house-down Posted July 10, 2023 Share Posted July 10, 2023 Pay off mortgage Or Invest Money I am sure a lot of people are facing the same question but for a 45% tax payer (ie earning over 125K a year) and with a 650K mortgage which now needs to re reset at 3.83% for five years I am seriously thinking of paying it off. I do have the money available in a savings account earning 4% and had thought of putting it in the SandP500 or heaven forbid a buy to let. Is my maths wrong that despite me paying 3.83% on my mortgage and earning 4% on the savings the effective tax rate that I need to earn is in fact 7% to just break even? Put differently I need to earn 7% before tax to match paying 3.83% mortgage. i realize that these are large numbers and I am very lucky that I have returned from working abroad after many years and able to use my pension money - The loan to value is 60% and I have another 25 years on the mortgage but able to repay the mortgage if I drain all my savings Quote Link to comment Share on other sites More sharing options...
nero120 Posted July 10, 2023 Share Posted July 10, 2023 Try this: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/ Quote Link to comment Share on other sites More sharing options...
ExeC-UK Posted July 10, 2023 Share Posted July 10, 2023 (edited) I'm in a similar situation. We are currently putting large overpayments (2x mortgage payment) into savings each month. We have a 1.69% until 2029 (so no use overpaying directly to bank) when hopefully we have enough to clear down the mortgage. I'd rather be short for a few years than pay that kind of interest when it's due to renew! In regards to tax. I think online calcs will help. Edited July 10, 2023 by ExeC-UK Quote Link to comment Share on other sites More sharing options...
Wurzel Of Highbridge Posted July 10, 2023 Share Posted July 10, 2023 May be small change to you guys, but you can put £50k in premium bonds and don't pay tax on the winnings/interest. Works out to about 2.55% to 3.7% depending on your luck. Another benefit is the return of capital when things kick off. Quote Link to comment Share on other sites More sharing options...
winkie Posted July 10, 2023 Share Posted July 10, 2023 Paying off a mortgage that is costing 6% is like saving with a savings rate of 6%.......so if do have some savings pay off what can get you down to a lower loan to value, a lower debt interest rate......always keep some savings back and add to it over time if can......this is not investment advise, anything can happen and it does. Quote Link to comment Share on other sites More sharing options...
house-down Posted July 10, 2023 Author Share Posted July 10, 2023 That site does not allow you to compare the equivalent rate that would need to bea earnt to compare paying off a mortgage. I make it as 7% required rate pre tax equal to 3.83% post tax for a haddiotnal rate (45%) tax payer. How do provate landlords turn a profit when these figures present themselves is a mystery Quote Link to comment Share on other sites More sharing options...
Sackboii Posted July 10, 2023 Share Posted July 10, 2023 38 minutes ago, house-down said: Pay off mortgage Or Invest Money I am sure a lot of people are facing the same question but for a 45% tax payer (ie earning over 125K a year) and with a 650K mortgage which now needs to re reset at 3.83% for five years I am seriously thinking of paying it off. I do have the money available in a savings account earning 4% and had thought of putting it in the SandP500 or heaven forbid a buy to let. Is my maths wrong that despite me paying 3.83% on my mortgage and earning 4% on the savings the effective tax rate that I need to earn is in fact 7% to just break even? Put differently I need to earn 7% before tax to match paying 3.83% mortgage. i realize that these are large numbers and I am very lucky that I have returned from working abroad after many years and able to use my pension money - The loan to value is 60% and I have another 25 years on the mortgage but able to repay the mortgage if I drain all my savings Have you considered paying large sums into a pension each tax year ? Limit now raised to £60k pa. Quote Link to comment Share on other sites More sharing options...
TheResponsibleHouseBuyer Posted July 10, 2023 Share Posted July 10, 2023 7 minutes ago, house-down said: That site does not allow you to compare the equivalent rate that would need to bea earnt to compare paying off a mortgage. I make it as 7% required rate pre tax equal to 3.83% post tax for a haddiotnal rate (45%) tax payer. How do provate landlords turn a profit when these figures present themselves is a mystery By not paying taxes lol... Quote Link to comment Share on other sites More sharing options...
Up the spout Posted July 10, 2023 Share Posted July 10, 2023 Don't forget it isn't just one or the other; you can make a lump sum payment and have some/more savings left over, or you could pay it all off and - if necessary - take out a new mortgage in the future. As long as you have a decent chunk set aside in an emergency (6 to 12 months outgoings, plus some money for an expensive fix like a new boiler or roof), then you have the freedom to do what feels 'right'. Quote Link to comment Share on other sites More sharing options...
sfr Posted July 10, 2023 Share Posted July 10, 2023 I did that last year. Not quite the same figures, but paid off £300k mortgage early (one year before the fixed rate ended) Reasons were - wanted to be 100% debt free, interest on the savings were below the mortgage rate and the most important one was (although i had it split across many banks) i was paranoid about loosing it if banks failed (or in the case of pension - the pension co failed as happened to my father in law) Still left a sum in bank to cover expenses and topping up the savings again with the money ive saved every month. Quote Link to comment Share on other sites More sharing options...
TheChangeIsCast Posted July 10, 2023 Share Posted July 10, 2023 I've been mortgage free since the age of 29 (I'm 39 now). I knew I could get a much better return investing it, but I was earning my money doing something I knew I wouldn't be able to do forever (as I really dislike the work), and also on a contract/freelance basis, which makes it inherently unstable. So I decided to blitz the mortgage, and looking back with hindsight, I'd do the same thing again. I'm planning on retiring next year from my current career, as 15 years doing it is enough. Going to take a much lower paid, but hopefully much more rewarding local job (youth work) as a core part-time income, and then continue my mountain guiding and rock climbing work, along with rope access work, to top up my earnings as and when needed. So more of a hybrid, multiple income stream approach. I've got a family, Including one child, and none of this would be possible if I still had a mortgage to be honest, and the peace of mind it gives me, along with the flexibility to do what I want, is priceless, worth more than any investment gains I would have made since 2011. Quote Link to comment Share on other sites More sharing options...
house-down Posted July 10, 2023 Author Share Posted July 10, 2023 Seems a shame to pay off the mortgage given money now costs 5.5% for five years and I have a mortgage at 3.83% - On the other hand I cannot think of many areas which would give me a 7% risk free rate of return so I am guessing this is the best thing to do I am seeing a few things appear on auctions as well including Savills which start to show the pain thresholds of some builders but I reckon there is a long way to go before it washes through I expect a glut of flats from landlords but not many houses to come up in distressed asles Quote Link to comment Share on other sites More sharing options...
Nomadd Posted July 10, 2023 Share Posted July 10, 2023 2 hours ago, house-down said: I do have the money available in a savings account earning 4% and had thought of putting it in the SandP500 or heaven forbid a buy to let. 100% BTL. * (* So you can provide us with plenty of meltdown entertainment over the next few years.. :)) Quote Link to comment Share on other sites More sharing options...
Shep Posted July 10, 2023 Share Posted July 10, 2023 1 hour ago, Sackboii said: Have you considered paying large sums into a pension each tax year ? Limit now raised to £60k pa. +1 on this (potentially gives you a 50% head start, and possibly more if your company will give you their share of the employee NI savings via salary sacrifice - also check re any unused allowances from previous years). For me the rest depends much more on other things like family/children costs, early retirement aims, will the current house be sold/upsized/downsized, is it possible you'll receive inheritance (or when might it happen), are you disciplined enough not to spend it on something else, etc. etc. I'd be willing to loose a bit for the opportunity value of having the lump sum available in reserve by not paying off the mortgage, you can always re assess at the next renewal time (and if you lose your job you have plenty not to have to rush into getting something else). You could always go down the offset mortgage route, the rates would be higher, but if you have the balance available to put in that account, it would effectively be like clearing the mortgage so it wouldn't matter but you'd also have a huge pre agreed loan available. Things to consider The Virgin 5%+ cash ISAs or invest some in a S&S ISA. The 7% First Direct regular saver & possibly the 6%+ Lloyds/RBS/Natwest regular savers. Someone posted about 6.15% First Save bonds on another thread that might be worth considering. If you have a partner consider adding to their pension, using their ISA and savings allowances etc. Also consider any share save schemes at work. Quote Link to comment Share on other sites More sharing options...
jevans Posted July 10, 2023 Share Posted July 10, 2023 I'd max pension and stocks and shares isa, hold a couple of years worth of take home pay in saving and pay a slab off the mortgage. Quote Link to comment Share on other sites More sharing options...
DarkHorseWaits-NoMore Posted July 10, 2023 Share Posted July 10, 2023 (edited) A cash neutral rolling offset mortgage arrangement to preserve access to the capital if needed in the future. Technical view: Edited July 10, 2023 by DarkHorseWaits-NoMore dyslexic mo fo Quote Link to comment Share on other sites More sharing options...
stuckmojo Posted July 10, 2023 Share Posted July 10, 2023 Interesting topic and I have the same dilemma. My 1.8% fix ends at the end of 2026. I'm overpaying by £600 per month and saving. Considering my options at the moment Quote Link to comment Share on other sites More sharing options...
TenYearToGetMyMoneyBack Posted July 10, 2023 Share Posted July 10, 2023 1 hour ago, DarkHorseWaits-NoMore said: A cash neutral rolling offset mortgage arrangement to preserve access to the capital if needed in the future. Technical view: I was going to suggest an Offset Mortgage. I have had one since buying this property in 2011. I haven't paid any interest for about five years but have flexibility should I need it. I just watched the video and he glosses over the tax situation(s). Even when I started my mortgage I didn't cash in my Stocks and Shares ISA as I realised it would take years to replace the tax free advantages if I did. Quote Link to comment Share on other sites More sharing options...
fellow Posted July 10, 2023 Share Posted July 10, 2023 100% I would pay down the mortgage as it's the least effort and the least risk. Imagine how you would feel if you lost a large amount of money on your investment and you still had your mortgage to pay. At least paying down your mortgage guarantees you will be better off and gives you fewer things to worry about. You will also be doing us a favour by reducing the money supply. Quote Link to comment Share on other sites More sharing options...
24gray24 Posted July 10, 2023 Share Posted July 10, 2023 5 minutes ago, fellow said: 100% I would pay down the mortgage as it's the least effort and the least risk. Imagine how you would feel if you lost a large amount of money on your investment and you still had your mortgage to pay. At least paying down your mortgage guarantees you will be better off and gives you fewer things to worry about. You will also be doing us a favour by reducing the money supply. +1. Quote Link to comment Share on other sites More sharing options...
house-down Posted July 10, 2023 Author Share Posted July 10, 2023 Thanks all - I wanted to double check my breakeven pre tax savings rate that I needed to match the mortgage rate - Am I correct that it is 7%? I already do pay pension and ISA will only help with 20K so not much in the grands schemes of things Either I put it in ETF or I pay the mortgage - Mu analysis shows the ETF will need to return 7% (not adjusted for risk) to match the mortgage rate Quote Link to comment Share on other sites More sharing options...
24gray24 Posted July 10, 2023 Share Posted July 10, 2023 The risk on the investment side is the problem. You could lose substantially on most investments in the current market. Play safe, keep it simple. Quote Link to comment Share on other sites More sharing options...
DarkHorseWaits-NoMore Posted July 10, 2023 Share Posted July 10, 2023 (edited) Any interest earned in an offset mortgage (that cancels out the debt interest) isn't classed as income and isn't liable to taxation. Both the debt and the capital offset fall with inflation, the repayments are paid from the capital offset. Where's the risk in this strategy? Is there some time lag in balance calculations or something that incurs some marginal cost? Eg. Say a 2 year offset deal with no fees. Edit: The Financial Services Compensation Scheme (FSCS) 85k limit might require some planning. Edited July 10, 2023 by DarkHorseWaits-NoMore add detail Quote Link to comment Share on other sites More sharing options...
Bruce Banner Posted July 10, 2023 Share Posted July 10, 2023 I had to make this choice about forty years ago. Inflation was high and interest rates peaked at about 16%. As I was on an interest only mortgage backed by an insurance policy, it wasn't fixed rate and almost every month the bank asked me to alter my mortgage payment standing order. I actioned the requests to increase and ignored the ones to reduce payment and my outstanding mortgage debt evaporated, leaving the insurance policy with no charge on it so I cashed that in while it was still worth something and have been mortgage free ever since. Having no mortgage debt changed my outlook on life and I never borrowed money again, even in my business which I ran on a positive cash flow with the emphasis on profit rather than turnover until I sold it and retired fifteen years ago. Quote Link to comment Share on other sites More sharing options...
Shep Posted July 10, 2023 Share Posted July 10, 2023 2 hours ago, house-down said: Thanks all - I wanted to double check my breakeven pre tax savings rate that I needed to match the mortgage rate - Am I correct that it is 7%? Yes, you're correct 3.83% x 1.82 = 6.97% You multiply or divide by the following depending on which way you are working it out (multiply up from net, divide down from gross). - 1.25 if you're a basic-rate taxpayer - 1.66 if you're higher-rate taxpayer - 1.82 if you're a top-rate taxpayer https://www.moneysavingexpert.com/savings/best-cash-isa/ Quote Link to comment Share on other sites More sharing options...
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