Mrs YFG: why we disagree on paying off the mortgage

Mr YFG’s favourite day of the year is April 6th. Not his birthday, nor Christmas, or our wedding anniversary, no – the start of the tax year floats his boat. He even woke up early on April 5th only to realise what day it was and, disappointed, crawl back into bed.

He likes this day because (other than portfolio reorganisation and maxing our ISAs) we get to decide our savings plan for the next year. Once we max our ISAs on April 6th, the question is what to do with the remainder of earnings saved. Mr YFG offered to open me a SIPP and I refused. He was initially confused, as he has a couple of private pensions. I insisted that any additional money should be put towards the mortgage.

I would rather put money towards paying off our mortgage than into my pension or open a SIPP, and here’s why:

Paying off a mortgage is a double win

It reduces your future predicted expenses at the same time as increasing your future net worth. The reduction in your expenses is more than the amount paid off because you also won’t have to pay interest on that sum. The mortgage capital reduces, and so your net worth goes up comparatively. Now you need less net worth in order to hit FI because your expenses are lower. This double whammy boosts you forward.

Whilst paying into a pension increases your net worth, it doesn’t affect your expenses.

I value my house more than my pension.

My house has a chance of increasing in value and percentage terms more than my pension. [Mr YFG: not sure I agree] Its value is much more liquid than my pension and I can genuinely appreciate its value. It is my dream home and I love it dearly. House prices have gone up.

My home being nicer, more valuable gives me a fuzzy feeling. Paying off our mortgage reduces our debts. It makes me feel more secure. The balance in my pension, accessible in 20-30 years(?!) doesn’t give me either of those feelings.

I maximise my employer match, and nothing more. I like free money. But I don’t want to put in more money without getting it topped up by the Firm in return, as I don’t value that.

I don’t trust the government

Since I’ve been paying into a pension the entire pensions landscape has changed. Tax changes have been aimed at me and my colleagues – making them less generous and less certain. I have no doubt that at some point the tax relief I currently enjoy will be cut. I suspect I would have been better off putting it into my ISA.

Lifetime allowance

I am in real danger of hitting the Lifetime Allowance at some point in my life if I keep working. The Lifetime Allowance has been on a downward trend since it was introduced. Only the past few years have provided a mediocre uplift. With compounding over the next 30 years it’s not a completely ridiculous thing to think about. I also don’t trust the government not to cut the LTA for the next 40 years to a point where I can’t avoid hitting it.

I have to wait 30 years for it

I can’t guarantee I will be alive when I want to take my pension. While this is morbid, it is absolutely true. The minimum pension age is 57 for me and Mr YFG, and will likely be nearer 60 once we actually wanted to use it. An ISA and our home are accessible now and for most of my lifetime.

Mr YFG doesn’t agree

He thinks it’s worth putting money into a pension. The tax relief, as it stands, for higher rate taxpayers is very generous. Likewise, left to its own devices in global index tracker funds, the money in a pension will compound into a substantial sum. Hopefully more than enough to cover a long and happy retirement.

He’s also bit a sceptical of bricks and mortar. He sees our home as both his castle but also a big immovable illiquid asset. One equally vulnerable to the whims of Government (through restricting housing supply, development rules and government largesse to homeowners).

Finally, he also feels that the current low rates on mortgages offer an opportunity for arbitrage. At a paltry 2.25%, our mortgage is reducing in real terms as inflation outstrips it. Money put into paying off the mortgage is money not put into the markets. Where returns have easily trumped our interest rate.

We don’t have to be rational

Mr YFG is of course right. On a pure rational financial perspective. It would be irrational to ignore the twenty-pound notes just lying there on the street. There are better opportunities out there than paying down the mortgage.

But life isn’t always rational. Things don’t always make sense. There are lots of people who do fancy calculations that show what would happen if you maximise this, minimise that. But except for some very odd people, nobody actually does those things. Who has actually just left their entire investment portfolio in a single tracker fund for 40 years – never touching it?

That’s why we don’t preach on the internet about the decisions we make as if they are the right ones for everyone. They are the right ones for us.

40 thoughts on “Mrs YFG: why we disagree on paying off the mortgage

  1. Good post. And timely for me. A friend asked me this Q yesterday. I said it was a head vs gut decision. My DOH prefers repaying the mortgage; I prefer investing in (higher returning, I believe) equities etc.

  2. Thanks for outlining your thought process Mrs YFG. I’ve been wrestling with a related conundrum, is good to see how others approach things.

    For mine, this is a straight up opportunity cost decision.

    The age lock-in with the pensions guarantees* we won’t be tempted to extract the money and blow it on frivolous things like holidays, educating our children, and lottery tickets. Which is great… until life happens, and you want to extract that money to cover non-frivolous outgoings like experimental drug trials, aged care for parents, or childcare fees for unexpected offspring.

    Home equity is somewhat accessible, while also providing a guaranteed** outcome of sorts.

    There is a third option of course, letting the mortgage tick over and investing the surplus funds in a non-restricted account like an ISA. Relies on self-discipline to avoid scoring financial own goals, but provides the most flexibility.

    That golden handcuffs “free money” argument has seen a great many unhappy folks trap themselves in unfulfilling jobs waiting for shares/options to vest, bonuses to be paid, or sacrificing quality of life today for a long delayed promise*** of greater potential financial reward in old age.

    * until the government changes the rules, like allowing people to borrow money via their SIPPs

    ** until the government swaps one-off stamp duty on purchases for an ongoing value based land tax… or starts means testing the NHS and state pension eligibility… or begins charging a wealth tax.

    *** government promise [chuckles disbelievingly]

    1. Thanks Indeedably. I agree, in that I don’t want to put extra money into a jar I can only open when the government tells me so, and if they change the tax position I can’t undo that. As a higher earner I’m exactly the target population for this….

  3. Great post!

    I think this will be a perennial question – to which there’s no right answer.

    My take is that the young should favour the mortgage over the pension. Older people the opposite.

    My reasoning is that you want to remove debt as quickly as possible – partly because it’s expensive and partly because owning your own home (properly owning it – no mortgage) is both a wonderful feeling and a great bulwark against what life may throw at you.

    The same reasoning meant that I always went for a repayment mortgage. Linking a debt to an investment (as endowment mortgages did) seems like the height of folly to me (and not just with the benefit of hindsight).

    I left university at 25 and retired, at 51, last year. I was an accountant in business but certainly not high-flying or massively well-paid (although well above the median).

    For my first 8 years I overpaid my mortgage with every penny I had spare. The mortgage was one where there was no limit to overpaying and I could borrow back the overpayments at will. I’ve no idea whether such mortgages still exist. Subsequent house purchases were for cash but I ported this mortgage (with just £500 o/s to keep it alive) as a means of taking a loan if I needed it. I used it once – as a source of a bridging loan when I bought my current house.

    The following 10 years I saved hard – in cash. In some of those earlier years I would have made a real return but after the stock market crash a small negative return. But I’m one who likes certainly and having, say, 10 years of spending money in cash is a great comforter.

    Then for the last few years I paid heavily into my SIPP – once the rules were relaxed. I made use of the 40% tax relief and the bringing forward of 3 years’ unused allowances.

    If you have a mortgage and are paying, say, 7% once initial discounts fall away, then overpaying the mortgage is the equivalent of a 4%+ real return. That’s on par with long-term equity returns, but with almost no volatility.

    So my view would be to pay off the mortgage as fast as possible. Then save in cash until you’re within 10 years of being able to draw your SIPP at which point fill your pension.

    There’s one huge point in favour of pensions (the 40% tax relief) and one huge negative (the lack of accessibility until 57, in your case). I don’t think the former outweighs the latter when you’re young. I’m assuming here you have normal works pensions (and have not opted out of them) and that you’re keeping an eye on NI contributions for the state pension.

    Fundamentally there’s no telling what might happen in the next 25 years for you both. Divorce, children (not always planned), redundancy and/or ill-health to name but four.

    If you look around at your friends / older colleagues who are, say, mid-50s I doubt there aren’t too many who haven’t had one (or more) unplanned “events” that had major financial impact on them.

    So make sure you’re in the works pensions, pay off your mortgage, then save cash like mad (or a stock and shares ISA if you want the thrill of investment) and then when you’re 10 years from being able to draw your SIPP (and assuming you’re unlikely to be fired / have a major health issue / get pregnant, in the foreseeable future) fill your SIPP.

    Just my tuppence-worth!

    1. Thanks Richard, I agree- my perspective is probably going to be different from someone in their 40s! For now, my pension is a mystery future pot and my house is something tangible (and able to be liquidated) which makes it more attractive. I think your thoughts are very useful and a good starting point for basic planning in this respect

  4. if you are old enough or have a mortgage with suitable terms, paying into your SIPP and using the 25% tax-free lump sum would be a great repayment mechanism.
    20/40/45% tax relief on the way in and no tax on the way out.
    Great idea but not open to those who don’t remortgage / tax out mortgages later in life / have IO mortgages.

  5. My head tells me to invest the money in the stock market. My heart tells me to pay off the mortgage. I think that there is something very reassuring about completely owning the roof over your head. No one can take it away from you and your outgoings are minimal. There is also the slim possibility that the stock market crashes and you lose a lot of the money you put in it and don’t have as much to pay the mortgage. My aim is to pay off our mortgage – currently we will do so in seven years – and then I can get a less stressful job as our outgoings will be greatly decreased.

  6. While I don’t agree with all of MrsYFG’s reasoning, saving up for and then buying a house outright was our first step to FI. Knowing that (almost) no-one can take the roof over our heads away after years of renting gives a palpable sense of relief. Plus in some small insignificant way it sticks it to the banks – there is no real alternative to using them for a mortgage, but there are plenty of ways to save.

    It was also an accelerator to FI as all of the money going into saving and renting could be shifted over to pension contributions and covering the period between now and private pension retirement date.

  7. I think you need to refine the discussion. You just talk about putting money into a pension or a SIPP without defining what it is.

    If the SIPP is invested mostly or totally in safe government bonds then paying down the mortgage instead would be better any day of the week: simply because gilt yields are lower than your mortgage interest.

    But if your SIPP is mostly or totally in equities, then you’re taking a view on how they will perform over time. Great if the bull run continues for 30 years. Not so great if you see a 50% equity drawndraft plus Japanese style deflation over 30 years – leaving your unpaid mortgage as a massive weight round your neck.

    Personally, I’d play safe and pay down the mortgage. Yes, you may miss some equity gains. But you’ll sleep well at night. What price on that?

    1. Hi ChrisB, to be honest it doesn’t get that granular for me – if I paid more into my pension it would be my work pension, which is a GPP with low charges, in the default fund! My priority though, like you say, is having a paid off roof over my head.

  8. We kept our cheap, flexible, interest-only mortgage as long as possible until it reached the end of its (extended) life. Then we cleared it using TFLSs from pensions. By golly it worked out well for us. That’s hindsight, of course, but foresight said that that was the likely, though not certain, outcome.

    I’ve since entertained various notions about exploiting the capital tied up in our house but the appalled offspring have cried “nay”. I’ve decided instead to look upon it as fall-back capital for my widow, a defence against possible future pension problems and Care problems. In other words, it’s an asset that may well be set off against future liabilities.

    1. Thanks dearieme, I think you’re the first person I’ve actually spoken to with an interest-only mortgage who had the money ready to pay it off! I’ve spoken to a few people still working in their 60s to accumulate that bullet payment…

  9. You probably want a bit of everything, workplace pension, SIPP, ISA & Mortgage. Hedge your bets, cover all bases…

    It is a phenomenal time historically to have a slug of mortgage debt?

    The way round the mortgage psychology issue could be to get it to a relatively low LTV and then just keep hold knowing you own *most* of your house, but just not quite all of it?

    i.e. de-risking but not removing the mortgage

    1. Hi rhino I think that’s what other people have done too- whittle down the mortgage to like £1,000 then keep it open (just in case). Mr YFG both have the holy trinity you mentioned, although mine is a company pension not a SIPP. While I’m working I don’t want to open a SIPP given 1. Default charge cap and 2. I have faith in the chosen default fund! If I ever left employment I might think differently

      1. You could smash it down to 1k and keep it open, but you’d need a reason, i.e. scenarios in mind where you’d increase your debt

        my thinking is more along the lines of FvL but using an interest only instead of a margin loan, i.e. using a mortgage to gear your portfolio

        I sort of wish I’d done it ten years ago.

        An offset would give me the greatest flexibility for this sort of thing – you could prob just run a mechanical strategy aiming to keep a) the monthly payments constant with respect to interest rate or maybe b) keep a constant LTV with respect to portfolio size?

        The ballpark LTV I’m considering is in line with current FvL numbers, i.e. 10-20%

        I think TI might be doing something similar – but there’s been no posts as of yet…

        It could go wrong for sure in the face of combinations of undesirable & unpredictable outcomes but my thinking is that if you can secure an interest rate a few 10s of basis points *under* inflation then there is a certain margin of safety in the concept? Obviously that could change, but then you could reassess your situation relatively easily if you have no overpayment limitations.

        The counter-argument, which funnily enough TI made to FvL and then sort of later unmade, is ‘if you’ve already won then stop playing’ and I can see that angle too.

        Its a finely balanced decision – one thing that is pushing me toward the mortgage is that it will have the side-effect of preserving a lifetime of ISA contributions, without me having to switch to a flexible and then worry about getting everything squared away by the EOFY

  10. Hi firstly I just wanted to say what a fantastic blog. I’ve slowly been working my way through the previous posts and have really enjoyed following your journey. The guest posts on Monevator are great too, but I think you have really found your own style and I particularly like the balanced perspective from a couple. Keep up the good work!

    It’s the first time I’ve commented, but this post hit a note with me, as my wife and I had the same conversation. Our conclusion was that bang for the buck investing in a balanced portfolio over a long time horizon 10-15 years minimum will most likely generate the greatest return. That said the satisfaction and security of owning your own home and knowing that no matter what you have a safe place to live which is “yours” should not be under estimated. It’s peace of mind and if it helps you sleep easier it’s hard to put a price on that. Interest rates are also at an all time low so mortgages can only go one way!

    We are both 39 and have chosen to pay our mortgage off first (down to the last 5K now) so will be done before we turn 40. Our intention is then to focus all of our income investing in a portfolio held in ISA’s from 40-55 and then live off that until we can draw our company pensions. By eliminating our debt early (we’ll owe nothing to no one) will enable us to focus a significant amount of our income each month on this goal.

    You’re in the ideal position, you have investments, you have pensions, so by overpaying the mortgage you are hedging your bets, in effect you’re backing all horses rather than just one, your going to WIN!!

    1. Fair enough, but tax. Some people face the choice of overpaying the mortgage or avoiding 40% income tax (or more) by making pension contributions. The tax advantage potentially balances the decision in favour of pensions. On the other hand if I faced only 20% income tax, knowing that in retirement the basic rate of tax might exceed that, I’d probably opt for overpaying the mortgage.

      In our case we rarely had to avoid higher rate tax but happily the basic rate of tax fell over the years so we still benefited from a tax boost. Hindsight again, though. For what it’s worth I’d probably recommend whatever lets you sleep best.

    2. Hi there welcome and thank you for your comment! It sounds like you have a similar aim to me: get rid of debt. I don’t like the idea that I don’t own my house, and although I appreciate the cold hard tax facts I want to focus on reducing what I owe the bank first, then try and tax optimise later. At my level of income I’ll be shafted tax-wise regardless, so I would rather funnel my energy and money where my heart is ( I have time to make it up later!). Sounds like you’re similar

  11. Hi, another first time commenter but have been reading your great blog with interest. I have been thinking about this issue recently, but in almost precisely the opposite direction to Mrs YFG – I am considering borrowing more on our mortgage while rates are so low, so that the borrowed money can be put into investments (mainly equities) that are likely to yield a return over the medium term that outstrips the interest cost on the borrowed money, hence accelerating our early retirement plans. My thinking was along the lines of locking in a 10 year fixed rate (which can be had for 2.34% on 75% LTV at the moment), on the basis there are very few 10 year periods where a balanced portfolio would not outperform that so you are unlikely to end the decade worse off, and likely to end it much better off.

    The borrowed money for me would be going into ISAs as fast as possible. I have been a prolific contributor to pensions in the past (I am a tax advisor and could not resist the tax breaks, which I agree may disappear at some point) and am aiming to retire well before pension age, so tax efficiency here has to take a back seat to having a source of funds to bridge the gap between when I want to retire and when I can extract money from my pensions.

    Interesting to hear so many different perspectives on this in the comments, and I definitely appreciate the distinction between what is statistically likely to be the optimal approach versus what is likely to help you sleep at night (I incline to the former as I am naturally a financial optimist but my wife inclines to the latter, hence the extra borrowing may never happen!).

    1. Hi Mike thank you so much for sharing your thoughts. As you rightly point out for some the decision is emotional. Completely agree with you on the pure tax perspective- on a cold hard look I’m wrong, but emotionally I have to do what helps me feel happier about my money. My pension does not give me the warm fuzzies because I fundamentally don’t trust it!

    2. Rates may be low now but might go up, this is more protective to you than buying a long dated gilt, and it might help increase your risk appetite where you do invest.

      Also the smaller the mortgage gets the bigger difference future overpayments make to your cashflow, since it becomes an ever larger %, eventually overtaking equities on that basis, but then again it’d be safer still to keep it in a huge cash pile that matches your mortgage interest.

      You could balance transfer from 0% credit cards into the mortgage to un-secure some of the debt, and possibly change the rate you repay it at.

      You could also take a riskier but cheaper 2yr mortgage fix rather than say 5+ years, so the excess goes against the debt, but risky, your call

  12. Hi thanks for another insightful and thought provoking post.

    This is a properly first world problem but here goes……….. from what you’ve implied in previous posts about earnings are you not impacted by the tapered pension contribution allowance which caps the amount of pension tax relief you can receive? If this is the case then annually there is a limited amount (to a minimum of £10k) that you can contribute to building up a pension pot. Given your implied savings rate I would have thought maximising pension first would still leave you with a fair amount to either pay down mortgage or fill up an ISA? It gives you the potential whilst your earnings are high to build a sizeable pot which can benefit from compounding until your retirement date and stand a reasonable chance of supporting you for 30 odd years!

    My preference currently is to maximise pension contribution on the basis that I think as a higher rate tax payer relief changes will be inevitable in the future and therefore I’m keen to take advantage now. I’m then using any residual to build wealth within an ISA wrapper as this is a use it or lose it opportunity each year, anything left over (?!) is then used to pay down mortgage. If the worst happened and I lost my job or earnings reduced substantially I could use the ISA investments to pay down a chunk of the mortgage. Yes there’s a risk to capital from the investment but with a diversified global tracker this should hopefully not be material (here’s hoping!)

    Would be keen to know any thoughts on where I’m wrong with this thinking?

    1. Hi there, thanks for your detailed comment! I am not yet affected by the tapered AA so my annual allowance is still £40k. You have to have both adjusted and threshold income above the right level to be caught. That said, maybe in 5 years time I will be caught. We max out our ISAs each year (and have done so this year) so the question is where to put the excess- other than in an interest bearing savings account or hold in current account. Priority is: 1 matched pension, 2. ISA 3. Mortgage for me, whereas Mr YFG doesn’t have any employer matched pension so his strategy is different

  13. Nice debate. I’d just add that it’s important to distinguish between ‘investing in property’ and ‘paying off the mortgage’. I appreciate you know the difference, but there’s a couple of moments in the post/discussion where I feel they’re conflated a tad.

    You took your position in the property market when you bought the house. Whether spare money goes into paying off the mortgage or into a SIPP, house prices rises from here are irrelevant from an investing decision. What you’re doing here is restructuring your financing not increasing your exposure to property per se. You are however (as you also state) reducing your exposure to debt/uncertainty.

    Anyway don’t want to tell you (or Mr YFG!) to suck eggs, appreciate you already get this, but worth underlining I think. 🙂

    1. Hi TI thanks for clarifying! I think I just wanted to purely focus on the debt reduction angle of paying off the mortgage so hopefully that came across!

  14. Love the opening sketch about about Mr YFG’s favourite day of the year.

    I’m going to raise my customary objection to the portrayal of pension reform as tantamount to government conspiracy. Reform has been necessary in the face of changing demographics, doubtless it could have been done better, but the tax breaks are still very generous, and are tilted in favour of higher earners. It might change, you might die, but it will probably remain a good deal and you probably won’t die before you need one. I underestimated the value of a pension in my 20s and I regret it now. Pensions are unlikely to be gutted because older people like to vote and are a powerful political force. The party that screws with them won’t last long in power.

    1. Hi TA- yes I married a very weird man.
      On pension reform, I agree it isn’t a conspiracy, and is sometimes sorely needed. But it’s the DB pensions the government won’t touch- and I agree that the old people (ie mostly the ones with DB) need to be kept onside. DC is a poor alternative which simply isn’t as valuable. The benefits of a pension or a SIPP in my mind are: 1 the employer match; and 2 the tax relief (for now). As long as one or both stick around I will continue to value contributing to me pension!

  15. I’m with Mrs YFI but in the past I’ve gone down the Investment route with cheap borrowing. ( three tunes ..)

    The leverage worked out ok but it’s surprising how quickly the investment climate can change, what seems a no brainer suddenly is a cause for concern, yes it worked out but not worth the wasted mental energy!

    I used ISAs as a primary investment vehicle, with a bit of pensions, I wasn’t a tax payer when earning ( company did pay corporation tax) and not a tax payer now, The ISAs pensions debate is really a matter of personal circumstances of course.

    The changes over the years in personal finance have been very considerable, keeping an open mind is important and more difficult as the years roll on , you might conflate financial success with great financial ability when it’s more luck and not making too many errors.

    1. Hi Hari yes I like your last sentence- if people are lucky they often assume they have skill in investing? I have no such skill, and so rely on the default lifestyle fund in my pension and the diversification of an index fund in my investments. Hoping luck evens out in the end….

  16. I tend to judge the decision as to whether overpaying is good or not based on the opportunity cost relative to investing. With mortgage rates at such low levels, it does not feel attractive to me to overpay my mortgage (and effectively save 1-2% which is also the equivalent of simple interest, versus compound interest I hopefully receive from higher returning investments). My current method is to overpay a different way – by using a side pocket strategy, where I still commit the overpayment, but direct this not to my mortgage, but to a dedicated investment account which I’m confident will outpace the gain relative to overpaying the mortgage balance. When the mortgage is set for renewal, I can then release those funds and make one big overpayment at the end.

    In the past, when mortgage rates were more like 5%, overpaying then becomes a far more attractive strategy relative to investing as its essentially a risk-free rate of return that would be hard to beat (on a risk-adjusted basis) by investing. During those times I’ve attacked it from multiple angles e.g. monthly overpayment equal to the same effect of making 13 payments per year, one-off annual overpayments, that increased each year as earning rose – and usually a combination of the two!

    But ultimately there is no right or wrong decision. There is great comfort paying down debt (even at low interest rates) so it’s really a personal decision.

  17. I feel that the role of rationality in any decision-making process should be to ensure that you’re not going to make a massive mistake. Once you’ve covered that base, then you should leave it to the heart. In this case, either paying off the mortgage earlier or building up a larger pension pot is not a mistake, therefore let the heart run reign. Awesome blog guys!

  18. Personally, whilst mortgage rates are relatively low, and pension tax relief/annual allowance are reasonably generous, I’d prefer to invest than pay off the mortgage. However, there are some mortgage tricks you can do that will give you that warm feeling of reducing debt.

    Some food for thought:

    I second The Rhino’s comment on an offset mortgage. The interest rates tend to be a little higher, but the flexibility is amazing.

    You can even offset a cash ISA against the mortgage, so the ISA wrapper is maintained. This opens a number of possibilities, for example:
    – If investing in 80% equity/20% bonds, you could instead put 80% into a 100% equity fund and 20% as cash against the offset mortgage.
    – If mortgage rates rise, you could convert the S&S ISA into cash and transfer it into the offset mortgage ISA.

    The opportunity cost of the annual ISA and pension limits are too good to miss. However with an offset mortgage, you could pay cash into the mortgage to reduce interest, but then change your mind a few years later and make use of the pension carry forward rules. Simply take the cash out of the mortgage and pay it into the pension. You’ll have benefited from reducing mortgage interest (reducing term length) and still not missed out on the pension contributions. Obviously you will miss out on and market gains, but it’s not a bad compromise.

    An offset mortgage offers the ability to drive interest payments to zero (with cash offsetting 100% of the mortgage) whilst maintaining liquidity of the cash.

    You can choose to make lump sum payments to reduce monthly payments or length of mortgage term. Once you do this though, you lose the liquidity of the cash.

    Another great “hack” is to use a 0% interest credit card and only pay off the minimum each month. The unspent cash will be offsetting the mortgage for the length of the credit card offer and can then be easily used to pay off the full balance when the time comes.

    Don’t neglect a traditional trading account, outside a tax efficient wrapper (ISA). The £2k dividends allowance and ~£12k capital gains tax-free allowance is worth making use of. Select income funds and use the dividends to pay towards the mortgage.

    1. @CV – I was able to find an offset at 1.55%, the best IO variable I could find was 1.45% (with IO fixed being the same) so only 10 basis points in it and all sitting under inflation.

  19. I keep coming back to this post, particularly since we’ve just remortgaged.

    We’re currently not overpaying. MrsShrink would like to, but we figure building a bigger cash fund makes more sense when we can get 5% interest on a regular saver. Our new mortgage is a 2 year fix at 1.68%, below inflation. The pension argument is fair, but because of my NHS DB pension I’m very likely to start knocking on the LTA cap by my 50th birthday even without increased contributions. In the next couple of years, or whenever interest rates go up, we’ll shift gear and overpay the mortgage when it outstrips our cash interest rate. I’ve been watching a lot of Dave Ramsey lately, and he bangs on about paying off any debt pronto because interest rates in the US are much higher. We’ve lived in a decade of low interest rates, and it’ll be interesting to see if this continues. I lack the chops to go IO/ leverage my mortgage on the stock market. Perhaps in bonds given their security, but to me the current market state is a bit too over-cooked to go wading in with cash for the roof over our head.

    Ultimately it’s very personal, and as always risk orientated. I just won’t take risks with the roof over my head!

    1. It’s a tough decision. I decided early on that clearing my mortgage was the most important thing to me. This was back where 4% mortgage rates were seen as very competitive. I cleared my mortgage in 5 years. I cleared my mortgage in 2008. With the benefit of hindsight I should then have remortgaged and put all the funds in the stock market. However, mortgage companies aren’t keen to agree on lending you money for investment purposes. Anyway, fast forward to present day and I now have 2 fully mortgage free properties. Consequently my daily outgoings are very low and I use salary sacrifice to put as much as possible in my pensions. I estimate I’ll hit LTA by 55 ( I’m presently 46). Then I’ll have a whole bunch of other problems such as what to do next. After living quite happily on about £15,000 per annum I’ll then have about 3 times that amount rolling in from pensions, savings draw down and rental income. Long story short, I don’t think there is a single right answer. I very much enjoy fully owning my own home(s) and I know I would have probably made more money leveraging the equity and investing the funds.

      1. Hindsight is wonderful, but I guess in 2008, post-recession, no-one would be advocating going all in on the stock market. That sort of leveraging might always raise eyebrows!

  20. What are your thoughts on upgrades to the house? Do you both see stuff like energy efficiency improvements or other value adding work as a valuable investment, or does that fall into the distrust of bricks and mortar category?

  21. I’m with Mr Rational on this one. Mortgage rates are so low, it only makes sense to borrow in todays climate, not repay.

    If I could borrow €100m at current UK mortgage rates (circa 2.5% fixed for 10 years) I would go right ahead roll that cash straight into a portfolio of investments. Achieving more than 2.5% return is a doddle, even these days.


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