Is paying off as much of your mortgage as possible best here?

[Chahat]

I am due to renew my mortgage at the end of the year. I am overpaying 600 a month. I have saved 150k to put towards it when it comes to renew. This will leave a balance of 120k, so will
vastly reduce the repayments and could probably clear it quickly after that. The overall market value of the house is estimated 550k.

I am a single parent and have nobody to talk about this with. I feel so much weight with these decisions and simply dont know if it’s best. Sometimes I read paying off mortgage early is silly as it’s low interest. I am late 30s and feel like I am approaching middle age totally alone in every sense. What is best? I looked at a financial advisor but they are so expensive.

As long as you have a decent buffer of emergency savings for anything that may crop up then that seems very sensible.

I don't think we have enough info to say. I'm not advisor so don't want to give advice, but do you have dependants, do you have a good pension, do you have a rainy day fund? These are all questions that you need to answer for yourself.

Also have a think about what you want to do in the future. 5, 10, 20 and 35 years for example.

This. I'm a single mum too, and I've been paying off chunks, while making sure I had 6 months money tucked away.
I was made redundant during covid and it took 7 months to find a new role. Extreme circumstances but that's the worst I've hit.

What is the interest rate on the mortgage and what interest could you get on your savings elsewhere?

Are ISAs maxed out? I am getting as much in my ISAs as the mortgage rate is yet I have the flexibility of having a big chunk of cash if I need it.
Once you pay it off it's not so easy to get it back out again for whatever reason and I got stuck with this problem previously. If you do pay some off make sure you keep a big chunk back for every eventuality you could possibly think of

What's your mortgage interest rate and what is the highest rate of interest you could get in a savings account?

The finance person I listen to always says that she wants your money acessible for an emergecy or big expense. So, you could think about paying some down, but leave yourself with a good amount of liquid money as well.

An emergency fund shouldn't be invested in the stock market as it's volitile, but a high interest savings account, GIC or similar would be fine. If you have extra beyond that, you can invest long term in the stock market to get the higher interest rate returns.

I think this all depends on your objectives. If you want security (and who could blame you there) the clearing the mortgage is the obvious choice. Is it likely to be the most financially sound route? No. If you are looking to maximise your wealth, then as much of your savings as possible are best off being diverted to a stocks and shares ISA or potentially a SIPP. The returns are likely to be around 8% a year, whereas your mortgage is likely around 4%. As a personal example, I would have saved £1660 over 3 years by overpaying my mortgage. Instead I have used what I would have overpaid to buy funds in an S&S ISA, these funds are now up by 27.5k, for me it's a no-brainer, but your situation and tolerance for risk may be very different. I sometimes use Chatgpt (the free version) to check my logic when it comes to investing/overpaying/pensions and get some good advice (though it's not flawless) and so it might be worth giving that a go.

Good luck :)

P.S congrats on saving such a huge amount, that's amazing on one income!

I’d save six months wages and pay the rest off. Well done!!

You need to think about the "opportunity cost" of the money - what could you do with it if you didn't put it into the mortgage? Would you get a better return on it?

ChatGPT is actually good with this. If you have the information about your outgoings and interest rates and planned lifestyle changes or retirement age and plug it in it will run different scenarios for you.

Try asking it options for splitting the money and diversifying as well.

Sorry I should say I have had financial help
to have these savings, not all was saved purely by me, only around half of that.

those mentioning the interest rate of the mortgage. I don’t get that because surely you have to consider the interest overall on the full amount? It can’t be just based on the interest rate you’d get elsewhere? This is what confuses me

Hi OP,

First of all - well done, you are doing a cracking job.

Here’s what I’d do in your shoes, based on what you’ve said:

See an independent financial planner to put all of your specific facts and figures into a big piece of modelling software that will allow you to see how your finances will play out. She/ can review your pension arrangements, life insurance and any other protection you may have, eg income protection/ health insurance. But, generally, my advice would be:

1. clear any debt including car finance
2. put £5k in a ‘high interest’ savings account for ‘rainy days’ eg you have a leek and need to pay for scaffolding, roof repairs and redecoration inside - the same month that washing machine dies and needs to be replaced.
3. set aside 6 months of living expenses (eg your net income less what you save pcm). Put this in Premium Bonds so it’s set aside and tax-free. You can forget about it and let the ‘wins’ just accumulate. This is to float a period of time to find and start a new job if you get made redundant
4. Pay down your mortgage with whatever you’ve got left
5. Continue to over-pay your mortgage to whatever you’re allowed to, without paying penalties, and get rid of it as soon as you can.

At this point all of your income is your own and you can switch from paying down your mortgage to saving for whatever your priorities are eg early retirement. Maxing out your ISA allowance every year with a stocks and shares isa - globally diversified index funds - on a low cost platform.

@Chahat it's still an impressive amount saved :).

I'll try to give an example. If you overpay your mortgage by £10'000 and it's at 4% you are saving £400 every year. The saving is only on the amount overpaid. If you invest £10'000 at 8%, you will gain £800 every year. That's a very simplistic explanation that doesn't take tax into consideration, but yes the % you're paying on your mortgage rate does matter.

Chat GPT told me this yesterday:

Mortgage rateRational default
1–2% Never pay off early
3–4% Depends on risk tolerance
5–6% Lean toward payoff
7%+ Payoff almost always wins

Hope this helps.

I don't understand what you don't understand about the interest rates, could you explain it in a different way?
I would think that both interest rates are relevant because one shows you how much you lose by continuing to borrow the money and the other shows you how much you could gain by parking your money elsewhere.

as you are remortgaging the new interest rate is unlikely to be less than the best savings accounts it will be less than the average stock market return but that is not without risk. A mortgage is normally the cheapest form of debt but unlike other debt it is secured against your house.
Assuming you have no other debt at all; remortgaging for the lowest amount possible without leaving yourself short is wise
make sure you have at least 6 months living expenses saved. If you know there is a big expense coming up soon add that amount to the emergency fund ie you will need a new car/ central heating boiler in the next 2 years or you know you need roof work done.
make sure you can float a minor emergency like needing a new washing machine or car break down
Make sure your national insurance contributions are uptodate you can buy missing years
do not pay mortgage off at expense of a decent pension
as you are a single parent you need term life insurance until end of mortgage or the age at which they are capable of being financially independent. Life insurance is not the best way to provvide an inheirtance it is to cover living costs for anyone who would be financially dependent on you if you died so they it can pay off mortgage and pay for your childrens care
if 150K is the sum total of every bit of savings you have you really should only use approx 130-135 towards house and keep 15-20k back as emergency fund

What pension arrangements do you have? I would think about paying off some of the mortgage and then using the difference between old and new mortgage payments to boost pension.
Honestly, pay an advisor to work through it with you. I have been with one since mid 90's and I know I am better off for having him as gradually I have built up funds in various sectors/areas to balance risk and reward and returns far outweigh savings account interest over the longer term.

https://ukpersonal.finance/flowchart/

Previously recommended on here. A bit will depend on your attitude to risk.

You don't have to consider the whole interest because your question is about the best use of your £150k (or each monthly £600).

You still pay interest at the mortgage rate on whatever you owe and then if you overpay, the amount of interest goes down but you have to also consider the amount of interest that money could have earned on savings. It's a simple comparison in rate (don't forget to allow for tax if you pay tax on the interest, if outside an ISA/above your personal savings allowance).

But for once, ChatGPT has come up with something fairly sensible, if quite cautious, posted by @Fletchasketch

Mortgage rateRational default
1–2% Never pay off early
3–4% Depends on risk tolerance
5–6% Lean toward payoff
7%+ Payoff almost always wins

Therefore, I hope the mortgage you've been overpaying isn't one of the ultra low interest rate ones from 2021. That's like winning the lottery and burning the ticket.

Of course, there is quite a good argument for stretching out your mortgage as long as possible because even at current interest rates of around 4%, it's cheap money that's likely to be outperformed by investments over time, especially if you're putting the money into a pension, because you benefit from tax relief.

you have to be honest about your own financial type
if you are risk adverse and do not want any investment that can lose value and you value financial certainity over larger potential growt then paying off the mortgage may be best
if you are happy with some risk then you can probably earn more interest or growth elsewhere rather than increasing mortgage repayment
would having no debt anywhere at all and a paid off house give you more joy than a larger savings balance knowing you can save anything spare as you no longer have any debt
you can do questions to determine how you deep down feel about risk

with you low LTV rate( less than 25%) you can probably get new 5 year fix at 4% or just under if you just put the money you would have overpaid in a high interest savings account you will just break, however invested you could probably make 8% last year the stock market wne tup over 20% but the long tern average over decades is 8%, then the £600 would be better in stocks and shares.
So there is a opportunity cost ie you could potentialy do better with the £600
there is also a risk cost the £600 might lose in value short term, you could find your income cut and still have a mortgage and your £600 is underperforming the time you need it so you have to weigh this up for yourself

Lets start by imagining a disaster - you lose your job and have to go on benefits. Support for mortgage interest is only up to 200,000 and it's in the form of a loan that you have to pay back. So paying off at least 70 k gives you more protection against disasters. Benefit rates are low, having 6 months earnings available would give you leeway to find another job and/or to downsize.

You could, of course, invest on the stock market and potentially make more than the interest you pay on the mortgage and then pay more off sooner -but that's a strictly financial argument and doesnt compare with the emotional impact of feeling more secure in your home.

I've never suggest using premium bonds for cash. The return is low, if you want to gamble go for the stock market. You can invest in gilts (government securities) if you want to forget tax implications and be able to get at money readily if needed.

It does depend on your attitude to risk but I'm risk averse and I'd pay off at least 70k and probably 100k.

My mortgage rate for example, is 2.4%. If i could get 6% rate in a savings account, its better "value" to save rather than pay off the mortgage.

This doesn't account for the mental peace of having no/smaller mortgage, which is worth quite a bit on its own, but purely financially, I am better off saving. So depends what mortgage product you have, and what you can get when you remortgage. If rates have gone up, it can be that you pay a chunk off then, rather than monthly

You aren't wrong. A 25year mortgage at 3% will pay way more interest than a 20year loan on the same amount of money at 7%

Will you still have some "shit hits the fan" savings, ideally 6 months of your essential spends?

Vastly reducing your mortgage will also increase the amount you have to save and live per month which is a bonus.

Id reduce down my mortgage in your circumstances.

At the moment if the money is in an instant access account it has maximum liquidity - you can invest it or spend it or do what you like with it.

Once it goes into the house, its all tied up unless you do equity release or sell.

I'd probably consider splitting it in some way. Maybe most of it towards the mortgage. But not all.

1. Do you want to live in the same house indefinitely, is it your forever home or will you downsize?

1. What are your childrens needs, will you need money for uni or any additional support costs related to them?

1. Are you in your forever career? Are you in your forever location? Are you thinking about FIRE? If you lose your job or become unwell whats the plan? Will you always be living in a higher cost of living area? Will there be salary/career progression?

I'd also consider using a small percentage to invest in myself in terms of mental/physical health.

Think about small ways to make my quality of life (day to day) better if I wasn't already optimising this.

Not holidays and random tat and expensive gyms, but allocate some money and time to things like eating better/supplements or regular exercise if you don't already do this. Or (sorry for cheesy phrase) making memories with children.

It gets harder in your 40s to bounce back physically and if you have a good baseline its a lot easier.

Seen a few people prioritise powering through their mortgage which is great

but also be burnt out physically and mentally and then they can't enjoy their earlier financial freedom.

Have a look at offset mortgages. Usually not the best rates but keeps access to the cash whilst reducing interest on the mortgage amount.