If you’ve cleared your mortgage early, has the heart over head decision been worth it?

[InDreamsHeCame]

Very generally speaking, a lot of financial advice suggests that it’s not really worth clearing a mortgage early if you have a decent interest rate because the money you have to hand could be earning more if you invest it.

Obviously, there are different factors to take into account but that’s the broad argument from an entirely financial point of view.

I’m in a position where I inherited a house that’s shortly going on the market. Once sold, it should mean that I’m able to clear, or almost clear, the mortgage on my home.

Psychologically, this would be huge for me. I’ve been paying a mortgage for over 20 years (not the same property the whole time). At times in the early days, it was difficult to make the payments at times (property market issues, interest rate inflation, redundancy etc) but it was paid every month and sacrifices were made to make sure that happened. Thankfully, in a better position financial position now so the mortgage isn’t as much of a strain, but it’s always at the back of my mind that until I own it outright, I could technically lose my home if something happened (unlikely, but possible).

So, for me, it’s a heart over head decision. I’d likely make more money if I sold the inherited house and invested the proceeds and continued paying my mortgage for the next 10 years.

If you’ve weighed up the heart vs head elements and chosen the former, how do you feel now? Would you do it again if you went back in time?

Absolutely this. People always compare the interest rate on savings to the interest rate on the mortgage, and conclude that ‘on paper’ it’s better to invest. But I rarely see people take the next step and realise that the amount they are taxed on the interest earnt lowers the amount, and therefore changes the ‘on paper’ arguement to be in favour of paying down debt or at least to make the two almost comparable.

I paid my mortgage off early and have never regretted it. I found the benefits were across many areas - I had a house no one could take away, I had eliminated the single biggest bill I had, meaning my retirement expenses were a lot less. Also, my current expenses to live were alot less. I kept saving the same mortgage payment for a year or so (that is: no lifestyle inflation for that first year, I kept my same spending/savings footprint) and was amazed at how quickly I saved a really significant sum of money. That, plus the lower bills, lead to a real feeling of freedom and choices. I take more leave (including leave without pay from work, and have a much better work life balance. I previously felt a bit burnt out/rushed in my job, but the additional holidays have really helped to manage this. I’m also considering dropping a day at work, again, with the freedom to do so, due to the mortgage being paid off.

I heard Dave Ramsey say once “money turns a crisis into an inconvenience”. Like - the boiler still breaks, but when you have the money to fix it, it’s merely an inconvenience to find someone to come around and fix/replace, rather than worrying about payment and having to put it off and be cold etc. I think paying off your mortgage is similar, but instead it turns everyday life into opportunities. Without the mortgage paid off, you can’t really think of dropping a day at work, or taking unpaid leave, or financially helping people, saying yes to buying the thing immediately etc.

I think paying the mortgage off was the best thing I did for myself. If the above is important to you, I think you will too. If the above doesn’t make you excited, then you probably aren’t someone who would deeply feel those ‘heart’ things (as opposed to a ‘head’ decision) and might be better off going the other way.

Heart v head also depends on your age and financial plans. We’re hoping to retire early- maybe in 5 years or so. While shares are very likely to do better than the interest saved from overpaying your mortgage over 10-20 years, that’s much less certain over 5 years. So we’re paying it off now, which is both sensible financially and a nice feeling. 10 years ago we were prioritising investments over paying off the mortgage, which was the right decision then (and part of the reason we can retire early now).

So I’d suggest making the decision by thinking about your financial circs in the round. It’s also perfectly sensible to take account of your own risk tolerance in all this- if you know you’re someone who will lose sleep over a market drop or be tempted to sell up, it’s not irrational to take that into account.

Not quite the same as I got rid of the mortgage when I got divorced and now live with elderly parent. However, not having that mental burden every month of the mortgage payment and the large debt with the 'what if I lose my job' fear is wonderful. I don't think you realise how much those thoughts sit in your head taking up space until you no longer have them. I am now debt free with savings and that is very liberating mentally.

I see this as a decision that is less about money and more about priorities. The variables will keep changing over time (mortgage rates, savings rates, etc.), but broadly speaking if you invest the value of the mortgage and pay a standard advisor fee of ~1% then your investments will beat mortgage interest rates and you will be financially better off in the long term. You’ll be better off still if you are able to put the investments into your pension: you could then claim tax relief (immediately outstrips interest rates) and, assuming Rachel Reeves doesn’t remove the allowance, use your 25% lump sum to pay down / off your mortgage when you reach retirement age.

I know all this and am still battling with the same decision. For me it comes down to flexibility. The psychological comfort of paying off the mortgage would be amazing but ultimately the money is then locked into the walls, as it were. I couldn’t use it to move overseas / fund a career change / in an emergency etc. so will likely keep it invested even though I keep itching to pay off / down the mortgage.

Are you mad? Pay off your mortgage as fast as you can!!

I think paying off the mortgage is always the best decision. I overpay mine every year and if I suddenly had a lump sum it would definitely go towards paying it off entirely.

It frees you in so many ways to be mortgage free and saving rates are never a guarantee.

We've paid off a mortgage twice on two different houses. Overall I recommend it but with the second we kept the money in savings for a while because the interest rate was higher than the mortgage. As soon as that changed we paid it off.

I think the flexibility point is a really important one and it's not often made. People talk about the security of paying off the mortgage a lot, owning your home and not being able to be kicked out if you can't make the payments etc etc - but I just don't get why having the equivalent sum of money invested or in an ISA earning interest (frequently more than the mortgage interest) doesn't give the same sense of security? If the worst comes to the worst, you use the invested money to pay the mortgage payments? It's not like it's gone anywhere just because it's invested, it's still your money? And an ISA is not at all a risky investment, it's just a savings account, the interest rate is guaranteed. To me it's quite mad that people wouldn't keep at least an emergency fund in an ISA but would be overpaying the mortgage. The beauty for me of having most of my money in investments while maintaining an affordable mortgage, is that I have maximum control over and access to my money, there are plenty of edge-case financial/personal disasters where having ready access to a good amount of money quickly is far more useful than having a paid off house (with all your capital locked away into it)/not having to make a mortgage payments monthly.

The other thing I don't really understand is why these questions are treated as a binary, one-off choice, either you pay off your mortgage immediately or you invest all your money, and never think about it or touch the invested money ever again. Whereas I would say the sensible thing is to regularly re-evaluate, considering all your circumstances at the time as well as current interest rates, tax situation, your income etc? If at one time paying some off the mortgage is sensible do that, if the next year a new ISA makes sense, do that?

No mortgage makes the world of difference when any other financial stress comes along.

Wouldn't change it for the world.

Totally worth it. We paid ours about 10 years early, and have been able to enjoy fantastic holidays and a stress-free life ever since.

This.

All these posters who are like "it's a no brainer" seem to have limited financial education. (Appreciate the original poster seems very clued up and isn't really asking what the financially astute thing to do is - I think with pensions/investments in order there's a good argument for paying off the mortgage).

In 10 years I turned a 160k ISA investment into 750k by investing the money I would have used to overpay my mortgage. My mortgage was only 200k so it made no sense not to invest.

“Likely make more money “

life isn’t about how much money you make

if you can see your future and you have enough pension then whatever is makes you happu

( investing some in pension may be wise because like a roof over your head , money for when you are older seems a good idea )

if you see you have enough then how you choose to spend or invest is your do whatever makes you feel best - pay off the mortgage, go on a trip of a lifetime, invest are all valid options

Paid off ours 8 years ago and i teduced my work hours to 30 hrs a week. Mentally jyst knowkng, I didnt NEED to work full time was a mental game changer. There were some spurious changes going on kn my work place and people were leaving as a result. Jyst knowing I coukd probably walk if it git too bad kept me so stress free whils those around me were stressed to the max.
3 years later at age 50 (covid times)my 23 year marriage ended and I lost my job at the same time. I had to re-locate to more expensive area (think west Wales to Bristol) to find employment in my field.
I scraped just enough divorce settlement to buy a place outright because age age 50 I didn't want to go back to being mortgaged. I doubt if we had still been mortgaged I would have secured my settlement. Its small but its mine. I do realistically need to work full time still to live a decent lifestyle (im still trying to furnish it with what I want, its mostly secondhand atm) but in February I had a serious accident and realised I needed a reset on life. So after being off sick didn't go back to my job. I have taken the summer off living off my meagre savings whilst recovering and deciding my next step. Im 53 and start a totally new job/career early next year. The breathing space no mortgage has given me is priceless imo. If id been mortgaged I would still be doing the grind.

I am going back to the grind full time for a few years but with a view once ive built up some savings and done a few projects on my little house and had a couple of bucket list holidays, I will gradually reduce my hours as I approach retirement.

Im sure financial wizzes will tell you there are smarter ways to make your money work but being mortgage free buys you a level of freedom in day to day life.

Savings interest rates are not very high max, 4.5% ish (is that much higher than your mortgage rate?), you might get more in S&S, theoretically it should be higher but the way things are there is no guarantee and it can take a long time to see real gains 10 years+. I would pay off the mortgage then save what you would have been paying on the mortgage.

https://www.moneysavingexpert.com/savings-hub/?mrasn=1475205.1835630.fBSW2b0M

This is an important point, especially if you are a high rate tax payer.

We've paid our mortgage off but it was very much a considered financial decision, not a heart over head one.

I work in pensions and finance and know that money invested in a pension is the absolute best way to reduce tax and create growth with compound interest.

That said, at 54, if I inherited £100k tomorrow I would definitely pay off my mortgage.

Psychologically this would make me feel free, increase my disposable income (mortgage is £100k £1,200 per month). I could work less hours, take more holidays.

Just a point of interest to some of the " money in the bank Is the same as owing it on your mortgage" statements.
If you had to fall back on the state temporarily or permanently you could keep your paid off house, but your investments / savings..nope. No state assistance until they are largely drained.

OP I think this video is worth a watch:

I find that it’s a balance. If you have money in an investment that’s fairly liquid ie bonds / stocks etc. (rather than pension / property), and it’s earning 8-10% while you have a mortgage of the same amount at a much lower rate, then it’s worth holding out a bit and letting that money work hard for you in investments. Not forever but until the interest on mortgage is closer to the earnings rate. I’d say 2-3% range is close enough as investments might make lesser than predicted in some years.
Until that ‘tipping point’ it’s worth keeping the mortgage if you can explain to yourself that you could close the mortgage anytime you like - you have the money, so it’s more ‘leverage’ than ‘debt’

I’m just starting to make overpayments and would like to have it paid by the time I’m 50. The feeling of security will be priceless as I really worry about being in Ill health as I get older. I’m starting with peri symptoms now and if I can go part time (if I need to) in the throws of menopause, I’ll be grateful!

We always overpaid it but about 10 years ago were in a position to clear it. Our financial guy told us to leave it - that the money would be better in investments - he was right as the interest rate was low enough. I sat with that for about 6 months and then dh and I decided that owning our home was as much an emotional decision as a financial one. We cleared the mortgage and I have never regretted it. I don't think your home is the same as other investment decisions.