You’ve almost reached the promised land and got yourself in the position where you can go mortgage free. It’s a very tempting thing to do, as the prospect of having no more mortgage payments to find is certainly an appealing one. However, before you take the plunge and pay off what remains of your mortgage, you should take a moment to think about whether it is actually the best thing for you to do, financially speaking.
Of course, we’re not talking about just those with residential mortgages, but also mortgages on buy to let properties. The financial sense of paying your mortgage off early will vary. Depending on your own personal and business circumstances, it’s something you really do need to give some serious thought to.
In this blog, we take a look at some of the questions you should be asking yourself, should you find yourself facing this scenario. We have attempted to come up with, what we think, is a pretty definitive list.
TOP 7 questions when considering ‘Should I pay my mortgage off early?’
Question 1 – How are interest rates behaving?
The current and projected mortgage interest rates for the coming year are big indicators as to the most savvy course of action. This applies primarily to those in the buy to let market. There are currently some tremendous fixed rate mortgages available. The Bank of England recently had to raise interest rates for just the second time in the last decade, so there’s no guarantee that these rates are going to be around forever. The money you release by paying off your mortgage, could be made to work harder for you by reinvesting it.
Question 2 – Could inflation help?
What £200k buys you now, won’t get you the same in 20 years time, relatively speaking. The longer into the future you go, the less the amount you pay, will seem. The money you have now will feel like less in the future and so, easier to pay down. This is offset by the mortgage payments you’d have to pay in the meantime. But if it’s a rented property, the income it provides will usually cover it.
Question 3 – Does your mortgage allow for you to pay it off early?
What can be a real deal breaker is whether your mortgage allows you to pay it off early or not. If you don’t have a pre-existing agreement to pay your mortgage early, there may be penalty incurred by doing so. Often you’ll find that a maximum of 10% of the loan amount can be repaid within a fixed period. However it’s likely that you don’t have any restrictions, especially if you’ve had a mortgage for a long time already. It’s just best to check before you do anything.
Question 4 – Could the money be better invested somewhere else?
Should the cost of finance remain low, then leveraging money tied up in your property against other investment opportunities that offer a better return could be a consideration. If you’re someone who views owning property as a career, rather than as a consequence of needing somewhere to live, then the cost of borrowing is going be something that you’re focused on. This allows you to maximise your earnings.
Question 5 – Is the reason for paying your mortgage off early a sound one?
Paying off your mortgage early is something that all homeowners aspire to. Occasionally the motives for doing don’t bear up to close scrutiny. For example, a commonly held belief by parents is that paying off the mortgage protects their children, should the worst happen. However, if you have life insurance policies that cover mortgages, they will receive a lump sump payment to pay it.
We’re not saying that paying off your mortgage early isn’t a good thing. But it might not be the most prudent one if your personal circumstances aren’t well catered for by your decision. Try not to get too focused on the “paying off the mortgage” carrot, which can cloud your judgement.
Question 6 – How close are you to retirement?
When you’re younger, investing funds into various assets can provide more returns than paying off existing loans. But when you approach retirement, you’re are likely to stop working soon. This is something you’re going to have to factor into your calculations. The older you get, the less you want to have in the way of liabilities. This makes paying things off a much more attractive proposition.
Question 7 – How fluid do you need your capital?
When you’re at the crossroads and having to decide whether to reinvest or pay off your mortgage, it’s important to consider whether you have sufficient contingencies in place in case of ill health, job loss or rainy day situation. Often, paying up to the maximum allowable represents a good half way house between reinvestment and completely repaying your mortgage, as being ahead of your official payment schedule provides an opportunity for a self imposed payment holiday, should your situation demand it.
So should I pay my mortgage off early?
If this blog achieves one thing and one thing only, we hope it’s that it made you stop and think before you committed to paying off your mortgage. You may have read through all of the questions and still ended up continuing with your repayment plans. In that case, great, but at least you know it IS the best course of action.
For those who stand to benefit from using other ways – more savvy ways to make your money work harder for you, we hope that it has been of some use to you.
With so many variables at work in the property market and the fact that they all fluctuate independently of each other. Re-evaluating what’s best for your financial health is a really good practice every now and again. What’s right for you now, might not necessarily be so in 7 or 8 years time. Life has a habit of throwing up things we weren’t expecting.
Have a question or wish to find out more? Then simply get in touch with us today and a member of the team will be on hand to help.