Mortgage rates, is it worth more aggressive overpayments?

[Affable Bear]

So mortgage rates are around 6%...

My plan is to retire in approx 13 years, wife is 6 years younger and will probably continue working for a while after that, we are hoping for a little one in the next 12-24 months and I would love to be at home when they are still young. We are thinking of overpaying so we clear the mortgage when our fix ends in 10 years which would mean around £400pm overpayment.

Our details:

£106k mortgage, house worth approx £200-220k (who knows atm)
18 year mortgage from July 2022
10 year fixed at 2.24%
Mortgage: £603pm

Obviously we are likely to make more by putting that money into stocks as our interest rate is so low but with rates going back up and who knows if they will ever come back down I can only guess that we would be on a higher rate after 10 years.

What is everybody else thinking, are you planning to keep investing or start to overpay your mortgage?

[ExitViaTheCashRamp]

The problem with the overpaying vs investment maths is that it ignores state benefits. Your home will not be required to be sold if you fall on hard times and need government help, your ISA will need to be emptied though.

 I overpaid mine and whilst mathematically I would have been better off investing - that is only because things went well for us for so long. In a different leg of the trouser of time, who knows ? However knowing that this home is mine and the conditions that would have to occur to make me sell are very extreme meant that I could sleep at night when things got tough.  I valued that far more than the few thousand lost to investment return.

[Affable Bear]

That is true!

I guess I am over thinking it a bit too much, we havent really overpaid much historically but we have continued to reduce the term each time we remortgage so we pay more automatically each month but I do like the sound of the security a home brings and now I can feel less guilty about it with rates rising back to more normal levels.

I guess with math we like to think there is some kind of certainty there, but it always starts with an if or but when it comes to market returns and interest rates but there is none of that with a paid off house, its just paid off!!

[daverobev]

Ten years is a nice long fix at that rate. In ten years if inflation stays back at more normal historical levels the current value of the debt will have fallen (and presumably salaries, investments, etc) will have gone up.

So you'd be overpaying 2022, 2023 '£400' rather than eventually paying '2032' £400.

I know which I'd rather do!

Also flexibility - assuming you can find some savings account paying > 2% (Premium bonds may get there eventually, I believe they are at 1.4% right now), you can just sit on the cash and pay off a lump sum later if you want to.

There is basically no way in hell I'd be putting cash into a mortgage when I can get a risk free return that is higher...

https://moneyfacts.co.uk/savings-accounts/

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

Nationwide 4.75% for 3 years seems pretty good...

[Manchester]

No, you shouldn't overpay. 

Because you've locked in at 2.24% (well done) and inflation is circa 13%, the value of your mortgage is actually decreasing.  You loads of equity in your property too.  It doesn't make mathematical sense to pay it down unless:....

- you're already maxing your pensions (combined £80k pa)
- you're already maxing your ISAs (combined £40k pa)
- you have no other outstanding debt (at a higher interest rate)

If all the above applied to you, then an extra £400 pcm isn't going to change your end results too much anyway, so go for it, and pay off the mortgage. 

Right now is a brilliant time to invest.  If I were you I'd be buying index funds with that £400 pcm. 

"When other people are being cautious, be greedy.  When other people are being greedy, be cautious".

[Affable Bear]

We both invest around 50% of our earnings and I am already wanting to retire at 32 so the quicker I can shorten that goal the better but the paid for house has always been tempting, its been a psychological battle to keep investing, its paid off so far for sure but the itch to overpay never goes away.

Because you've locked in at 2.24% (well done) and inflation is circa 13%, the value of your mortgage is actually decreasing.

Haha it was a lot of luck rather than any genius on my part, the expiry of our last deal coincided with the Bank discussing rate increases but we need to take advantage of our luck!

Right now is a brilliant time to invest.  If I were you I'd be buying index funds with that £400 pcm.

"When other people are being cautious, be greedy.  When other people are being greedy, be cautious".   

This always makes me feel like there is an angel on one side telling me to pay off the mortgage and the devil on the other saying load up on index funds, lets get rich.

At the moment I am holding strong and continuing to invest, I guess I can always pull some out in 10 years to clear the mortgage if I want too or if inflation continues the mortgage will be so low I wont care..

[MisterA]

We both invest around 50% of our earnings and I am already wanting to retire at 32 so the quicker I can shorten that goal the better but the paid for house has always been tempting, its been a psychological battle to keep investing, its paid off so far for sure but the itch to overpay never goes away.

Our mortgage is paid off (I'm old!), and it very reassuring to fully own your own home. But, you can't argue with all the points made by other posters. Give yourself several pats on the back for locking in at 2.24%, even if it was just lucky.

The problem at the moment is where to put your new investments. Money, property, stocks and bonds are all performing poorly, unless you perceive that you're buying at a bargain price right now. I'm continuing to pump our monthly investments into our passive funds, whilst watching the total value decline every month.

[GilesMM]

Do you know what rates will be in 10 years?

[Manchester]

We both invest around 50% of our earnings and I am already wanting to retire at 32 so the quicker I can shorten that goal the better but the paid for house has always been tempting, its been a psychological battle to keep investing, its paid off so far for sure but the itch to overpay never goes away.

Our mortgage is paid off (I'm old!), and it very reassuring to fully own your own home. But, you can't argue with all the points made by other posters. Give yourself several pats on the back for locking in at 2.24%, even if it was just lucky.

The problem at the moment is where to put your new investments. Money, property, stocks and bonds are all performing poorly, unless you perceive that you're buying at a bargain price right now. I'm continuing to pump our monthly investments into our passive funds, whilst watching the total value decline every month.

Same here.  I keep investing, but my investments continue to go down.

I'm just riding it out though.  Because stocks are performing poorly, it seems like a good time to buy them.  There are 2 potential outcomes right now:

1 - Stocks are finished and continue to lose value indefinitely.  If this is the case, then there are going to be much bigger issues at play than 'how early can I FIRE?'.

2 - Stocks will eventually rebound.  When this happens, anyone who stopped investing in the dip will be gutted.  They would have missed out on the returns that those of us who stick to the plan benefit from. 

I'm playing a calculated risk that the stock market will do what it's always done - grow.

Now if I had a short-term financial goal (under 10 years) then I would think about it more thoroughly, but as I'm (only just) still in my 20s, it's not worth worrying about.  Just keep investing and by the time I'm in my forties, sitting on a beach with a beer, this will be a distant memory.  If the OP was paying 6% plus on their mortgage, it would make more sense to pay it down, but as they're locked into a great rate for 10 years, it doesn't really make much sense.

With inflation, holding cash has become an utterly horrible investment.

[Howdotheyriseup?]

So mortgage rates are around 6%...

My plan is to retire in approx 13 years, wife is 6 years younger and will probably continue working for a while after that, we are hoping for a little one in the next 12-24 months and I would love to be at home when they are still young. We are thinking of overpaying so we clear the mortgage when our fix ends in 10 years which would mean around £400pm overpayment.

Our details:

£106k mortgage, house worth approx £200-220k (who knows atm)
18 year mortgage from July 2022
10 year fixed at 2.24%
Mortgage: £603pm

Obviously we are likely to make more by putting that money into stocks as our interest rate is so low but with rates going back up and who knows if they will ever come back down I can only guess that we would be on a higher rate after 10 years.

What is everybody else thinking, are you planning to keep investing or start to overpay your mortgage?

I'm thinking about this too. Investing in stocks has high variability and as someone with a larger mortgage than I would ideally like - I would rather focus on getting that down.

BUT -> I just realized that Tesco are doing a 4.75% savings account fixed for 2 years.
My mortgage rate is 2.44% and fixed for 5 years.

So it seems like there's no real benefit to overpaying vs. just putting that money into a Tesco account and then using it to repay after 2 years. Is that right?
https://www.tescobank.com/savings/fixed/fixed-rate-saver/

[daverobev]

So mortgage rates are around 6%...

My plan is to retire in approx 13 years, wife is 6 years younger and will probably continue working for a while after that, we are hoping for a little one in the next 12-24 months and I would love to be at home when they are still young. We are thinking of overpaying so we clear the mortgage when our fix ends in 10 years which would mean around £400pm overpayment.

Our details:

£106k mortgage, house worth approx £200-220k (who knows atm)
18 year mortgage from July 2022
10 year fixed at 2.24%
Mortgage: £603pm

Obviously we are likely to make more by putting that money into stocks as our interest rate is so low but with rates going back up and who knows if they will ever come back down I can only guess that we would be on a higher rate after 10 years.

What is everybody else thinking, are you planning to keep investing or start to overpay your mortgage?

I'm thinking about this too. Investing in stocks has high variability and as someone with a larger mortgage than I would ideally like - I would rather focus on getting that down.

BUT -> I just realized that Tesco are doing a 4.75% savings account fixed for 2 years.
My mortgage rate is 2.44% and fixed for 5 years.

So it seems like there's no real benefit to overpaying vs. just putting that money into a Tesco account and then using it to repay after 2 years. Is that right?
https://www.tescobank.com/savings/fixed/fixed-rate-saver/

If you're not paying tax on the 4.75% then no, clearly repaying 10k now vs repaying (10k * 1.0244^2) with money that's grown to (10k * 1.0475^2) is in your favour.

Even if you're a higher rate taxpayer saving and paying later is better, though it'll be marginal.

[Affable Bear]

It's definitely a psychological battle, the numbers don’t lie (although stocks can vary), I have focused so much on reducing my expenditures and streamlining my bills the only large bill left to cut is really the mortgage. Not including the food shop our mortgage represents just over 60% of our regular household bills (utilities, internet, mobile etc..) which just makes it so tempting a target regardless of the maths...

Equally its been getting more and more attractive to invest with stocks cooling off, if we have a crash it would be an awesome time to buy up, provided our employment is steady…

I'm still concentrating on investing at the moment but its going to be an interesting decade I think!

[Manchester]

It's definitely a psychological battle, the numbers don’t lie (although stocks can vary), I have focused so much on reducing my expenditures and streamlining my bills the only large bill left to cut is really the mortgage. Not including the food shop our mortgage represents just over 60% of our regular household bills (utilities, internet, mobile etc..) which just makes it so tempting a target regardless of the maths...

Equally its been getting more and more attractive to invest with stocks cooling off, if we have a crash it would be an awesome time to buy up, provided our employment is steady…

I'm still concentrating on investing at the moment but its going to be an interesting decade I think!

You can say that again!

I think it's worth having a discussion about mortgages vs investments, especially in the current economic situation.  You definitely can't put a price on your state of mind, so if someone is stressed due to their mortgage, then pay it down.  There's not really a right or wrong.  But the maths doesn't lie and emotions can cost a lot of money.  My point is that for some people, it can be money well spent.

[Dicey]

For positive reinforcement, feel free to stop by this thread any time:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

The thread is 68 pages at this point, but you can start at the end or jump in anywhere.

[Affable Bear]

Thanks Dicey!

Im going to start from the top I think

[Howdotheyriseup?]

So mortgage rates are around 6%...

My plan is to retire in approx 13 years, wife is 6 years younger and will probably continue working for a while after that, we are hoping for a little one in the next 12-24 months and I would love to be at home when they are still young. We are thinking of overpaying so we clear the mortgage when our fix ends in 10 years which would mean around £400pm overpayment.

Our details:

£106k mortgage, house worth approx £200-220k (who knows atm)
18 year mortgage from July 2022
10 year fixed at 2.24%
Mortgage: £603pm

Obviously we are likely to make more by putting that money into stocks as our interest rate is so low but with rates going back up and who knows if they will ever come back down I can only guess that we would be on a higher rate after 10 years.

What is everybody else thinking, are you planning to keep investing or start to overpay your mortgage?

I'm thinking about this too. Investing in stocks has high variability and as someone with a larger mortgage than I would ideally like - I would rather focus on getting that down.

BUT -> I just realized that Tesco are doing a 4.75% savings account fixed for 2 years.
My mortgage rate is 2.44% and fixed for 5 years.

So it seems like there's no real benefit to overpaying vs. just putting that money into a Tesco account and then using it to repay after 2 years. Is that right?
https://www.tescobank.com/savings/fixed/fixed-rate-saver/

If you're not paying tax on the 4.75% then no, clearly repaying 10k now vs repaying (10k * 1.0244^2) with money that's grown to (10k * 1.0475^2) is in your favour.

Even if you're a higher rate taxpayer saving and paying later is better, though it'll be marginal.

I just wanted to come back on this - because I think the answer is actually more complicated.

When I type my numbers into this mortgage overpayment calculator: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

and do a comparison between overpaying & saving the money, with an assumed saving rate of 5%...
which option is better also seems to depend on the amount of overpaying you are doing.

For instance - overpaying by £1k/month is a bad idea vs. saving that £1k at 5% interest.
BUT - overpaying by £1.5k/month is a good idea vs. saving that £1.5k at 5% interest.

I think it's because the length of the mortgage gets reduced a lot if you overpay significantly... to be honest, I'm not really sure - because I assumed as you did that all that matters is comparing the two interest rates.

Can anyone explain where I'm getting confused? Maybe I'm just using the calculator wrong here.

[Manchester]

So mortgage rates are around 6%...

My plan is to retire in approx 13 years, wife is 6 years younger and will probably continue working for a while after that, we are hoping for a little one in the next 12-24 months and I would love to be at home when they are still young. We are thinking of overpaying so we clear the mortgage when our fix ends in 10 years which would mean around £400pm overpayment.

Our details:

£106k mortgage, house worth approx £200-220k (who knows atm)
18 year mortgage from July 2022
10 year fixed at 2.24%
Mortgage: £603pm

Obviously we are likely to make more by putting that money into stocks as our interest rate is so low but with rates going back up and who knows if they will ever come back down I can only guess that we would be on a higher rate after 10 years.

What is everybody else thinking, are you planning to keep investing or start to overpay your mortgage?

I'm thinking about this too. Investing in stocks has high variability and as someone with a larger mortgage than I would ideally like - I would rather focus on getting that down.

BUT -> I just realized that Tesco are doing a 4.75% savings account fixed for 2 years.
My mortgage rate is 2.44% and fixed for 5 years.

So it seems like there's no real benefit to overpaying vs. just putting that money into a Tesco account and then using it to repay after 2 years. Is that right?
https://www.tescobank.com/savings/fixed/fixed-rate-saver/

If you're not paying tax on the 4.75% then no, clearly repaying 10k now vs repaying (10k * 1.0244^2) with money that's grown to (10k * 1.0475^2) is in your favour.

Even if you're a higher rate taxpayer saving and paying later is better, though it'll be marginal.

I just wanted to come back on this - because I think the answer is actually more complicated.

When I type my numbers into this mortgage overpayment calculator: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

and do a comparison between overpaying & saving the money, with an assumed saving rate of 5%...
which option is better also seems to depend on the amount of overpaying you are doing.

For instance - overpaying by £1k/month is a bad idea vs. saving that £1k at 5% interest.
BUT - overpaying by £1.5k/month is a good idea vs. saving that £1.5k at 5% interest.

I think it's because the length of the mortgage gets reduced a lot if you overpay significantly... to be honest, I'm not really sure - because I assumed as you did that all that matters is comparing the two interest rates.

Can anyone explain where I'm getting confused? Maybe I'm just using the calculator wrong here.

I think you're over-complicating things.

If your current mortgage rate is 2.44%, and the (presumably tax-free) interest rate on the savings account is 4.75%, you'll earn an extra 2.31% (£23.10 for every 1k invested). 

By saving money, you have it readily available in case of emergencies too. 

Of course the overpayments will reduce the life-span of your mortgage, but, depending on your asset allocation, having a mortgage isn't a terrible thing.  It's better to have liquid 'cash' that you can access, rather than a paid off house that won't pay for your tea!

[Affable Bear]

It definitely comes down to a number of factors, how comfortable your risk tolerance is and where you are with your investments and your journey, I still firmly believe investing will net the most return in general but a paid off house isn’t exactly a bad thing either.

The house still represents the majority of our net worth at the moment and is one of the reasons I’m trying to stay disciplined with investing, my main goal is retiring in about 13-15 years and it would be convenient if at the same time the mortgage was gone by then. We only have 18 years left though and my wife will probably work for a few years after that as she is 6 years younger than me.

I guess we will re-evaluate at the end of the fix, I think we will have around £52-53k left by then, if interest rates are moderate/high (5%+) I would be tempted to just clear the balance, if its under 5% will probably just fix on a new deal, if in the unlikely event its back down in the 1-2% range I would even be tempted to extend it!

[sea_saw]

When I type my numbers into this mortgage overpayment calculator: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

and do a comparison between overpaying & saving the money, with an assumed saving rate of 5%...
which option is better also seems to depend on the amount of overpaying you are doing.

This calculator is a bit of a weird one. I and others have emailed them about it but not heard back.

You can test its assumptions by ticking 'compare to savings' and putting in the exact same interest rate as the mortgage. Mathematically, it should come out identical, but the calculator will come out tens of thousands in favour of overpaying.

The reason for this is that it compares the costs of the full mortgage term with no overpayments to the reduced costs if you overpay. But with the savings interest, it compares it to the shorter, overpaid mortgage. So basically, using the default values in the calculator:

* Default mortgage: £130k mortgage, 25 years long, at 3.5%. Total cost £185k
* Overpay by £200pm: mortgage now ends after 17 years, with a total cost of £162k = £23k cheaper
* Save £200pm at the exact same interest rate as the mortgage (3.5%): they calculate £200pm saved at 3.5% for 17 years = £15k earned in interest

THEREFORE, supposedly, the savings are less cost effective. But what's happened here is that they've made an unfair comparison between 17 years of interest paid and 25 years of interest (hypothetically) owed. In reality at year 17 your net situation looks the same for both options: either £0 mortgage and £0 savings if you overpaid, or £x mortgage owed and an equivalent £x saved if you saved.

It's a bit weird to get your head around. Making your own table in Excel showing the balances of the loan and savings year on year helps. Or just trust Manchester and others when they say the higher interest rate wins :)

Ultimately I think the calculator was built to make the case to an average person that overpaying their mortgage is worth the money and get them motivated about it. And it was built at a time where there was no chance you could get a savings account competitive with your mortgage anyway.

[Howdotheyriseup?]

When I type my numbers into this mortgage overpayment calculator: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

and do a comparison between overpaying & saving the money, with an assumed saving rate of 5%...
which option is better also seems to depend on the amount of overpaying you are doing.

This calculator is a bit of a weird one. I and others have emailed them about it but not heard back.

You can test its assumptions by ticking 'compare to savings' and putting in the exact same interest rate as the mortgage. Mathematically, it should come out identical, but the calculator will come out tens of thousands in favour of overpaying.

The reason for this is that it compares the costs of the full mortgage term with no overpayments to the reduced costs if you overpay. But with the savings interest, it compares it to the shorter, overpaid mortgage. So basically, using the default values in the calculator:

* Default mortgage: £130k mortgage, 25 years long, at 3.5%. Total cost £185k
* Overpay by £200pm: mortgage now ends after 17 years, with a total cost of £162k = £23k cheaper
* Save £200pm at the exact same interest rate as the mortgage (3.5%): they calculate £200pm saved at 3.5% for 17 years = £15k earned in interest

THEREFORE, supposedly, the savings are less cost effective. But what's happened here is that they've made an unfair comparison between 17 years of interest paid and 25 years of interest (hypothetically) owed. In reality at year 17 your net situation looks the same for both options: either £0 mortgage and £0 savings if you overpaid, or £x mortgage owed and an equivalent £x saved if you saved.

It's a bit weird to get your head around. Making your own table in Excel showing the balances of the loan and savings year on year helps. Or just trust Manchester and others when they say the higher interest rate wins :)

Ultimately I think the calculator was built to make the case to an average person that overpaying their mortgage is worth the money and get them motivated about it. And it was built at a time where there was no chance you could get a savings account competitive with your mortgage anyway.

Thanks for this reply. I did make my own excel table and you (and Manchester) are correct.
IMO more than a little misleading from moneysavingexpert.

[sea_saw]

I agree, not their best work for catering to the squeeze-every-last-bit-of-financial-value-out clientele. As I said I think it was built to basically sell the value of overpaying a mortgage to an audience that might not be the spreadsheet optimising type, or super financially disciplined (mortgage overpayments safely lock in the benefits, while savings can be forgotten in a low interest account after a fix, or spent, etc).

But it's frustratingly presented for those of us who want to actually understand the calculations.

[Manchester]

I agree, not their best work for catering to the squeeze-every-last-bit-of-financial-value-out clientele. As I said I think it was built to basically sell the value of overpaying a mortgage to an audience that might not be the spreadsheet optimising type, or super financially disciplined (mortgage overpayments safely lock in the benefits, while savings can be forgotten in a low interest account after a fix, or spent, etc).

But it's frustratingly presented for those of us who want to actually understand the calculations.

Yes, it's quite irresponsible from MSE.   Not only would the savings be a better financial option mathematically, but their readers would also benefit from having accessible cash to hand which you can't really put a price on. 

The only logic I can presume they've applied is that their 'aim' is to help readers reduce their monthly costs.  Therefore paying down the mortgage would fulfill that, whereas investing/saving the money wouldn't, it would increase their earnings.  So perhaps they want to motivate readers to reduce their expenses, at the expense of being in a slightly better position financially.

[Dicey]

I agree, not their best work for catering to the squeeze-every-last-bit-of-financial-value-out clientele. As I said I think it was built to basically sell the value of overpaying a mortgage to an audience that might not be the spreadsheet optimising type, or super financially disciplined (mortgage overpayments safely lock in the benefits, while savings can be forgotten in a low interest account after a fix, or spent, etc).

But it's frustratingly presented for those of us who want to actually understand the calculations.

Yes, it's quite irresponsible from MSE.   Not only would the savings be a better financial option mathematically, but their readers would also benefit from having accessible cash to hand which you can't really put a price on. 

The only logic I can presume they've applied is that their 'aim' is to help readers reduce their monthly costs.  Therefore paying down the mortgage would fulfill that, whereas investing/saving the money wouldn't, it would increase their earnings.  So perhaps they want to motivate readers to reduce their expenses, at the expense of being in a slightly better position financially.

More nefariously, perhaps they want to kill off as many low-interest loans as they possible so they have more funds with which to originate new loans at higher interest rates.

[sea_saw]

Dicey I am so curious about this nefarious theory, but quite baffled about who you mean by 'they'!

[Dicey]

Dicey I am so curious about this nefarious theory, but quite baffled about who you mean by 'they'!

In this case, MSE or whoever they represent.

[Manchester]

Dicey I am so curious about this nefarious theory, but quite baffled about who you mean by 'they'!

In this case, MSE or whoever they represent.

MSE is Money Saving Expert. 

It's a guy who gives (usually great) advice to the man on the street about how to cut expenses and save money.

[Dicey]

Dicey I am so curious about this nefarious theory, but quite baffled about who you mean by 'they'!

In this case, MSE or whoever they represent.

MSE is Money Saving Expert. 

It's a guy who gives (usually great) advice to the man on the street about how to cut expenses and save money.

Remember when some CC wanted Pete to tone down his content? Not everyone can resist the temptation over easy advertiser/sponsor money.  I'm not saying that's the case here, but we've all seen it happen before.

[Affable Bear]

I generally enjoy MSE content but they are only 50% of any solution as they are careful to avoid any investment advice. They tend to stick to the certainties like how much interest on a mortgage, CC or Savings Account but no advice in relation to putting money in a decent index fund to grow earnings..

Bit of a shame because he does have a big audience and if anyone could espouse the benefits of spending less investing more it would be him. Even on lower incomes and you can only put £100 away every month if you can put it into a good index fund over 40 years you will have a decent pension/nest egg even if you cant retire early.

[PhilB]

At the moment, it's pretty much a no-brainer if you can get a higher, risk-free return on savings than the mortgage.  More generally, the maths is also clear that, on average, investing beats overpayments.  But what if the average outcome isn't and shouldn't be what concerns you?

There are a whole range of possible 'bad outcomes' to guard against and which ones you need to prioritise in your planning depend very much on your personal circumstances.  Try these for size:

You get laid off and take X months / years to find another job
This is the favourite of the 'don't pay off your mortgage' proponents.  In this situation you can sell some investments to eat, but you can't sell part of your house.

You get laid off and can only find temp and PT work for a while
Maybe you can survive on those reduced earnings if you don't have a big mortgage anymore?  Otherwise, you'd be selling investments, possibly in a bear market, to pay the mortgage interest.

You get laid off - but there's a welfare state
Your house is ignored when working out your eligibility for benefits, but your non-pension investments are not.

The maths is not as simple as it's often painted, varies by your individual assessment of the likelihood of what you need to protect against, and changes over time.  TLDR there is no one-size-fits-all solution - if there was, people wouldn't spend so much time arguing about it :)

[Gronnie]

My view on paying extra on the mortgage is that it's very risky until it's completely paid off.

The bank doesn't care that you've paid a bunch extra already, they still want their payment every singe month.

[never give up]

That’s not necessarily the case in the UK Gronnie, but I can’t speak for other locations. Many mortgages here have features such as payment holidays* or overpayment borrow back or underpayments**. Any one of these features can come in handy in the redundancy type scenario. Of course they would all increase the total amount of interest paid in the long term too.


* A limited period of not paying anything at all.
** Pay less than the normal amount for a limited period.

[PhilB]

Another difference is that I believe you are in a non-recourse state Gronnie?  So if you get were to get foreclosed, any money you had paid off the mortgage would potentially be wasted?  That concept doesn't exist in the UK.  All mortgages here are recourse mortgages and the borrower remains liable to the lender for any shortfall between the value of the house and the outstanding mortgage amount.

[Gronnie]

That’s not necessarily the case in the UK Gronnie, but I can’t speak for other locations. Many mortgages here have features such as payment holidays* or overpayment borrow back or underpayments**. Any one of these features can come in handy in the redundancy type scenario. Of course they would all increase the total amount of interest paid in the long term too.


* A limited period of not paying anything at all.
** Pay less than the normal amount for a limited period.

Good to know.

[Dicey]

My view on paying extra on the mortgage is that it's very risky until it's completely paid off.

The bank doesn't care that you've paid a bunch extra already, they still want their payment every singe month.

That’s not necessarily the case in the UK Gronnie, but I can’t speak for other locations. Many mortgages here have features such as payment holidays* or overpayment borrow back or underpayments**. Any one of these features can come in handy in the redundancy type scenario. Of course they would all increase the total amount of interest paid in the long term too.


* A limited period of not paying anything at all.
** Pay less than the normal amount for a limited period.

For US-based mustachians, Gronnie is absolutely right. You Brits are much more civilized.

One would think it would be so much more cost-effective to add missed payments to the end of the loan for X number of payments to avoid foreclosure. It  would make so much more sense, but it hasn't caught on. During the Great Recession, some banks were so overwhelmed that they made exceptions, but tell that to the people who lost their homes.

At the moment, it's pretty much a no-brainer if you can get a higher, risk-free return on savings than the mortgage.  More generally, the maths is also clear that, on average, investing beats overpayments.  But what if the average outcome isn't and shouldn't be what concerns you?

There are a whole range of possible 'bad outcomes' to guard against and which ones you need to prioritise in your planning depend very much on your personal circumstances.  Try these for size:

You get laid off and take X months / years to find another job
This is the favourite of the 'don't pay off your mortgage' proponents.  In this situation you can sell some investments to eat, but you can't sell part of your house.

You get laid off and can only find temp and PT work for a while
Maybe you can survive on those reduced earnings if you don't have a big mortgage anymore?  Otherwise, you'd be selling investments, possibly in a bear market, to pay the mortgage interest.

You get laid off - but there's a welfare state
Your house is ignored when working out your eligibility for benefits, but your non-pension investments are not.

The maths is not as simple as it's often painted, varies by your individual assessment of the likelihood of what you need to protect against, and changes over time.  TLDR there is no one-size-fits-all solution - if there was, people wouldn't spend so much time arguing about it :)

Hmmm, while all of those things are definitely possible, one solution is a big, fat emergency fund.

As to arguing, I'd call it "discussing". Though I'm a founding member of the DPOYM Club, I just want people to understand the math and the magic of compound interest before they elect to prepay their mortgage. I am US-based, as are the majority of folks on this thread forum. If I lived in a place where interest rates are not fixed for 30 years and/or potentially tax deductible, it might not be as easy a decision.

[sea_saw]

I am US-based, as are the majority of folks on this thread.

This thread is actually in the 'UK Discussion' section of the forum, thus the UK-centric discussion.

[PhilB]

snip: Hmmm, while all of those things are definitely possible, one solution is a big, fat emergency fund. /snip

As long as you account for the drag on returns of needing a bigger EF to allow for the mortgage interest ;)

The solution I had was an offset mortgage - I could leave my emergency fund in an account that reduced the mortgage balance I was charged interest on.  Very nice.

As you say, the situation is much, much clearer in the US.  Here in the UK we haven't had any ability to offset mortage interest against tax for 25 years or so, fixes only tend to be for a few years, under/overpayment arrangements are often much more flexible and we have no possibility of stiffing the bank for any negative equity short of actually declaring bankruptcy so it's a much more nuanced decision.

The other big possible factor in the UK is if you can use your pension lump sum to pay off some or all of your mortgage.  If you have the right combination of age, marginal tax rate and contribution capacity, this can be a great way to proceed.

Of course, if higher inflation becomes ingrained again, that would push the needle very strongly to the DPOYM side.  When my father bought his first house 40 odd years ago, the perceived wisdom was very much borrow as much as you possibly can and cling on for dear life until inflation makes the repayments more manageable.

[Dicey]

I am US-based, as are the majority of folks on this thread.

This thread is actually in the 'UK Discussion' section of the forum, thus the UK-centric discussion.

My apologies for not noticing that. I did look to see that Gronnie was in the US, but didn't realize I'd stumbled onto a UK- based thread.

Your mortgage system makes it a much more nuanced decision and your pension system seems incredibly complex, so I typically avoid commenting on either subject. Lemme see what I can do with that post...

ETA: As mortified as I am for the mistake, I see how it happened. When one selects "Show unread posts since last visit", it's not clear that one is looking a UK-based thread. Yes, it's in the fine print at the very top once the thread opens, but the title itself is non-specific. When I see a thread that's helpfully captioned like this: "[UK] Sea_saw attempts an art of balance", it's easier to know where the hell I am. I will try to be more mindful in the future.

As my vision is crap, I have to blow up the screen of my tablet so much that I can't even see the author's name*, much less the fine print at the top of the page. Reading/responding during insomnia time is sub-optimal as well. My mistake, but at least I figured out how it happened. I'll try to be more careful in future.

*It's funny how I've come to recognize certain writers' style. Malcat, never give up, and PhilB are so distinctive, I usually know it's them without looking. Maybe I have a thing for lovely accents, lol.

[sea_saw]

Don't stress about it Dicey, it happens with every thread in here, as there are many different pages on the forums (new topics, your topics, notifications etc) which display thread names without the context of which section they're in.

Adding 'UK' was adopted as an informal convention in the journals section so we can spot each other in the mix of worldwide journals. Maybe we should ask everyone who makes a thread in here to also include 'UK' in their title even though it's a UK-specific section. It feels redundant when you're here inside the UK bit making your thread, but as you say, in other places the thread titles all get shown together.

Titles can be edited in by editing the first post in a thread so maybe those of us who browse this section regularly can hop on new threads and inform their posters!

[Gronnie]

I am US-based, as are the majority of folks on this thread.

This thread is actually in the 'UK Discussion' section of the forum, thus the UK-centric discussion.

My apologies for not noticing that. I did look to see that Gronnie was in the US, but didn't realize I'd stumbled onto a UK- based thread.

Your mortgage system makes it a much more nuanced decision and your pension system seems incredibly complex, so I typically avoid commenting on either subjecf. Lemme see what I can do with that post...

ETA: As mortified as I am for the mistake, I see how it happened. When one selects "Show unread posts since last visit", it's not clear that one is looking a UK-based thread. Yes, it's in the fine print at the very top once the thread opens, but the title itself is non-specific. When I see a thread that's helpfully captioned like this: "[UK] Sea_saw attempts an art of balance", it's easier to know where the hell I am. I will try to be more mindful in the future.

As my vision is crap, I have to blow up the screen of my tablet so much that I can't even see the author's name*, much less the fine print at the top of the page. Reading/responding during insomnia time is sub-optimal as well. My mistake, but at least I figured out how it happened. I'll try to be more careful in future.

*It's funny how I've come to recognize certain writers' style. Malcat, never give up, and PhilB are so distinctive, I usually know it's them without looking. Maybe I have a thing for lovely accents, lol.

Exact same thing happened to me. I always use "Show unread posts since last visit." I guess I need to pay more attention to which subforum a thread is in!

[never give up]

Ah sorry Gronnie. I probably should have said this was the UK board when I replied to you. The reason I replied to you earlier was because I didn't want anyone UK based to be misled by your (accurate for the US) comment. You probably thought "why has this UK person responded to me telling me UK stuff I don't need to know!" Thanks for being so polite and saying "good to know" though :-)

[never give up]

Thanks for saying I have a lovely accent Dicey!

Anyway, the OP has had some good advice in here and hopefully that's been useful. With interest rate rises after a long period of low rates, it will be interesting how people from all countries tackle the mortgage and investing balance over the coming months/years.

[Gronnie]

Ah sorry Gronnie. I probably should have said this was the UK board when I replied to you. The reason I replied to you earlier was because I didn't want anyone UK based to be misled by your (accurate for the US) comment. You probably thought "why has this UK person responded to me telling me UK stuff I don't need to know!" Thanks for being so polite and saying "good to know" though :-)

Even if it was not in the UK specific sub us boorish Americans are really bad at assuming everyone else is American on the internet. My bad.

[never give up]

No, nothing to apologise for. You were just trying to help a previous poster. This is primarily a US based site with US related boards. You did nothing wrong.

It is interesting I think how different US and UK mortgages are though. Although I referred to some of the features UK mortgages have, I would rather have had a simpler long term US style fixed mortgage. The longest I could ever fix for was five years, and the features mentioned cost in terms of a higher rate. I was always paranoid my fix would end, and interest rates will have rocketed in the meantime. I would have loved to have fixed for 15 or 30 years and have had great certainty over my payments.

I was a mortgage over-payer during the 2010-2017 period. With a longer term fix I think I would have had more confidence to have invested more during this period. At least I can console myself that this period didn't follow a huge crash! Oh no wait a moment... :-)

[Manchester]

It's easy to tell this thread is on the UK board... there are at least 4 unnecessary apologies posted!

[PhilB]

It's easy to tell this thread is on the UK board... there are at least 4 unnecessary apologies posted!

Sorry!

[never give up]

I once apologised at a busy underground station when someone stood on my foot. Well, I was in their way.

[MustacheAndaHalf]

UK bonds from 2y to 10y all seem to pay about 3.1% or 3.2%, which does seem odd during high inflation.

Despite that, an idea: invest in a government bond for 2 years at a higher rate than your mortgage, and dump all of the interest into paying off your mortgage.  I think that takes a lot of guesswork and uncertainty out of the idea, and lets you both pay off your mortgage earlier while also getting the benefits of higher bond yields.

[Bowthy]

I paid my UK mortgage off last year before the rate rise. Mathematically perhaps didn't make sense, but for the simplicity it's brought and the knowledge that if things go south there's a place I can stay rent free, it's been worth it.
I no longer have to ponder every month "should I pay a bit more". It's done.

...my goodness it's difficult to contribute to this forum.

[Dicey]

I paid my UK mortgage off last year before the rate rise. Mathematically perhaps didn't make sense, but for the simplicity it's brought and the knowledge that if things go south there's a place I can stay rent free, it's been worth it.
I no longer have to ponder every month "should I pay a bit more". It's done.

...my goodness it's difficult to contribute to this forum.

Well, you obviously made it in, so welcome! Feel free to share as much or as little of your story as you please. And...congratulations on the mortgage payoff!

[Manchester]

I paid my UK mortgage off last year before the rate rise. Mathematically perhaps didn't make sense, but for the simplicity it's brought and the knowledge that if things go south there's a place I can stay rent free, it's been worth it.
I no longer have to ponder every month "should I pay a bit more". It's done.

...my goodness it's difficult to contribute to this forum.

Yes, and there's nothing wrong with that route if you'd prefer to live mortgage free.  Sometimes we slip into a mindset of 'FIRE' as quickly as possible, by any means.  But there's plenty of nuance in life and what may suit one person might not suit another.

If paying down your mortgage is going to offer more reassurance than building your investments, go for it.  If working beyond financial independence brings satisfaction, great.  If you enjoy eating out every now and again, brilliant.

The main goal is to be aware that our financial choices have consequences and that delayed gratification is an option that many people don't consider.  Once you're aware of that fact, the world is your oyster!