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Original poster

To pay off mortgage or not

32 replies

Raindancer411 · 03/08/2022 19:39

Have an offset mortgage and we are now at a point what's in the savings is also more than what's owed on the mortgage itself. The money in the savings is an inheritance I had marked for my pension as I never had one...

What would you do? Pay off the mortgage and save what we were paying a month on the mortgage? Or keep the lump and pay a monthly mortgage.

I like the security of knowing I have a large lump in events of hubby out of work or issues we need to fix with the house, is if not, that I can use this towards an inheritance.

Also we have life insurance that if anything happens to either of us the mortgage is paid off (and I take it any savings would remain extras).

We have an early repayment charge on the mortgage until 2024.

Advice please...

OP posts:
DevilsVineBlues · 03/08/2022 19:43

You need to work out what the mortgage will cost you to keep (i.e. the interest you will pay over the remainder of its term), offset by the interest the savings can make you over the same term.

Then compare that to the cost to pay the mortgage early, plus the lost interest of using yohr savings, offset by the interest your new svings will earn over the same time period.

Compare the two and see which is financially cheaper.

Then weigh it up against the emotional toll of both of those options (e.g. the comfort of no longer having a mortgage vs the comfort of having a lump sum).

NoSquirrels · 03/08/2022 21:31

If you have an early repayment charge then you’re likely on a fixed rate? Interest rates are rising so you’re likely to earn more in a decent savings account than the interest on your mortgage. If you’re offsetting at the moment you’re effectively paying 0% on the mortgage debt but making 0% on the savings. Depends on the terms of your mortgage so do the sums but you might be much better off diverting some or all of your savings elsewhere.

I wouldn’t pay down your mortgage until 2024 when the ERC runs out.

Chickadeeandchic · 03/08/2022 21:41

How long til you plan to retire? Would you realistically save the money if you paid off the mortgage now, or are you likely to want to spend it?

The mse mortgage page is useful for working out the cost of your interest over the remaining period etc.

SwimmingOnEggshells · 03/08/2022 21:51

Invest your savings, or at least a chunk. Managed/mutual funds should give 6% interest (disclaimer: value of your investment may go up or down etc)

Original poster
Raindancer411 · 03/08/2022 23:13

Thanks all. We signed up to a 5 year fixed jan 2020 at 1.9%.

I am early 40s and a stay at home parent for at least the next 2 years (hoping to get a part time job once youngest in Year R). Saving it back would be hard work and I probably won't get to retire until normal retirement age (67 I think for me)

OP posts:
DevilsVineBlues · 04/08/2022 06:38

That's a low rate. I bet if you did the comparison you would get more from that money by saving it until 2025 at least. Then see what the interest rates are doing and decide then.

ItsSnowJokes · 04/08/2022 08:13

Some savings accounts are offering 3% interest at the moment. Would make more sense to put it in a high rate savings account.

Luckydip1 · 04/08/2022 08:16

A five year fixed mortgage is now around 3.5% interest.

Original poster
Raindancer411 · 04/08/2022 16:00

I am just looking to open up 1 year fixed rate with the same company we have the mortgage with and their best is 2.7%. It would however be fixed in for a year and would need to work out how much our mortgage payments would go up without the offset.

OP posts:
Original poster
Raindancer411 · 04/08/2022 16:03

Sorry pressed send early...

But they only allows up to 20k. Next best is another fixed rate for a year at 2.35% up to 250k.

OP posts:
Ana86 · 04/08/2022 16:05

I don't understand why you'd want to pay it off. Is the money in the savings account that offsets the mortgage? If it is fully offset then presumably you are paying no interest but have access to a very large lump sum at a low rate should you need it. What happens at the end of the term? Presumably it remains an offset mortgage but on the standard variable rate - is that right? Of course it doesn't really matter what the rate is if it is fully offset.

Unless I have misunderstood I can't understand why you would want to pay the mortgage off in this situation.

Donotgogentle · 04/08/2022 16:11

We’re in a similar boat - mortgage interest rate is 1.89% and we’re fixed until December 2024.

Given the way interest rates are heading we’ll probably aim to pay it off at the end of the fixed term, but we could probably get a better return than 1.89% by investing it.

Although inflation is eroding the value of the offset savings it’s also eroding the value of the mortgage debt so I’m trying not to worry too much about inflation.

Personally I would keep your options open for when it’s time to remortgage - god knows what interest rates will be like then.

Donotgogentle · 04/08/2022 16:14

Ana86 · 04/08/2022 16:05

I don't understand why you'd want to pay it off. Is the money in the savings account that offsets the mortgage? If it is fully offset then presumably you are paying no interest but have access to a very large lump sum at a low rate should you need it. What happens at the end of the term? Presumably it remains an offset mortgage but on the standard variable rate - is that right? Of course it doesn't really matter what the rate is if it is fully offset.

Unless I have misunderstood I can't understand why you would want to pay the mortgage off in this situation.

The argument for paying it off is that repayment may become unaffordable if the SVR is very high by the end of the fix.

Ana86 · 04/08/2022 16:17

Donotgogentle · 04/08/2022 16:14

The argument for paying it off is that repayment may become unaffordable if the SVR is very high by the end of the fix.

Show quote history

If it is fully offset then it doesn't matter what the interest rate is. She won't be paying any.

Original poster
Raindancer411 · 04/08/2022 16:19

@Ana86 Thanks for the reply. I want to keep the lump but the DH has said about paying off the mortgage and saving what we pay on the mortgage each month to recoup the lump sum.

The lump sum is fully offsetting the interest on the mortgage currently and we are removing some slowly at a time to put in higher interest accounts as the two accounts draw level.

I was asking others for their thoughts too, so your view is appreciated.

OP posts:
Zeus44 · 04/08/2022 16:20

Luckydip1 · 04/08/2022 08:16

A five year fixed mortgage is now around 3.5% interest.

Such nonsense when people write this. It all depends on LTV and term.

l

PastMyBestBeforeDate · 04/08/2022 16:21

We're in a similar position except we aren't on a fixed rate. We decided to not pay it off. We keep the money and access to it, we don't pay any interest and we keep the life insurance. That's useful as since taking it out I have become a much less insurable person.

Donotgogentle · 04/08/2022 16:22

i don’t think it works like that. On our product at least the monthly repayment amount is based on the mortgage interest rate over a 25 year term. The offset savings reduce the term of the mortgage but doesn’t actually offset the monthly interest payments.

So if we were at (say) 5% at the end of the fix our monthly repayments would really increase.

Ana86 · 04/08/2022 16:22

Just to be clear, atm you are just paying the capital sum each month for the mortgage?

Do you have any pension provision or other savings?

PastMyBestBeforeDate · 04/08/2022 16:26

DoNot some products allow you to pick whether to reduce the term or the payment. We chose payment.

Original poster
Raindancer411 · 04/08/2022 16:27

Donotgogentle · 04/08/2022 16:22

i don’t think it works like that. On our product at least the monthly repayment amount is based on the mortgage interest rate over a 25 year term. The offset savings reduce the term of the mortgage but doesn’t actually offset the monthly interest payments.

So if we were at (say) 5% at the end of the fix our monthly repayments would really increase.

You could choose with our mortgage, either to reduce the amount you pay monthly or to shorten the mortgage term. We chose the smaller payments than to shorten the term.

OP posts:
Donotgogentle · 04/08/2022 16:27

Interesting - I didn’t know that was an option.

Original poster
Raindancer411 · 04/08/2022 16:29

Ana86 · 04/08/2022 16:22

Just to be clear, atm you are just paying the capital sum each month for the mortgage?

Do you have any pension provision or other savings?

Yes just paying off the capital at the moment.

I don't have a pension and only just opened a SIPP this year. This was my pension pot, or planned to be.

OP posts:
PiffleWiffleWoozle · 04/08/2022 16:30

OP Please look up the meaningful money podcasts by Pete Matthews, or buy his book or The Simple Path to Wealth or similar. This will help you work out what you would like to have I. Retirement and how to close the gap.

in your situation I would:


  • save a lump sum of 6-12 months expenses in a cash account for emergencies

  • max out pension this tax year and ISA allowance and invest for the longer term

  • either overpay mortgage at the end of the fix or invest more in pensions/ISA next tax year, or a mixture of both depending on goals


I would also check my state pension entitlement and ensure claiming tax credit etc

SpiderinaWingMirror · 04/08/2022 16:37

I wouldn't. I know that I would never save that lump sum again.
Dh inherited £80k. We did not use it to pay off the mortgage as we already had a plan for that, and it was in sight (4 years)
The peace of mind thar lump sum has given us over the last 5 years is beyond financial.