Pay off mortgage or invest?

[70smillie]

I have an inheritance. I have spoken to an IFA but was seriously unimpressed. I will speak to another but want to be a bit more clued up first. I know it seems insensitive to talk about what to do with money at the moment but its not the kind of thing I can talk to in real life with so many people struggling.

I am early 50s. We have 10 years & £150,000 left on our mortgage. No repayment charges due. We could pay this off and still have £250,000 left to invest.

My plan is to pay it off and set a direct debit for the mortgage payment into a stocks and shares ISA up to the max. By the time we repaid the capital amount of £150,000 to ourselves (not accounting for growth) we would have saved 2 years in mortgage payments which is roughly £33,000. Plus any growth from the ISA which would accummulate.

Can anyone explain the downsides to paying off early in this way? Does this represent a poor return for the money ?

I have looked at previous threads but a lot of the reasons don't apply ie we don't have a repayment penalty, we would still have a significant sum to invest elsewhere & the money wouldn't be swallowed up in living expenses. Pensions are ok but not amazing.

I appreciate this is a very privileged dilemma to have but it only comes at the expense of losing both parents. I would much rather they were here.

Hi @70smillie, we're just giving this thread a bump in case anyone's around to answer your query.

Hello, sorry you haven't had any replies. It's not that it's a "bad idea" to pay off your mortgage, that's a gross over-simplification, it's more that potentially, depending on your mortgage rate, you can earn more through investments. So for e.g. my mortgage rate is 1.75% fixed, my stocks and shares ISA invested on a medium-conservative management strategy nets about 3% per year on average and I also have an index linked fund currently paying out more (but is taxable) - so my current choice is to keep the mortgage as a cheap form of borrowing and invest y capital elsewhere. But obviously that equation can change depending on your mortgage rate, whether you're on a fixed deal that'd ending soon and may therefore see an increase, also other factors such as your income, tax payer status etc. Also in terms of risk, while traditionally housing is a very safe investment, house prices can theoretically fall and as such I don't want all my capital tied up in my home, I prefer to diversify, plus the house is a very illiquid investment and while many do say they love the secure feeling of having no mortgage to pay on a monthly basis, personally if we have some kind of major health crisis, job loss or something I would rather have the cash more immediately available in the form of a ISA or investment fund. Plus also you may want to give some thought to inheritance planning of your own and whether you might want to give a substantial gift to any DC in the near future (you don't mention if you have DCs and their ages, another relevant factor to discuss with a financial advisor), if so you might want to have more cash immediately available...

Also, you say your pensions are not great, this is definitely something to touch on with your financial advisor as I personally would prioritise maxing out your workplace pension schemes and potentially starting a SIPP of some kind over and above either paying off the mortgage or ISAs or anything else, as it's usually a very tax efficient savings vehicle.

But overall there are no bad answers here (well, potentially spunking your whole inheritance on gambling or champagne and cocaine would probably be a bad idea but it doesn't sounds from your post as though that's really what you're thinking!). So a large amount depends on personal preference and if paying off the mortgage would give you some satisfaction or is what your late parents would like you to do with the money then certainly go ahead ...

What are you doing with the remaining £250k? Presumably you'll be maxing ISAs with this each year, so your mortgage amount would have to go elsewhere.

I'd do it for security, and not knowing where interest rates are going, but I'm very risk adverse.

Think about what you were unimpressed by with the IFA and what you actually want from them. You need a fit.

Why not max out your pensions and use previous years pension allowances if you haven't already done so. You immediately benefit from the tax relief. For your mortgage if you wanted to you could pay it off in just a few years when you can access a tax free lump sum from your pension. I'm no expert but I've been reading a fair bit recently and we've decided to use a recent windfall to live off for the next year while putting the maximum salary sacrifice into pensions.

Pay off mortgage or invest comes up often as a question... there are YouTube videos about it, such as this one

m.youtube.com/watch?v=dzDxHdtUAcE

While interest rates are low, investing may be better but how much risk do you want to take?

I paid off my mortgage before I was 40. When I was made redundant at age 42, age 44, and then again at age 46, I was concerned but not bothered that much as without a mortgage my outgoings are quite low.

Maxing your pension contributions and ISA this year would be great. Doing so again for 2022/23 tax year would be great too.

There is no crystal ball, you cannot predict the future.

What would make the person who you inherited from happy? What would make you happy?

Lots of people will say invest in pensions etc. However, there’s a lovely feeling to know your mortgage is paid off, especially in these uncertain times.

What @maxelly said. It comes down to maths: if the interest rate on your mortgage is lower than the interest you’d make on investing the money elsewhere, invest it elsewhere. In the UK we seem to want to pay off our mortgages, but when you look at the numbers it’ll often make you more money investing elsewhere. @maxelly also mentioned diversifying. You’d never invest, say, £200k in one stock as the risk is too high. That’s essentially what we’re doing with housing: it’s one investment. Granted, it also gives us a roof over our heads but all our money is tied up in one asset. The housing market is unlikely to see the huge returns it has in the past 20-30 years so my advice would be invest it elsewhere and keep a low rate on the mortgage. (Source: worked in an investment company for many years and have an IFA)

I work for an IFA, although my specialism is in a different area.

Can I ask what rate your mortgage is, most investments if managed well are returning far better than the rate of mortgages.

We maxed out our mortgage to invest as rate was 1.75 blended and fixed. Last year return was 25pc on stocks and shares self investing. I would keep the mortgage while rates are low as you can't always get that money back. Share isas, a couple of buy to let's (potentially even in kids names), look at accounts for grandkids if you have any etc for IHT as you need to plan for that too. You can have great fun investing safely yourself if you do your research, but even if you're not comfy doing that, you will find somewhere good to manage the money and make a better return than paying off the mortgage.

You could max out on ISA's and get two btl houses to let out to give you income in old age. You could load some of it into pensions.

You should invest it. It doesn’t have to be stocks and shares - you could buy another property (or couple of properties) and rent them out. A friend got an inheritance of 400k and bought 4 terraced houses in commuting distance from a major northern city and now she earns £3-4k a month in rent after all her maintenance charges etc go out. It’s given her a pension effectively.

Thanks for the advice everyone. Seems there's no totally right answer but I think we're going to fix for next 5 years as that will save a bit each month (currently on a variable) and protect us against rises for the next few years and then reassess.

I think I'm daunted by the amount that needs investing and also should we need to move (obviously will take a portable mortgage) we will be at the mercy of the values at the time. For example if we were about to buy in March 2020, we would have lost out significantly. Even now, values have dived since late last year.

My point about moving is that we may need to liquidate some assets if we do move.