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Second Time Around

Should We Pay Off The Mortgage?

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Mrs STA and I saw the writing on the wall a few years ago and decided we wanted a debt free future. We have no credit card debt and for three years we have made overpayments on the mortgage. We will pay off the remaining amount next week with a lump sum from our savings.

However, it crossed my mind that the interest (currently about 2.5%) we are losing on the savings we are using to clear the mortgage is greater than the interest we are paying on what remains of our mortgage (1%). It occurred to me that for significant sums of money ie £20,000+ it would not make sense to pay off the mortgage until mortgage rates increased or savings rates fell.

Is anyone on this site holding back from paying off their mortgage because higher savings rates make it less attractive at this time?

What are the advantages of paying off a mortgage in the present circumstances?

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Assuming you dont have an offset mortgage and your net savings rate is better than your mortgage rate then you may as well keep the savings and not pay off the mortgage.

When the situation reverses and there are no mortgage penalties then pay down the mortgage. (keeping an emergency buffer).

VMR.

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What are the advantages of paying off a mortgage in the present circumstances?

For many, paying your mortgage down could result in a lower LTV and a better rate. In your case, you want get a new mortgage below 1% so it doesnt make sense.

VMR.

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Mrs STA and I saw the writing on the wall a few years ago and decided we wanted a debt free future. We have no credit card debt and for three years we have made overpayments on the mortgage. We will pay off the remaining amount next week with a lump sum from our savings.

However, it crossed my mind that the interest (currently about 2.5%) we are losing on the savings we are using to clear the mortgage is greater than the interest we are paying on what remains of our mortgage (1%). It occurred to me that for significant sums of money ie £20,000+ it would not make sense to pay off the mortgage until mortgage rates increased or savings rates fell.

Is anyone on this site holding back from paying off their mortgage because higher savings rates make it less attractive at this time?

What are the advantages of paying off a mortgage in the present circumstances?

Well you do save more money each month than just the interest payments, since obviously you would be paying off some of the capital. Also for some people, having the money in the bank can be an incentive to spend it, so as a forced savings scheme it can be good.

However, for most people, it is probably better in these circumstances though to make sure that you have a few months of money in the bank in case of unforeseen financial problems (job loss, serious illness etc). you might not be at risk of course and it is obviously your judgement on that.

Edit to add.

I see VMR has covered most of my points already. Serves me right for working and abandoning "my post". :)

Edited by bobthe~

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What are the advantages of paying off a mortgage in the present circumstances?

Reducing your savings is useful if you are made redundant. If you have over £6k in savings then your benefits will be reduced. Over £16k and you'll get sod all benefits. If you wait till you get made redundant then you won't be able to use your savings to pay down the mortgage since that will be counted as depriving yourself of capital.

Clear the mortgage now. Hide your savings. Only keep a small amount in the bank.

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Don't you have to pay tax on your interest which you cannot write off against interest paid

It's always seemed stupid to me, but is this (below) how it works?

Get charged ten pounds in interest in the year and get given ten pounds in interest in the year, result is you pay tax on the ten pounds if you're over the tax free bracket?

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Mrs STA and I saw the writing on the wall a few years ago and decided we wanted a debt free future. We have no credit card debt and for three years we have made overpayments on the mortgage. We will pay off the remaining amount next week with a lump sum from our savings.

However, it crossed my mind that the interest (currently about 2.5%) we are losing on the savings we are using to clear the mortgage is greater than the interest we are paying on what remains of our mortgage (1%). It occurred to me that for significant sums of money ie £20,000+ it would not make sense to pay off the mortgage until mortgage rates increased or savings rates fell.

Is anyone on this site holding back from paying off their mortgage because higher savings rates make it less attractive at this time?

What are the advantages of paying off a mortgage in the present circumstances?

It seems to be fashionable amongst certain members of society to pay off the mortgage and then forget that you have done so. :rolleyes:

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Interest received 2.5%, less 40% tax, effective interest rate = 1.5%

Interest paid 1%.

Net profit thus 0.5%. Which on 20k = £100 profit per annum.

Scarcely seems worth the bother. However, having spare cash around is always beneficial; the bank will not give it back to you when you need it for an emergency. A colleague of mine has 300k on deposit and mortgage of more than that. I keep telling him he's wasting his money; he says he'd never get it back.

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Interest received 2.5%, less 40% tax, effective interest rate = 1.5%

Interest paid 1%.

Net profit thus 0.5%. Which on 20k = £100 profit per annum.

Scarcely seems worth the bother. However, having spare cash around is always beneficial; the bank will not give it back to you when you need it for an emergency. A colleague of mine has 300k on deposit and mortgage of more than that. I keep telling him he's wasting his money; he says he'd never get it back.

If you are tying it up for the long term by paying off the mortgage, you can get 4% nowadays. (Edit to add: I meant in a fixed rate bond, not on the mortgage).

The problem with that of course is that you might be on a variable IR for the mortgage that could increase waaay past 4%, leaving you out of pocket.

Edited by bobthe~

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How quickly would you rebuild your savings if you paid it off?

If you put your monthly mortgage payment in a savings account how fast would you build your cash back up to what you've got now?

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For many, paying your mortgage down could result in a lower LTV and a better rate. In your case, you want get a new mortgage below 1% so it doesnt make sense.

VMR.

but if the OP wants to pay off ALL his mortgage this is not an issue. If I was in that position and paying off the mortgage would still leave me with 'rainy day' money I would pay off the mortgage - it is a nice feeling. Whatever happens to House prices you are never in negative equity and you have a home.

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Is anyone on this site holding back from paying off their mortgage because higher savings rates make it less attractive at this time?

What are the advantages of paying off a mortgage in the present circumstances?

My strategy is to take on as much mortgage as safely possible and never ever pay it back. Inflation erodes repayments. If you bought a house and didn't pay any interest which increased the principal you would be well ahead in the long term.

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Find out when you should repay the mortgage. If you repay a chunk off at the wrong time of the year you may have to wait upto 12 months for the interest to be recalculated and you loose an entire years 'interest'. Also check with the mortgage if there are any penalties for repaying early...

It depends on the type of mortgage, IMHO a combined savings/mortgage might be the ticket for you

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Reducing your savings is useful if you are made redundant. If you have over £6k in savings then your benefits will be reduced. Over £16k and you'll get sod all benefits.

wrong. You can claim contributions based job seekers allowance of 60 quid a week for 6 months regardless of savings. I am claiming this and I have a quarter of a million in the bank.

Fair no, but you should claim it if you can

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In principle I think it is always advisable to pay off a mortgage if one is able. No-one knows what the future holds but everyone knows that it is better long term to be out of debt than in debt.

No-one who is in debt is a free man - he is a servant to his creditor.

Get out of debt and be free!

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Mrs STA and I saw the writing on the wall a few years ago and decided we wanted a debt free future. We have no credit card debt and for three years we have made overpayments on the mortgage. We will pay off the remaining amount next week with a lump sum from our savings.

However, it crossed my mind that the interest (currently about 2.5%) we are losing on the savings we are using to clear the mortgage is greater than the interest we are paying on what remains of our mortgage (1%). It occurred to me that for significant sums of money ie £20,000+ it would not make sense to pay off the mortgage until mortgage rates increased or savings rates fell.

Is anyone on this site holding back from paying off their mortgage because higher savings rates make it less attractive at this time?

What are the advantages of paying off a mortgage in the present circumstances?

you don't get taxed on mortgage payments so if you are a higher rate tax payer you save 40% tax by paying off your mortgage and rates are likely to rise. However, it makes little difference at the moment.

I'm taking the thousands saved on my mortgage payment and investing them in high return high risk ventures. I've just sold all of these yesterday and am awaiting a down leg on the stock markets to re invest. This will provide a better return than your mortgage but you could lose the lot. Tax free if you do it in your ISA.

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wrong. You can claim contributions based job seekers allowance of 60 quid a week for 6 months regardless of savings. I am claiming this and I have a quarter of a million in the bank.

Fair no, but you should claim it if you can

This post raises the question of morality.

On the one hand I think you are a selfish tw@t and should not take money you clearly do not need. But, then I think feck it everyone else.

And on the question of 'should you pay off the mortgage', get real that was so 1990's. You need to MEW and never pay it back, Gordon will take care of you when it goes tittie pappers on you.

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The sensible answer would be to top up the ISAs for the year, keep the minimum in savings so you could get benefits if you lose your jobs and then use the excess...

but as someone else has said check how is best to overpay

Edited by SarahBell

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We're doing similar to the OP. Savings rate for spare cash as a higher rate tax payer are so bad that we're paying lump sums off our mortgage AND taking a hit on the early repayment charge (3%). We lose a few quid over the year but gain peace of mind when considering a high inflationary period.

Start of this year our outstanding mortgage was £220K we're reducing it to £50K by the end of this year.

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However, it crossed my mind that the interest (currently about 2.5%)

Actually there are a couple of 1-year fixed rates around at upto 4.3% at the moment

Against 1% for your mortgage debt you are better off saving.

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This post raises the question of morality.

On the one hand I think you are a selfish tw@t and should not take money you clearly do not need. But, then I think feck it everyone else.

And on the question of 'should you pay off the mortgage', get real that was so 1990's. You need to MEW and never pay it back, Gordon will take care of you when it goes tittie pappers on you.

`

id completely disagree, if hes paid national insurance all his life hes entitled to claim for it, a purely means tested system is entirely why the UK has such a high level of young single mums and long term unemployed/incapacity claimants

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This post raises the question of morality.

On the one hand I think you are a selfish tw@t and should not take money you clearly do not need. But, then I think feck it everyone else does.

I can certainly understand your point.

My thoughts on it from a moral perspective is that people who have lost money through bad luck with the rules against them are unable to do anything about it. So if you are in a position of being lucky, with the rules in your favour, you should feel morally right to claim, so that you have the money to compensate you for future bad luck.

Saying that I am seriously considering paying my benefits to that poor guy who could not claim anything because his wife was earning £5K per year. Let the papers know, and they might run a story on it.

Anything to stick the knife into Gordon :ph34r:

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If you can afford the mortgage do not pay it of.Money is very hard to borrow at present and when the bargins begin you will not be able to borrow,cash will be king,and you will get good deals.

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Why do so many posters appear to be led by a here today and gone tomorrow pragmatism?

What about basic principles of debt and servitude?

To whom you owe money, you are a slave.

Or is everyone gagging to be a slave so as to extract an extra penny in interest at the expense of freedom?

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Why do so many posters appear to be led by a here today and gone tomorrow pragmatism?

What about basic principles of debt and servitude?

To whom you owe money, you are a slave.

Or is everyone gagging to be a slave so as to extract an extra penny in interest at the expense of freedom?

If you can pay it all off then fine. Otherwise leave yourself a safety net and play it safe.

No eggs all in one basket.

once you'v paid it off you should save the same amount as you were paying every month.

Or that's what you should have done beofre this govt screwed it up.

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