So, you’ve almost reached the promised land and you’ve got yourself in the position where you can go mortgage free if you choose to. 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, so 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.
Question 1 – How are interest rates behaving?
The current and projected mortgage interest rates for the coming year are big indicator as to the most savvy course of action. This applies primarily to those in the buy to let market, as there are currently some tremendous fixed rate mortgages available. The Bank of England recently had to raise rates for just the second time in the last decade, so there’s no guarantee that these rates are going to be around forever. Money you’re releasing by paying off your mortgage early, could in some cases, 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, so relatively speaking, the longer into the future you go, the less the amount you pay, will seem. Using that rationale, 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 it?
What can be a real deal breaker is whether your mortgage allows you to pay 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 is just as likely that you don’t have any restrictions, especially if you’ve had 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, so as to maximise your earnings.
Question 5 – Is the reason for paying it off a sound one?
Paying off your mortgage early is something that all homeowners aspire to, but 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, many of us have life insurance policies that cover that kind of thing already, also able to pay off our mortgages when we die.
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 are in the prime of life, then investing funds into different assets can provide more in terms of returns than paying off existing loans, but when you are approaching retirement age, the fact that you are likely to stop working soon 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, which 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.
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.
Thank you for reading. Come back soon for more advice, news and guidance from the property world.