Pay your mortgage off early or invest?

dLockers said:
That's the thing though. Mortgage rates are fixed. Averages are made up of highs and lows; no one 'trades the average'.
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? might not be seeing your point
I have a tracker mortgage, the rate is not fixed, and I intend to do that for the entire mortgage period.
I invest in tracker funds, so that's about as average as investing can be.
 
throwaway4372 said:
? might not be seeing your point
I have a tracker mortgage, the rate is not fixed, and I intend to do that for the entire mortgage period.
I invest in tracker funds, so that's about as average as investing can be.
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Fixed as in - the percentage is known upfront and you can plan for it (obviously not withstanding the tracker changes with the rates, but you don't get massive swings like you do in stocks and shares).

Tracker funds can still tank.
 
D.P. said:
The long term average of a stock market tracker, e.g S&P 500 is nearly 7%. Over a 20 period, the US stock market has never experienced negative returns, and over 10 years this has only ocurred once in Great Depression 1929. Out of all the crashes in the US stock market, only the 1929 crash took signifciantly long to recover, in every other crash the tracker was above pre-crash valuation within 4 months to 3 years.


That is, irrespective of when you invest, you have extremely high chance of seeing 7% returns over a typical mortgage period. The 7% expected returns is far higher than any mortgage rate and as log as that is the case then over-paying mortgage makes little sense. This kind of investment is extremely safe, doesn't require any skill, doesn't mater about investment timing .


When considering risk, you also have to consider the risks of housing market crashes which historically happen with the same frequency as stock market crashes. You also have to consider maintenance costs, and inadequate insurance risks.


Things swing even more in favour of investing when you consider taxation. In most countries you pay property taxes , and these are often linked to %age of the property you own out-with the mortgage. Interest payments from the mortgage are often tax deductible. Moreover, you can often invest via pension deductions and avoid the 40% income tax
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Most of that is irrelevant to the UK however.

This was the sentiment that caused the whole endowment mortgage issue.
Its fine 7% returns but they are not guaranteed and once you have a few bad years they likely wont recover.

However if your talking about extra payments being invested as opposed to thinking to fund a mortgage with investments then your fine.

As said above, timing is the most important thing, its even more critical when it comes to pensions! (assuming annuity purchase)
 
dLockers said:
That's the thing though. Mortgage rates are fixed. Averages are made up of highs and lows; no one 'trades the average'.
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yes you, because if the investment is over a long period before you sell then the sell price is the average of the high and lows over that period.
 
Mercenary Keyboard Warrior said:
Most of that is irrelevant to the UK however.
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You don't need to be an American to invest if a a US tracker fund, and similar returns are seen in most stock indexes. The same risk and recovery of crashes is universal. As long as you are investing over a longer time period then the risk reduce significantly but the expected returns stays relatively constant, merely the maxima and minima reduce and there is lower variance.

It is like the difference between weather and climate. It is impossible for me to know exactly the temperature of April 1st in any particular year, but I can estimate very accurately the average temperature in the next 20 years.


This was the sentiment that caused the whole endowment mortgage issue.
Its fine 7% returns but they are not guaranteed and once you have a few bad years they likely wont recover.
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Highlighted in bold, this is completely false. As stated, every 20 year investment period as shown positive returns, and every crash has recovered, usually within a few months to a couple of years.

However if your talking about extra payments being invested as opposed to thinking to fund a mortgage with investments then your fine.

As said above, timing is the most important thing, its even more critical when it comes to pensions! (assuming annuity purchase)
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Timing of investments is not important, as long as the investment period is long enough. When it comes down to choosing when to invest in stocks vs over paying mortgages, in general it makes sense to be heavily weighted in investment early on especially if you can lock a mortgage rate for 10 years or longer. When you are younger zou can take more risks and have the life expectancy to realise the growths of an investment. Once you get close to retirement then you might not want so much money tied to investments and since you will have a reduced income then lowering mortgage payments will be more beneficial. Also, once retired you have less income tax so the interest deduction are less impactful.


So in general, minimize mortgage payments early on and maximize investments, as you get closer to retirement you can start inverting this.
 
D.P. said:
You don't need to be an American to invest if a a US tracker fund, and similar returns are seen in most stock indexes. The same risk and recovery of crashes is universal. As long as you are investing over a longer time period then the risk reduce significantly but the expected returns stays relatively constant, merely the maxima and minima reduce and there is lower variance.
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Not the investment, the stuff about tax etc. We are in the UK here mainly.
Im an accountant, I understand how the UK takes work ;)

Ive got investment in US as well. In fact any balanced portfolio should be wider than one country.
You have for example excluded exchange risk which is a massive risk for a UK citizen if they were to invest heavily in US based stocks.
You now not only have stock price risk, you have added exchange risk on top of that.


D.P. said:
Highlighted in bold, this is completely false. As stated, every 20 year investment period as shown positive returns, and every crash has recovered, usually within a few months to a couple of years.
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Your completely missing the point. Im really starting to think you dont understand.
Timing is important. If your using funds that need to be freed up to do something at a set point in time the closer you get to that point in time the more risk there is in keeping them invested.

Its why pension funds for example have lifestyling built into many funds.
Its MASSIVELY relevant to pensions as most people will be converting in part or fully to an annuity at a set point in time. If investments just crashed 20% a week before they cant choose to wait "only 3 months to a few years" in order to do that.

The problem with endowments in the UK was massive it was literally invest instead of paying off the mortgage. Loads and loads, in fact the vast majority were burnt who took these out. The history of investment returns didn't work out so well then.
Simply the historic rises failed to materialise and people were asked for more and more to ensure the funds were going to be able to satisfy the mortgage.
Again timing an issue. I am sure many of them would have been fine if they were able to hold out for a higher point on the upward curve, however they wern't. Now this is a slightly different scenario to investing potential overpayments but it again highlights that timing is important.
 
To echo some others in this thread, I can definitely understand why people get so hell-bent on paying off a mortgage early but at the moment I'm deciding not to.

Our mortgage is sizeable but also very affordable for us (~15% of house income after tax) and we'd actually be not far off being able to pay it off from other investments right now. Those investments make a lot more than the low % our mortgage currently is.

Of course that can all change and we're setup to be flexible enough to react if it does.
 
Similar position to above, our mortgage payment is roughly 14% of net income. I tend to pay 21% of net income every month, so overpay by a good margin every month. Have been doing this for the last 6 years, so managed to save quite lot in interest. I have recently (6 months ago) started investing in a stocks and shares ISA roughly 12% of net income each month, but I might have to drop to 4% for this month as estate charge and tennis membership is due. I prefer overpaying the mortgage as we plan to leverage the equity to loan more money and use it to buy another property.

We already pay into private pensions, and we also have approximately 2.5 months of our net income in savings, which should last us 1 year of commitments if need be (e.g. If we both lost our jobs).
 
M1k3H said:
Similar position to above, our mortgage payment is roughly 14% of net income. I tend to pay 21% of net income every month, so overpay by a good margin every month. Have been doing this for the last 6 years, so managed to save quite lot in interest. I have recently (6 months ago) started investing in a stocks and shares ISA roughly 12% of net income each month, but I might have to drop to 4% for this month as estate charge and tennis membership is due. I prefer overpaying the mortgage as we plan to leverage the equity to loan more money and use it to buy another property.

We already pay into private pensions, and we also have approximately 2.5 months of our net income in savings, which should last us 1 year of commitments if need be (e.g. If we both lost our jobs).
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Good balance :)

I think its worth considering here that income level vs debt is probably key.

If your very able to afford payments and have a good amount of excess income over debt payments then its far easier and probably far more worthwhile looking for investment gain over debt reduction.
Its all risk management, nowhere does less risk equal higher returns.
If your already "well off" then chances are your excess income is higher and its not for you a massive risk to undertake investments.
If your already "poor" and almost certainly never going to have a high income vs debt then its a far higher risk to you of undertaking investments.
I mean for example, if your excess income over your expected working life (after paying all debt back and living expenses) is £500k then investing say £100k isn't going to materially affect you if it went wrong, not only can you likely look to give it time to recover, you can also suffer the loss.
If however your excess income is only going to be £100k is investing £100k worth the risk to you.
Assuming 7% compound growth your talking 10 years roughly to double your money.

You need to also consider money management. Some people are terrible, these sorts of people are also far more likely to be better off by paying down their mortgage than investing it.
Many people seem unable to stop wanting something now, and a large investment balance will typically mean these people will just "draw a bit down", it doesnt matter.
They are less likely (although certainly not guaranteed) to do so with out the funds being available
 
Liquidity, Cash, is king in all walks of life. I'd overpay so my mortgage clears before 60. After that ISAs (liquidity for the present as I'm pre-40) and then Pensions (tax relief).

Once I'm maximising Pensions (without being so daft to hit the LTA), ISAs come next, anything above that will hit debt. You must balance the short term with long term. Being mortgage free at 45 is lovely, but punishing yourself of a nicer car or additional holiday in your 30s/40s to achieve it? Stupid trade off.

Mercenary Keyboard Warrior hit the nail on the head that it is risk tolerance, money management, and what your actual income is that really drives these decisions.
 
dLockers said:
Fixed as in - the percentage is known upfront and you can plan for it (obviously not withstanding the tracker changes with the rates, but you don't get massive swings like you do in stocks and shares).

Tracker funds can still tank.
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And mortgage rates can still balloon.
 
So my take on it is there are quite a few different factors and no one-size fits all answer.

  • If you are risk-averse then paying off the mortgage is a safe option
  • If you want to maximise potential gains then investments have a much higher ceiling
  • The effectiveness of paying off a mortgage depends on what the interest rate is / will be. The lower the rate, the less good an option it is compared to investing. I used to be on a lifetime +0.59% tracker mortgage. Interest rates dropped to 0.5% meaning a 1.09% interest charge. Therefore despite having a bit of capital I decided not to pay off the mortgage, because I could get higher returns from risk-free cash investments. I just let the term run rather than paying it off early. But prior to that, when interest rates were around 5.75%, I did make a lump sum repayment.
  • Clearly, it depends how effective your investments are - if you are knowlegeable / skillful then it's probably a great option. I'm not, I just pump money into S&S ISA funds and the rate of return is pretty mediocre.
  • Personal circumstance may influence how much liquidity you [think you will] need. Paying off a mortgage (moreso with other debts) early in some ways is locking money away because unless you have a flexible product you can't claw that cash back easily. Say you overpay £100k on your mortgage. A month later you need a big lump of cash for something. Your only option might be to remortgage, which could cost a bit in terms of fees etc.
In hindsight, what I wish I'd done instead of having a small mortgage was have a bigger mortgage and a bigger house, given the gains in property over the period. That's sort of synonymous with the question in this thread, as effectively instead of paying down mortgage I would have invested in property. Back in 2008 however, I was a bit wary of property investment and indeed there was a short-term crash after we remortgaged to a lower level.
 
Ah this question. Been wrestling with this one for years now.

We're trying to do both, with massive bias towards the mortgage. When we were DINK just prior to the start of COVID we'd overpay by about 15% and threw everything else at the market. Our daughter's arrival made me more risk adverse overnight and we've essentially tripled our repayments (from £205 a week to £600 a week) for the past year. I can't remember how the mortgage structures work in the UK anymore as it's been a while now, but in NZ you can also pay off 5% per annum of the mortgage total value, penalty free, so we do that too. However this means our investment contributions have taken a bit of a step back. We're lucky that we locked in 60% of our outstanding dollar amount into low interest terms until October 2023 and October 2024 respectively, with a sizeable float portion we're attacking hard. That'll be done by September and then we can go back to focusing on the 5% which we can pay any time from October 2022 for the next 12 months. The earlier the better really. Once our first fixed portion is up in October 2023, we'll pay off a chunk from whatever we've saved up until then, float a portion we think we can pay off in a year and fix the remaining amount for a year at the lowest rate. Rinse and repeat until we're free.

It really comes down to personal preference. Personally I loathe the interest I'm giving away to the bank. Although we have a very good amount invested in ETFs and Index Trackers where the returns (mind you, not so much lately) more than make up for the 'lost' money to the bank, and then some.

I'm trying for mortgage free by age 44 so we have three years of heavy overpaying before us and then 6 years of stacking more into the investments and then hopefully an early retirement from my current role/industry to do something more enjoyable part time. That's the current plan anyway.
 
Smart safe money pays off the mortgage first

Smart gamblers money goes in on other tangible assets with risk spread

Idiots buy NFTs or Dogecoin with both sets of fingers crossed
 
Kreeeee said:
It might have been me in the stock investment thread.

As I said in there, everyone has to calculate their own numbers, although it always ends up with not overpaying the mortgage as a result.

This doesn’t factor in any psychological factors though as some people just can’ don’t like having the debt “hanging over them”.

I also linked to this video in that thread which looks like it could be useful in here given some of the shocking misinformation being thrown around:
(for those not quite making the connection, an interest only mortgage is mostly equivalent to renting)
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I think it might have been you, if so then thanks, you certainly gave me some food for thought. It's spurred me on to do a lot of research and create some spreadsheets to help visualise the outcomes. It is of course improbable to accurately predict the interest rates over the duration of my mortgage and investments so there's some elasticity in my numbers.

I have been overpaying the mortgage each month and the plan was to increase that by £100 year on year, depending on other factors that affect cashflow. What I'm investigating now is splitting that overpayment 50/50; half to overpaying and half to investments. The 50% to overpaying will not achieve the goal of clearing the mortgage by my set target, so the shortfall would have to be made up from the ten years or so of compounded investing.

It interesting to know that there are no penalties to overpaying my mortgage per se, I'm just not permitted to pay it off in it's entirety during it's fixed period.
 
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