

VRD

[Julian]

We (wife and I) have approximately four years and four months left on our interest only mortgage.

I have realised that with ISAs (set up to back up that mortgage) and savings we could pay that off early. The B/S have confirmed there are no early exit charges etc.

The plan once paid off would be to then pay the amounts we have been paying monthly towards the investments plus interest etc into another savings vehicle for the future (that may be another thread on another day).

The investments payments currently made also include an element of life assurance would would obviously also end when we pay off etc - but that's to back the interest only mortgage anyway and other life cover is in place already.


Are there any other considerations we should have to let the current mortgage instead run its course until December 2023?


didds

I went down a similar path myself. Up until 1998 I diverted pretty much all of my surplus cash into paying down my mortgage and did become mortgage free in early 1999. The result however was that I didn't have enough spare cash during my paying-down-the-mortgage years to subscribe to any PEPs (which were replaced by ISAs in 1999). I now regret my single minded focus on paying off my mortgage because, had I gone a bit slower and left some money aside to fully or even partially use the PEP allowances available at the time, that would have been a worthwhile additional amount of my investments now that would be tax-sheltered within my ISA (PEPs can/could be transferred to an ISA account to consolidate it all) and I would still have my mortgage paid off by now. For me the red flag in your plan is the mention of cashing in your ISAs. You can never get those past years of ISA allowance back and in 10 years time you might well be left thinking "why didn't I just wait the extra 4 years?".

My personal perceptions are also different to itsallaguess's and vrdiver's. I'm not disagreeing with them, what they write are their personal feelings so to disagree would be about as idiotic as arguing about the validity of someone's favourite colour, but for me finally paying off the mortgage was more of a routine tickbox "done it, move on to something else" event rather than any huge liberating psychological milestone. I suppose maybe there was some initial pleasure from having achieved the milestone and seeing a fairly big direct debit no longer going out of my account but the money that was no longer going towards the mortgage simply started going towards ISA subscriptions (finally!) so I didn't have a huge chuck of extra money every month for wine, women and song. I also came to realise, although luckily not through any bitter personal experience, that owning one's house outright really isn't a total step change in security since if one's finances were to get in a bad enough mess due to extended unemployment or some unexpected massive liability to meet one's house might still need to be sold to release the equity, it's simply a matter of scale that if owned outright all equity would be available instead of house-value minus mortgage. Even worse, in extremis one's house could be seized in the event of bankruptcy even if owned outright so there isn't a jump to 100% safe when redeeming a mortgage.

Congratulations on getting yourself to that position, and maybe there are other factors that might push you towards redeeming, but personally if I had my time again I would have let my mortgage run for another 10 years, paid it down more slowly, and as a result probably now have at least another hundred thousand quid in my ISA if not £200K or more (10 years of £6K PEP subs + about 6 years of £3K single company PEPs by 1999 and then 20 years growth on that total which, depending on what I invested in and I suspect at the time I would have gone for big well-known unit trusts, that capital would probably at least have doubled by now).

- Julian

[Alaric]

if I had my time again I would have let my mortgage run for another 10 years, paid it down more slowly, and as a result probably now have at least another hundred thousand quid in my ISA if not £200K or more

It's a variation on the concept of endowment mortgages. At one time financial advisers were convinced that endowment mortgages were "better" than repayment ones. As you suggest, not paying off a mortgage can give a higher return than paying it off, but only if the return on the investment exceeds the rate of interest on the mortgage. When finally in around 1998/99, the FSA commissioned research that said this, it was the long overdue start of the demise of the endowment mortgage concept. The problem with endowments being that by the time expenses and tax had been taken off, then particularly over shorter periods, the returns didn't exceed the mortgage interest rate.

[DrFfybes]

But you asked about "gotcha's". If you completely pay off the mortgage, you may find you are classified as a "first time buyer" but with all the penalties and none of the benefits. Should you need another mortgage, for whatever reason, this may work against you.

The "gotcha" for NOT paying off the mortgage now has already been mentioned. If your house-money is invested, it risks going down with the market. If it's cash, then you're likely earning less in interest than you're paying. I'd be nervous of essentially borrowing against the house to invest in the market and I'd be dissed-off to be paying more in mortgage interest than I was earning in savings interest... However, if you were to lose your job, would your remaining savings be sufficient to tide you over for a reasonable length of time, or would you be in a position that you needed a new mortgage, but applying from a position of weakness? You know your job situation and the market - what is a "reasonable period out of work" and how would you deal with it?

VRD

There are some very good points here. When our mortgage was paid off it was nice to get it out of the way, but like Julian it was a "done that, what now?" operation, and as the payments were relatively low by the end it wasn't a big change.

Personally I wouldn't get too hung up over taking money out of the ISA. ISA limits are very generous now, and from what you have said then barring a windfall you are unlikely to get close the maxing out the £40k/year allowance you have at the moment. Also there is no chance of clearing the debt from non-ISA savings, so they'll have to come out at some point.

There is the flexibility of "cash in hand", and something you would lose if you cashed in all your savings. A mortgage is still a pretty cheap way of financing a car/kitchen/redundancy should you need to, and you should keep some savings. If you look at your ISAs and think "hmm, nice to have a buffer" then the comfort of clearing the debt might be obscured by the worry of losing the cushion.

Then there is your attitude to risk. As VRD says, you are effectively borrowing on the house to invest in your ISA. With current political shenanigans then the next couple of years could be quite volatile. You might find that in 12 or 18 months you can't clear it, or you might be able to clear it twice! In 4 years things might have settled more, but who knows. 12 years ago the FTSE was nudging 6500, 5 months later it was around 4000, and took another 4.5 years to recover. 20 years ago that wouldn't worry be, but as the timescales shorten and investment goals change the risk/reward changes.

You asked if you should cash in your ISA to pay off your mortgage. The other viewpoint is "Would you go out now and borrow £100k against your house to invest in your current ISA portfolio?"

Paul

[Julian]

Personally I wouldn't get too hung up over taking money out of the ISA. ISA limits are very generous now, and from what you have said then barring a windfall you are unlikely to get close the maxing out the £40k/year allowance you have at the moment. Also there is no chance of clearing the debt from non-ISA savings, so they'll have to come out at some point.
...
You asked if you should cash in your ISA to pay off your mortgage. The other viewpoint is "Would you go out now and borrow £100k against your house to invest in your current ISA portfolio?"

Good points. It's always difficult to offer opinions without knowing the questioner's full situation and no one expect someone to post a life story to accompany a question.

For me it was a windfall, in my case a significant inheritance that could to some extent have been reasonably anticipated since it was from my parents although I knew few details of their estate until my father died. Had that not arisen then I think your subsequent points might well have given me food for thought when I was making my decision. At the time however the ISA limits were a lot lower and as a high earner I was saving too much to all fit into an ISA in the 1990s so was already starting to accumulate outside-ISA investments. The ISA limits are higher now but there's no guarantee about what will happen to the allowance in the future. It's perfectly possible that some future government might reduce it or even stop ISAs altogether but I suppose there's only so much gazing into non-functioning crystal balls that one can do in making such decisions; the risk of potential detrimental changes to annual ISA limits in the future may or may not be something that Didds wants to consider.

Not withstanding a possible need to anticipate and factor in a future predictable windfall (e.g. inheritance) that final paragraph seems to me to be an excellent way of looking at it. Didds has said that their mortgage rate is 2.2% which, even if not fixed, I personally can't see going up in the next few years given the current UK and global economic concerns. That 2.2% gives a pretty precise benchmark to consider what you realistically expect from your ISA investments going forward and how that compares with the interest being paid on the mortgage.

- Julian

[pendas]

I don't know if this is relevant anymore with computerised records, but at the time we paid our mortgage off, the bank held the deeds to the house which would have been returned to us on completion.

This gave the problem of keeping them somewhere safe.

Halifax offered a deed store scheme whereby they retained and stored the deeds at no cost and the mortgage was left open with a few hundred pounds outstanding that attracted no interest charges.

This was more than 20 years ago and to this day I receive an annual statement with zero charges.

[Slarti]

I don't know if this is relevant anymore with computerised records, but at the time we paid our mortgage off, the bank held the deeds to the house which would have been returned to us on completion.

This gave the problem of keeping them somewhere safe.

Halifax offered a deed store scheme whereby they retained and stored the deeds at no cost and the mortgage was left open with a few hundred pounds outstanding that attracted no interest charges.

This was more than 20 years ago and to this day I receive an annual statement with zero charges.

When we paid our mortgage off, 6 years ago, First Direct only had 2 options, return the documents to us or they would dispose of them.

We had them returned out of historical interest and I'm glad we did as they go back to the 18th century, even though the house was only built in the 1950s.

Slarti

[paulnumbers]

We (wife and I) have approximately four years and four months left on our interest only mortgage.

I have realised that with ISAs (set up to back up that mortgage) and savings we could pay that off early. The B/S have confirmed there are no early exit charges etc.

The plan once paid off would be to then pay the amounts we have been paying monthly towards the investments plus interest etc into another savings vehicle for the future (that may be another thread on another day).

The investments payments currently made also include an element of life assurance would would obviously also end when we pay off etc - but that's to back the interest only mortgage anyway and other life cover is in place already.


Are there any other considerations we should have to let the current mortgage instead run its course until December 2023?


didds

Hi Didds,

Something I’ve noticed (and taken advantage of) is that 2 year fixed rate mortgages always appear to have lower APR’s than 2 year fixed rate ISA’s.

I had expected that keeping my ISA’s would cost me money (effectively using mortgage debt), but it’s turned out to be the opposite, and source of small profit.

I’ve only played this game the last 6 months, so don’t know if it’s the same under all market conditions, or for all types of mortgages (discount variable, 3 year fix, etc)

Paul

[mutantpoodle]

apologies if i missed a reply by others but...

when i had an interest only mortgage the 'required' life policy was a separate deal
so
when i paid off the loan i maintained the life policy endowment.........which in those days was very beneficial

so the life insurance 'might' not be lost