The Merits of a Paid-off Mortgage?

This is a quick post about whether paying down debt is the best way to preserve capital in these stormy times.

This Corona Virus has been making me wonder about our long term Finances – at a Global, National and Family level.

One thing that is sticking in my mind is the fact that the government has been committing to spend a lot of money (paying millions of people’s wages) to combat the virus.

I’m not saying that I’m against that – I’m not in a position to say if it’s right or wrong to bail out everyone but I do find that some of the beggars who are coming cap in hand are those that have done their best to avoid paying back/in over the years.

What I’m thinking is that if the government has no particularly clear exit strategy for our health; there is similarly no exit strategy for our wealth either.

Who ultimately ends up paying for the debts incurred now? The obvious answer is taxpayers – but given that we can barely balance our books pre-CV19, what hope have we after?

So it is inevitable that tax rises or new taxes will appear in the future. If councils are talking of 20% cuts to their services than a 25% rise in council tax could be one response?

If workers are already feeling vulnerable then income tax stays at 20% but dividend tax could jump to 20% from 7.5% or even higher?

Or a wealth tax, or 25% VAT, or removal of the personal allowance or CGT or anything else you could think of.

Tax Rises are Coming?

If tax rises are coming, then what can I do now to prepare for the eventual fall out.

Also, what if (since I am not a star stock picker like Woodford my investments all have negative growth over the next few years – as the world slips into recession and depression – my money is just wasting away. Maybe it would be better to put it into something which is low risk and “safe”.

So I’ve been flirting with the idea of overpaying the mortgage. It’s currently at around 1.75%, fixed for another 40 months and is around £150,000. I could pay all/most it off in the next year or so from free cash from work, investments (VCTs). (I think that there is a 10% overpayment limit per annum).

A fully paid off mortgage would be a great relief. Although in paying off the mortgage our FIRE Assets would be diminished because I’d be diverting pre-pension money into something which only reduces my mortgage interest cost and I can’t easily access (re-mortgaging after being mortgage free might be a pain!).

Maybe I’m flip flopping a bit. I’ve previously thought that an Interest Only mortgage is the way to go and I’ve applied for a mortgage holiday as I prefer the free cash over reducing the mortgage balance.

My instincts say that if you have to chose between cash (or fixed interest) or equity (shares) after a bust then the best thing to do now is invest in shares. But it’s the question of tax that is making me think and I can’t see any feasible way that the government can tax housing equity – which is what paying off your mortgage gives you.

I’ll think about what’s the best way to play it. I reckon that filling ISAs, LISA, paying into the pension should be the fiscal priorities right now but there’s always a question of what should I do with money above that? There’s the spectre of tax and losses alongside the promise of growth and riches.  The mortgage is incredibly cheap (a cup of coffee shop coffee a day costs about the same as the mortgage interest on £50,000 – if only the cafés were open).

Summary

Bigger picture is that we are in a fortunate position compared to many.

The risk of tax rises is in my head (for now) and maybe the best option is to fill up the ISAs (including JISAs) this year and then take another think about things.

Finally, I think that in this crisis there are people who can’t afford their car payments, mortgage/rent or even to feed themselves – millions of people! Financial Independence has given me the resilience to know that now that the shit has hit the fan that I’m covered! No need to indulging the “poverty mindset” that I have – we’ll be fine one way or the other.

Thanks, GFF

 

 

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21 comments

  1. Hi GFF,
    This sounds like a great idea. I also note you mentioned (something I was thinking reading this) that it may by you fidgeting and potentially looking to make a move of some sort. I guess this isn’t something you can do the number crunching on as it’s pretty simple what impact it would have and future taxes / investment returns are unknown ?

  2. Hi GFF

    Im not paying off my mortgage as it is low interest so going to keep it as long as I can. Just putting as much as I can into my pension and keeping investing. Not worried about tax rises as ill optimise as and when changes happen, as that is out of our control anyway.

    All the best

      • No I dont bother with jisas. Id rather use my own pension and isa allowances first to keep control of the money. I can then pass it on at the right time to my kids.

      • I reckon that the money might be better in the jisa than taxable accounts.
        What the kids do with it in 15 years time is another matter.
        Of course 15 – 20 years we’ll have access to pensions so it requires a bit of a think
        Possibly income into pensions and assets into tax free isas

  3. It’s that oft-debated balance of overpay mortgage vs. invest. In terms of what’s currently known and the future unknowns, not a fantastic amount has changed. We still tip just towards the over-payment side of the scale, but that’s predominantly a psychological rather than fiscal thing. As you acknowledge, being in a position to do either is a blessing and it’s a ‘nice’ problem to have.

  4. Paying off the mortgage means one less thing to think about. On the other hand if you think equities are good value now then having that money invested in them could offer good returns.
    It feels a bit early in this crisis to be considering tax concerns. I think any first steps on tax would be more marginal or stealthy and not too radical. Topping up on approved vehicles (SIPP, ISA, JISA) would make sense.

  5. For the time being put aside all payment penalties, and try thinking about it this way:
    6 months from now equities have dropped 30%; and you did not clear some of the mortgage; OR
    6 months from now equities have gained 30% and you did clear some of the mortgage
    which would hurt you the most?

    Maybe you need to consider a move to an offset mortgage – see e.g. Scottish Widows (SW) offers, which seem to be fixed rate with an offset facility – as this might allow you to somewhat hedge your bets.
    However, I personally would avoid an IO mortgage – and I am not sure if the SW package is only IO or if C&I is available.

  6. Expect more of the usual – more tinkering with tax position on pensions, and reducing the national debt in real terms by artificially holding down interest rates whilst maintaining 2%+ cpi. If you have mortgage on your own property, you’ll be quids in.

    • Thinking about this now, the tough choices like taxing work (income tax plus national insurance) the same as savings interest or pensions (income tax but with more allowance/ tax free) would be the right thing to do.
      30% tax all round?
      But they won’t do that.

  7. It’s a tough decision! 😛 I battle with the same kind of thoughts lately. However, I lean (heavily) towards maintaining an LTV around 50% (currently a bit higher) and then converting to interest-only once I get somewhere in the 50-60% LTV range. But I currently only pay 0.50% on my mortgage (3-year fixed), so to me that is pretty much a no-brainer.

    I think you need to seriously consider your risk profile though. This is more a risk adjustment than it is an “investment choice”. Where are you on the risk scale? High/low/medium? Leveraing your mortgage would put you in the high-medium risk category I wanna say. Paying off your mortgage “because you can” and “because it feels good” would put you in the low-risk category (imho).

    And btw FYI, capital income tax in Denmark goes as high as 42%. So quit your whining about taxes 😛

  8. Thanks for stopping by.
    Taxes are what you pay and services are what you get and having spent a lot of time in DK and Scandanavia I would rather live there than the UK- including taxes.

    On the risk profile i am somewhere between cavalier and foolish but mostly in index etfs.

  9. I’m lucky as I have an interest only offset mortgage with First Direct ( not sure they are available any more ). This gives me the facility to draw more funds out or put them back in when it suits me ( subject to remembering that I have to pay the mortgage off by its end date ). That mortgage is currently on my first residence which I’m currently renting out on a 2 year Consent To Let. Technically that property is mortgage free as it’s fully offset. Our current family home is also mortgage free. Added together this amounts to a significant amount of funds tied up in property and not otherwise invested in the market. However, I like the sense of security that fully owning our home(s) gives us. Having no mortgage to pay and a bit of passive income from the rental property means I can then direct all my remaining earnings into pensions / investments and some personal enjoyment. There is the odd side effect of being rather less motivated at work once I realised how little I actually “need” to earn once the biggest bill has been cleared (hopefully) for life.

  10. I’d like to hear about your VCT experience, have you written about it? I have a chunk sitting in an offset as my emergency buffer, but interest rates are higher in Aus where its stashed 🙂

  11. Great article, I find myself in a very similar position and always worrying and the future if’s, but’s and maybe’s. I recently decided that having the mortgage paid off was the way to go and I have started making the over-payment’s to have it paid off in just under 3 years. I recently started blogging about this over at https://planonfire.com

    • I still think that the benefits of pensions mean that if you can manage it – an IO mortgage is the way forward.
      Of course a world where everyone is simultaneously rich and massively in debt is not going to work out. Holiday is over for us soon – mortgage repayments being in July.

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