I had a few comments asking why I was overpaying my mortgage, in these low interest rate times.
Surely the money would be better put to work in the markets, in the long run this should be expected to provide returns in excess of the interest I’m saving on the mortgage. So what am I doing?
Up Yours, Debt
It’s true, interest rates are low. On top of that I get a super cheap mortgage from my employer. And better still, I bought my house in 2009 when house prices were a pittance compared to now. So my mortgage is relatively small and the payments are killer.
Despite this, I’m still overpaying each month. One of the reasons is that, even if it is cheap, it’s still debt. And I don’t like debt. Currently, Mrs Z and I are postured up, battering the debt into submission.
It’s So Cheap
Yep, I’ll admit it. I’ve got a pretty sweet deal on my mortgage. Even after being taxed for the benefit it comes out as a very low rate, not quite the best, but there or thereabouts. To get the best rate on the market would mean moving provider every few years and so incurring fees.
Any many limit when, and how much, you can overpay. Like a Mortgage Vagabond, I can do what I want (as long as that involves paying the bank some money).
As good as it is, it’s still a tie to my current employer. Paying the mortgage off would remove the invisible shackles to my desk.
The likelihood is that if I deployed savings to the market, instead of overpaying the mortgage, I’d never then get round to selling investments to eventually pay off the mortgage. End result…less freedom.
In 10 years time I’d admittedly have more in savings, but I’d still be looking in the Financial Shadows with an unnerving feeling that wherever I went creepy Mr Mortgage was watching.
If the plan was to then use savings to pay off the mortgage, but markets had taken a tumble the plan would change. One More Year Syndrome here we come. I’d like to avoid that if possible, please.
It’s Diversification, Innit
I already put a fair whack into the markets each month, through my pension and ISA contributions.
Scattering my Savings Net a bit wider, and overpaying the mortgage, is essentially diversification (if you think of the mortage as a huge negative cash position). I’m already maxed out on all the best interest paying current accounts or savings accounts.
The ISA Limit Is The Limit
Mrs Z and I are already saving enough to max out our ISAs by the end of the tax year, so there’s nothing to be gained here.
It would be the first place I’d put extra savings if there was any allowance left.
I could up my pension contributions, which is probably the most efficient move. But I can’t access that until I’m nearly 60 and I already put in 21% a month (including employers contributions), which feels enough.
Maybe The Mortgage Isn’t All Bad
There are certainly some strong arguments to just pay the minimum on the mortgage and save instead of overpaying.
Fear Of Missing Out
In the long run, the expected returns of investing in the market are greater than the savings I’m making in interest on the mortgage.
If we assumed a 4% return on investments, versus a 1.1% interest rate saving by overpaying the mortgage, on a £500 overpayment for 10 years the difference is around £10k. So I’d be £10k better off in 10 years time if I invested in the markets instead of overpaying the mortgage. Certainly not an amount to be laughed at. Unless you’re so minted you wear stupid hats.
There’s a glaring issue with this, glaring so bright it’s fried my retinas. The savings on overpaying the mortgage are guaranteed (OK, the rate may vary, but it’s only likely to increase) whereas the 4% is an assumed growth rate. It could well be smaller than 4%, or even *swoons* negative.
I’m happy missing out on those potential returns in exchange for suplexing my mortgage into oblivion.
It’s not particularly easy to access equity in a house. Once I’ve made an overpayment, the cash is then sat in bricks and mortar, I can’t just remove a brick from the house and cash it in at the bank for a few hundred quid. It loses it’s liquidity.
There’s a sacrifice being made here, reducing future interest payments and my tie to my employer/the bank in exchange for a reduction of liquidity.
I don’t benefit from the overpayments, really, until I sell the house (so releasing monies) or the mortgage is completely repaid (so improving my cashflow).
Which I why, although making some overpayments, I am still saving more than I overpay.
The Right Decision?
It makes sense to me.
If I had more ISA allowance to go, I’d put money there first, but it’s all used up. My pension contributions are already high enough, in my opinion. I’ve deployed cash to the best rates on the market and maxed them out, so there’s not much to be gained from holding even more cash. There’s also a taxable share dealing account I put a bit towards each month, but I don’t want anymore in there.
Current overpayments leave me mortgage free in 10 years. That does still seem like quite a long time, but increasing overpayments further would start to hamper liquidity. Some quick sums show me that my savings/investments should outstrip my mortgage in about 21 months…
A decision will have to be made when that happens, as being mortgage free in less than two years is pretty tempting. Then again, effectively starting savings all over again would be brutal.
So To You, My Friend
Right, it’s Saturday night and I’m off to do what any awesome dude does on a Saturday.
Hit up a casino. Play a board game with some friends.
Where do you stand on overpaying the mortgage? And why?
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