Mortgages: to repay or not repay?

If a country’s financial persona could be summed up succinctly, the UK’s would most certainly be defined by our obsession with property, home ownership and mortgages.

As soon as we settle down in a relationship or start a family, most of us become fiercely determined to lay down roots and achieve that sense of pride and security that comes from owning our own bricks and mortar. Then, after working hard to scrimp and save to do just that, the very next thing we want is to pay off the debt used to buy the property in the first place – commonly known as ‘the mortgage’. First, we are desperate to buy our own home. Then, we become equally desperate to rid ourselves of the huge loan lingering above our roof.

No wonder, with most people and couples securing a mortgage for up to 5 x their annual income, spread over 30+ years, the overall cost can be an eye-watering sum of money (I speak from recent personal experience here; my wife and I having just bought our first proper family home together).

For most of us, the family home is the most expensive purchase we are ever likely to make, and we will borrow large sums of money to make the dream a reality. Paying your mortgage off early can be a great way to achieve a sense of financial freedom and independence – you’ll no longer owe anyone money for living in your own house, and you’ll have plenty of spare cash burning a hole in your purse to put towards your family’s future. It’s a no-brainer, right?

Of course, as with most other things in life, there are pros and cons that come with what seems like such an obvious decision. Why wouldn’t everyone want to pay off their mortgage at the earliest possible opportunity? Here are some things you might wish to consider before rushing into anything:

• Are there early repayment charges? Most mortgages, particularly fixed rate deals, will come with early repayment charges and limit the additional amount you can pay off each year without penalty, usually 10% of the outstanding balance. Interest rates may still be very low at present, but the banks are still going to make a profit one way or another. Be sure you are aware of any penalties for additional repayments.
• Can you negotiate a better deal? There is always the opportunity to find a better deal out there. Many people simply go to the same bank or building society they have always used since opening their very first current account, unaware that spending a little more time researching better mortgage deals, either by themselves or through a broker, could save them £thousands over the long-term. If you’re still working full-time and comfortably covering your regular expenditure, securing a lower interest rate on your mortgage could be a better option than tying up capital to make additional payments.
• Are you investing for the future? If you are in the fortunate position of having some spare cash lying around, it might be a better option to invest some of that cash into a pension or stocks and shares ISA. From a purely logical standpoint, if you are able to achieve a better return on your investments than the interest you are paying on your mortgage, the growth to your capital will outstrip the cost of your debt over the long-term, meaning you will ultimately end up better off. Of course, be aware that investing capital can be a complex and there is no guarantee of future returns, so best to speak to your independent adviser first.
• Are your mortgage payments comfortably affordable? If you and/or your partner are still earning a regular income, and your mortgage is on track to be fully repaid by the time you retire, where is the urgency to pay it off early? It could make more sense to retain access to liquid capital or surplus income, rather than tying it up in your property. Remember, you can’t suddenly access cash by selling part of your property like you can with cash deposits or a well-managed investment portfolio. Always be mindful of ‘unknowns’ in the future and ensure you have a cash fund for emergencies.
• Do you have a retirement plan? Believe it or not, many people view their property as their pension. However, paying off your mortgage before downsizing and living off what’s left over is far more easily said than done. Legal fees, stress, market conditions, all of these have a role in whether this strategy plays out. Best not to have a retirement plan reliant on your family home. If you have managed to build savings in a pension plan, it can be tempting to access this money at the earliest opportunity to pay off your remaining mortgage balance at 55. Be wary, however, that your pension savings are there to support your lifestyle throughout retirement. Taking out a large sum of money early on will either mean less income in the future, or running out of money altogether. Building a lifetime cash flow forecast can provide a glimpse into the future and help you feel more secure about potential outcomes.

It is difficult to say with any certainty whether it is right for someone to pay off their mortgage early. Everyone has different needs and objectives around which to focus financial decisions. If you or someone you know might benefit from a chat with one of our financial planners at Herbert Scott, please feel free to get in touch via our contact page.