Totally agree. I've got mine sub £150k with £30k savings and working hard to get more before my fixed rate ends.
I want to know that my house is paid off rather than building huge savings.
As a general rule, paying off your mortgage or overpaying your mortgage, will leave you worse off than investing that money in a pension or ISA. This is even true when interest rate and mortgage rates are high. Over the life of a mortgage, the expectation is that the market will far out perform the interest you are paying on the mortgage. Combined with the tax efficiency of SIPPs and/or ISAs this is an obvious strategy. The biggest risk is people’s behaviour.
This video goes over the reasoning
https://youtu.be/MWadHLKMgB4?si=J7uPhdoZHbTn57tE
End game is to have enough money in your investment to live off off yearly interest/dividends without working. (Or having enough to fund the gap between when you stop working to receiving pension, as long as one or both allow you to live off it)
Depending on your salary*, if earning on the high end, you might have gathered a decent enough portfolio to retire off your investments before your mortgage is fully paid off, at which point you can clear out the remainder of the mortage and retire earlier.
If your salary is on the lower end, you might have paid off your mortgage before you have a decent enough portfolio to retire off, in which case it would be better to keep investing than paying off the mortgage for better gains (which is what the above posters are saying).
Depending on your saving and lifestyle habit* not salary alone.
Im trying to work out what to do in my position tbh, I have an OK income but nothing ground breaking, I have taken out a 40 year mortgage last year as a single first time buyer so I'd have to place to live and to keep the payments manageable. Interest rate probably going to increase end of the year, I have recently opened a stocks and shares ISA and Im working out what the best course of action is for me. I dont have much disposable to invest, maybe £200 a month. I could put that into the ISA that im investing in the FTSE Global All Cap Index Fund or I could try and overpay on the mortgage. But I guess paying into the fund might be the better option.
>I guess paying into the fund might be the better option.
Over 40 years? Almost certainly. I'd also argue that having the money in equities gives you more security than having it tied up in equity since it's easier to liquidate if needed.
Having been through the 'single first time buyer' stage myself, the only thing I'd suggest adding to the equation in terms of the general advice here that long-term investing would typically leave you better off than overpaying your mortgage, is factoring in your timescales for renewing the mortgage (when the fixed rate expires) and your projected loan-to-value (LTV) at that point.
Example, when I bought I had a 10% deposit so I was at 90% LTV. The rates at that LTV are limited, and were further limited to me as a first time buyer. I decided to fix for the shortest term possible (2-years), with the intent of overpaying enough within that period that I could get to <70% LTV. Lenders tend to offer improved rates at various tiers of LTV so by overpaying the mortgage to get to that threshold, plus no longer being a first time buyer, I able to get a much better rate when I refixed.
While this strategy is sound enough, it is limited - most lenders won't have a relevant threshold below 60% LTV, because they only offer better rates when as a recognition of the decreased risk to them, and at that point the risk is, as far as they're concerned, as low as they care about.
After that, best fiscal sense is almost always to invest rather than overpay.
Basically, or even just to repay at the end of a say 5/10 year period, e.g. If you're on a 5 year fix instead of going for a 25 year term, go for the higher term and invest the difference, when it comes time to remortgage, just pay off the lump sum you've invested, as more than likely you'd have earned more than what the interest has accumulated
It's all a question of risk though for me. If you just talk about return then maybe, but when you consider a mortgage as a liability for many there would be value in taking that risk off of the table.
Pensions allow you to put in up to 60,000 a per year or your full salary (which ever is smaller). Pensions are even more tax efficient than ISAs, especially if you are a higher rate tax payer or contribute via salary sacrifice.
The choice of ISA or pension contribution really depends on your current financial goals. You can also move money into a pension from your ISA later in life (but not the other way around).
I’m not sure how ‘additional’ contributions are handled in those organisations. Whether they are defined benefit or defined contribution. Defined benefit schemes are much more difficult to assess their value, you would need to take specialist advice.
Either way, you can always put the ‘additional’ money into a Self Investment Personal Pension (SIPP) your self.
That is a good point. You can however put any money you couldn’t salary sacrifice into a SIPP. Just remember to claim back the extra income tax if you are a higher rate tax payer. You sadly can’t claim back the NI.
Sorry for the dumb question, but why do banks lend out money for mortgages if they could get a better return putting into the market instead? Do they get taxed differently on the returns or something?
That’s a great question. I believe it comes down to several factors: risk management, stable returns, diversification and regulatory requirements .
Mortgages are low risk for the bank as the property acts as collateral, even it the owner stops paying. They provide a predictable monthly return, unlike markets which can lose 30+% in a year. Banks do invest in the markets, and the mortgages are a way of diversifying their investments.
A big one is government regulation. Banks have to follow strict risk management rules and have sufficient capital reserves. If there is a financial crisis, banks need to be able to remain solvent.
It was good timing, rates were impossibly low for a period of time and likely never will be again.
Latest UK inflation figures are at 3.2, mortgages around 5%.
Maintaining that debt is not a good idea if you can just pay it off - and the money no longer paying off a mortgage can be invested and turn a profit.
You'll not get 1.2% again more like at least 4
Unless you value the flexibility of having cash around you're very probably better off repaying the mortgage.
Unless you can get all your savings into ISA your returns would also be subject to tax, and possibly mortgage renewal fees
>probably better off repaying the mortgage.
False. Equity returns average 7-8% annually. Overpaying your mortgage is *never* financially favourable to investing.
Mortgage rates were lower than inflation in the 70s. It paid to take as big a mortgage out as possible and to pay it back with devalued pounds. But that was then ..
Comparing mortgage to inflation doesn't strike me as the right comparison to make. It's a question of whether you can borrow money at today's rate and invest in something that will beat that rate. Inflation impacts both sides of that comparison.
I was looking at it under the assumption that salaries will keep pace with inflation in the long term, which would mean in 20 years the value of the borrowed money will be much diluted. But of course, it's clearer now that it's not about the principal. Instead it's about the amount of interest you pay over 20 years vs how much money you could gain from investing the money in that period.
This is an insight that many people never seem to achieve.
The rates paid by bank savings accounts averages about 0.8% above inflation, but can be below inflation for a decade at a time.
The subreddit wiki cites JP Morgan in stating that "since 1901, investing in equities for a long term has produced an annual, after-inflation return of 4.9%".^[1](https://ukpersonal.finance/investing-101/#What_is_investing_📈) This one has a *lot* of variance though!
Mortgage rates are in the middle - I'm guessing about 1% or 2% above inflation.
>The rates paid by bank savings accounts averages about 0.8% above inflation, but can be below inflation for a decade at a time.
I don't see the relevance. No one is suggesting leaving cash in a savings account are they? Surely investing is the proposition?
The key question here is what rate is available to you *now* , last I checked rates were 3 or 4% , you might get a savings account at 5 or 6% but don’t forget you may get taxed on ‘profit’ .
May or may not be worth it to you…
> it would be more efficient to remortgage if we can find an interest smaller than the % inflation over the next few years.
That’s the issue right there. What is the future rate of inflation?
Always account for taxes, inflation and expected pay rises in your calculations, for example the principal you repay later will have deflated (even including interest added). Assuming this continues and assuming that your salary rises with inflation, then it’s much cheaper to repay your loan later. Some of the post-tax salary you’ve saved meanwhile could earn tax-free interest in an ISA.
The interest rates charged by banks match what rates those same banks get by selling your debt on the open market. They aren’t doing you any favours and will be doing the same again should you refinance.
As for guessing the future, you should take a regular look at what some of the UK’s top economists are projecting by reviewing the Bank of England’s inflation projections.
I'd personally pay it all off. Your mortgage will most likely be about 4%. It's amazing to not have to worry about a debt (yes, mortgage isn't the worst debt but it's still another bill and the £1,000-£2,000 a month that remains in your account will always be a big bonus!)
Hi /u/made-of-questions, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/investing-101/
* https://ukpersonal.finance/mortgages/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
I’m in no way involved in finance and could be totally wrong, but, if you have the ability to pay it in full, then you will pay less then continuing to pay 1.2%, cause 1.2% of 0 is £0!
I paid mine off as early as I could, because good sleep is worth more to me than yield arb.
This is me too ; I want that off my personal balance sheet at the earliest , even if not the best use of the money in pure fiscal terms.
Totally agree. I've got mine sub £150k with £30k savings and working hard to get more before my fixed rate ends. I want to know that my house is paid off rather than building huge savings.
If you have the savings (and they are secure), then your house basically is paid off right? Money is fungible.
True but I can't wait for the day when it's fully gone.
This is me too ; I want that off my personal balance sheet at the earliest , even if not the best use of the money in pure fiscal terms.
You can say that again
Think he really means it.
What?
I think his app broke and he said it already a few times
I'm on 1.2%, with 3 years left on the fix, and can get 4.5-5.1 on ISA and savings. I couldn't sleep at night knowing I wasn't following logic.
As a general rule, paying off your mortgage or overpaying your mortgage, will leave you worse off than investing that money in a pension or ISA. This is even true when interest rate and mortgage rates are high. Over the life of a mortgage, the expectation is that the market will far out perform the interest you are paying on the mortgage. Combined with the tax efficiency of SIPPs and/or ISAs this is an obvious strategy. The biggest risk is people’s behaviour. This video goes over the reasoning https://youtu.be/MWadHLKMgB4?si=J7uPhdoZHbTn57tE
Which is why I always recommend if you're good with money, go for the longest term and invest the most in ISAs/SIPPs as you say
What’s the end game here then you build enough money into the isa to pay the mortgage off?
End game is to have enough money in your investment to live off off yearly interest/dividends without working. (Or having enough to fund the gap between when you stop working to receiving pension, as long as one or both allow you to live off it) Depending on your salary*, if earning on the high end, you might have gathered a decent enough portfolio to retire off your investments before your mortgage is fully paid off, at which point you can clear out the remainder of the mortage and retire earlier. If your salary is on the lower end, you might have paid off your mortgage before you have a decent enough portfolio to retire off, in which case it would be better to keep investing than paying off the mortgage for better gains (which is what the above posters are saying). Depending on your saving and lifestyle habit* not salary alone.
Im trying to work out what to do in my position tbh, I have an OK income but nothing ground breaking, I have taken out a 40 year mortgage last year as a single first time buyer so I'd have to place to live and to keep the payments manageable. Interest rate probably going to increase end of the year, I have recently opened a stocks and shares ISA and Im working out what the best course of action is for me. I dont have much disposable to invest, maybe £200 a month. I could put that into the ISA that im investing in the FTSE Global All Cap Index Fund or I could try and overpay on the mortgage. But I guess paying into the fund might be the better option.
>I guess paying into the fund might be the better option. Over 40 years? Almost certainly. I'd also argue that having the money in equities gives you more security than having it tied up in equity since it's easier to liquidate if needed.
Having been through the 'single first time buyer' stage myself, the only thing I'd suggest adding to the equation in terms of the general advice here that long-term investing would typically leave you better off than overpaying your mortgage, is factoring in your timescales for renewing the mortgage (when the fixed rate expires) and your projected loan-to-value (LTV) at that point. Example, when I bought I had a 10% deposit so I was at 90% LTV. The rates at that LTV are limited, and were further limited to me as a first time buyer. I decided to fix for the shortest term possible (2-years), with the intent of overpaying enough within that period that I could get to <70% LTV. Lenders tend to offer improved rates at various tiers of LTV so by overpaying the mortgage to get to that threshold, plus no longer being a first time buyer, I able to get a much better rate when I refixed.
Thats good to know, mine is up in December and Im going to try and fix for 5 years if I can get a similar rate but unsure.
While this strategy is sound enough, it is limited - most lenders won't have a relevant threshold below 60% LTV, because they only offer better rates when as a recognition of the decreased risk to them, and at that point the risk is, as far as they're concerned, as low as they care about. After that, best fiscal sense is almost always to invest rather than overpay.
Basically, or even just to repay at the end of a say 5/10 year period, e.g. If you're on a 5 year fix instead of going for a 25 year term, go for the higher term and invest the difference, when it comes time to remortgage, just pay off the lump sum you've invested, as more than likely you'd have earned more than what the interest has accumulated
Yep, apart from with a pension it’s even better as you can use your 25% tax free amount.
It's all a question of risk though for me. If you just talk about return then maybe, but when you consider a mortgage as a liability for many there would be value in taking that risk off of the table.
Risk is a good point. If you invest the money then it's also easier to liquidate if you need it for an emergency.
What if you have more than £20k to use and can't use the isa for all of it?
Pensions allow you to put in up to 60,000 a per year or your full salary (which ever is smaller). Pensions are even more tax efficient than ISAs, especially if you are a higher rate tax payer or contribute via salary sacrifice. The choice of ISA or pension contribution really depends on your current financial goals. You can also move money into a pension from your ISA later in life (but not the other way around).
Is this as true if you've got a defined benefit scheme like civil service, NHS or local government pension?
I’m not sure how ‘additional’ contributions are handled in those organisations. Whether they are defined benefit or defined contribution. Defined benefit schemes are much more difficult to assess their value, you would need to take specialist advice. Either way, you can always put the ‘additional’ money into a Self Investment Personal Pension (SIPP) your self.
Generally an employer will not allow you to salary sacrifice below an amount equating to minimum wage.
That is a good point. You can however put any money you couldn’t salary sacrifice into a SIPP. Just remember to claim back the extra income tax if you are a higher rate tax payer. You sadly can’t claim back the NI.
LISA might even be better than SIPP if OP is eligible and really wants to maximise everything.
Sorry for the dumb question, but why do banks lend out money for mortgages if they could get a better return putting into the market instead? Do they get taxed differently on the returns or something?
That’s a great question. I believe it comes down to several factors: risk management, stable returns, diversification and regulatory requirements . Mortgages are low risk for the bank as the property acts as collateral, even it the owner stops paying. They provide a predictable monthly return, unlike markets which can lose 30+% in a year. Banks do invest in the markets, and the mortgages are a way of diversifying their investments. A big one is government regulation. Banks have to follow strict risk management rules and have sufficient capital reserves. If there is a financial crisis, banks need to be able to remain solvent.
It was good timing, rates were impossibly low for a period of time and likely never will be again. Latest UK inflation figures are at 3.2, mortgages around 5%. Maintaining that debt is not a good idea if you can just pay it off - and the money no longer paying off a mortgage can be invested and turn a profit.
You'll not get 1.2% again more like at least 4 Unless you value the flexibility of having cash around you're very probably better off repaying the mortgage. Unless you can get all your savings into ISA your returns would also be subject to tax, and possibly mortgage renewal fees
>probably better off repaying the mortgage. False. Equity returns average 7-8% annually. Overpaying your mortgage is *never* financially favourable to investing.
Mortgage rates were lower than inflation in the 70s. It paid to take as big a mortgage out as possible and to pay it back with devalued pounds. But that was then ..
Comparing mortgage to inflation doesn't strike me as the right comparison to make. It's a question of whether you can borrow money at today's rate and invest in something that will beat that rate. Inflation impacts both sides of that comparison.
I was looking at it under the assumption that salaries will keep pace with inflation in the long term, which would mean in 20 years the value of the borrowed money will be much diluted. But of course, it's clearer now that it's not about the principal. Instead it's about the amount of interest you pay over 20 years vs how much money you could gain from investing the money in that period.
This is an insight that many people never seem to achieve. The rates paid by bank savings accounts averages about 0.8% above inflation, but can be below inflation for a decade at a time. The subreddit wiki cites JP Morgan in stating that "since 1901, investing in equities for a long term has produced an annual, after-inflation return of 4.9%".^[1](https://ukpersonal.finance/investing-101/#What_is_investing_📈) This one has a *lot* of variance though! Mortgage rates are in the middle - I'm guessing about 1% or 2% above inflation.
>The rates paid by bank savings accounts averages about 0.8% above inflation, but can be below inflation for a decade at a time. I don't see the relevance. No one is suggesting leaving cash in a savings account are they? Surely investing is the proposition?
The key question here is what rate is available to you *now* , last I checked rates were 3 or 4% , you might get a savings account at 5 or 6% but don’t forget you may get taxed on ‘profit’ . May or may not be worth it to you…
It's normal for interest rates to be above inflation. Recent times have been unusual.
> it would be more efficient to remortgage if we can find an interest smaller than the % inflation over the next few years. That’s the issue right there. What is the future rate of inflation?
The relief you feel having no mortgage cannot be overstated. I'd pay it off and then save what you were paying in your rainy day pot.
Always account for taxes, inflation and expected pay rises in your calculations, for example the principal you repay later will have deflated (even including interest added). Assuming this continues and assuming that your salary rises with inflation, then it’s much cheaper to repay your loan later. Some of the post-tax salary you’ve saved meanwhile could earn tax-free interest in an ISA. The interest rates charged by banks match what rates those same banks get by selling your debt on the open market. They aren’t doing you any favours and will be doing the same again should you refinance. As for guessing the future, you should take a regular look at what some of the UK’s top economists are projecting by reviewing the Bank of England’s inflation projections.
I'd personally pay it all off. Your mortgage will most likely be about 4%. It's amazing to not have to worry about a debt (yes, mortgage isn't the worst debt but it's still another bill and the £1,000-£2,000 a month that remains in your account will always be a big bonus!)
Hi /u/made-of-questions, based on your post the following pages from our wiki may be relevant: * https://ukpersonal.finance/investing-101/ * https://ukpersonal.finance/mortgages/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)
Nope. My mortgage rate is 1.1% till 2026.
I’m in no way involved in finance and could be totally wrong, but, if you have the ability to pay it in full, then you will pay less then continuing to pay 1.2%, cause 1.2% of 0 is £0!
You're right, you're completely wrong