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To pay off or not to pay off- that is the question

gez

gez

pfm Member
Just a bit of fun, but I can see this starting a good discussion :)

Scenario:
  • You have 100k left outstanding on your mortgage (for the sake of this discussion ignore any "termination" fees that may be owing at the end of the term)
  • Mortgage has 10 years left to run
  • Mortgage is (currently) on a fixed term for the next 3 years and payments are (currently) £1,000 per month

You come in to a windfall of £100k.

Do you pay off the mortgage or not?
 
The calculation is very, very simple.

Can you find an investment for £100K that pays a higher return, after any tax, than the mortgage acrues as interest? If you can, invest the money. If you can't, pay off the mortgage.

If you are in a job where there is any significant chance of finding yourself jobless, you might want to pay the mortgage off anyway.
 
gez said:
Just a bit of fun, but I can see this starting a good discussion :)

Scenario:
  • You have 100k left outstanding on your mortgage (for the sake of this discussion ignore any "termination" fees that may be owing at the end of the term)
  • Mortgage has 10 years left to run
  • Mortgage is (currently) on a fixed term for the next 3 years and payments are (currently) £1,000 per month

You come in to a windfall of £100k.

Do you pay off the mortgage or not?
Click to expand...

You switch to an offset mortgage to effectively pay off the debt but maintain liquidity should you need it.
 
If it is a one-off, never to be repeated, windfall then think what is the best use that can be made of that money. Do that. Paying off the mortgage is like a pay rise and gives peace of mind but there may be medical or education bills coming up.
 
If your’re 55 or nearly consider putting the maximum amount allowable into a SIPP pension and get an immediate 25% extra boost eg pay in £40k in and your pension sees £50k going in. You’re immediately £10k up. Once you’re over 55 it can be withdrawn if you need it.

VCTs also are an option.
 
Vinny said:
The calculation is very, very simple.

Can you find an investment for £100K that pays a higher return, after any tax, than the mortgage acrues as interest? If you can, invest the money. If you can't, pay off the mortgage.

If you are in a job where there is any significant chance of finding yourself jobless, you might want to pay the mortgage off anyway.
Click to expand...
I think it is simple, but not in the way you describe. Sure, the investment element make sense, but even assuming a relatively risk free investment, how much “value” do you put on the mental benefit of not having a mortgage. It will be different for everyone, but I think the benefit of no longer having a mortgage is worth a significant amount.
 
PeteVid said:
If your’re 55 or nearly consider putting the maximum amount allowable into a SIPP pension and get an immediate 25% extra boost eg pay in £40k in and your pension sees £50k going in. You’re immediately £10k up. Once you’re over 55 it can be withdrawn if you need it.

VCTs also are an option.
Click to expand...
The maximum allowable is £40k (including tax relief) for the 23/24 tax year, rising to £60k from April, so it would take you 3 tax years to invest this way.
 
If you can get more interest from investment than you are paying off on the mortgage The mental benefit is still there, knowing you can pay off the mortgage at any time, meanwhile you are paying off the mortgage at no nett cost to yourself.
 
There's a chipmunk for sale in an adjacent thread. It's not £100k, but once you see the pictures you will want one so you can subtract a hundred from the windfall right there.

Joe
 
In theory, high interest account, maybe locked in for 3 years, then review when remortgage time.

Presumably your existing loan is at a lower interest rate.

The delta between the two is probably not going to be life changing.
 
barnitto said:
The maximum allowable is £40k (including tax relief) for the 23/24 tax year, rising to £60k from April, so it would take you 3 tax years to invest this way.
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Indeed if you wanted it all to go into a pension. I think I’d do a third, a third, a third into pension, offset mortgage and equity ISA over two tax years.
 
Definitely clear it. But the thought of being able to spend it on something else is tempting.

I remember buying my last new car, at a main agents. After the deal was done, the salesman asked me if I'd have a word with the finance director. He wanted me to buy it on credit. I asked him if he did "interest free," he said they didn't. I said then what was the incentive for me not to pay cash? He suggested I could spend the money on something else. I said there wasn't anything else I needed, so we went our separate ways. I guess if there were anything that came to mind, I might have considered it, but not for long.
 
Pay it off at the first cost-free opportunity. I learnt my lesson when interest rates soared above 15% and owed more to the bank when I sold the house than I borrowed 15 or so years earlier (repayment mortgage too). Never had another with 5 properties since. since.
 
Paying off the mortgage or investing is sensible. And dull. Spend a chunk of it now on something that gives you pleasure. Make some happy memories to reminisce on your deathbed.
 
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