It's a "should I pay off the mortgage" one - new mortgage rate would be 5.6% - leasehold flat rented out

[largeprintagathachristie]

The facts do seem to indicate I should pay off the mortgage but I'm feeling a bit stuck and reluctant. This is the first time in my life I've had significant savings and almost to my surprise, with an ISA maturing and a redundancy payout plus 17 years of paying down the mortgage, there is enough money in hand to pay it off.
I'm 52.

Tiny flat bought on my own in 2006; I slipped in when 100% mortgages were around; after the financial crash it was worth a lot less than the mortgage, which led to much stress
For the last three years the mortgage rate has been 1.98%
I moved out of my flat to live with my partner two years ago
The bank gave me permission to let my flat
My mortgage fix is ending and the new mortgage will be a buy-to-let product
Best rate is 5.6%. Higher than I can get in savings interest rates.
Paying off the mortgage would still leave me with six months of emergency money

Why am I hesitating? It's like I think there will be some kind of catastrophic emergency that means I'll regret not having that bigger amount of savings. Once the money's paid down the mortgage, it's gone. This is an emotional reaction, I realise. I'm so used to only having myself to rely on, have been financially independent since I was 18. No help from family has ever been possible, in fact, I had to help my mother pay off her own mortgage, long story.

My partner isn't good with money, earns very little and although things have been going well relationship-wise and we're now five years in, I'm still cautious. Particularly because we broke up once during that period and then got back together.

Probably the only rational reason to keep hold of my savings is towards a deposit for a new property with my partner. However, there is no firm plan to do so, and it's all a bit pie in the sky. I'd say it's about five years until this might happen, and even then, the only way my partner could come up with a share of the deposit is if he got an inheritance through his elderly parent passing away. Blunt, but true. My partner and I keep finances separate at this stage. I pay him £600 a month and it's not earmarked what that's actually for - towards bills and his mortgage, I suppose.

Next bit of detail is why my flat won't be particularly sellable for a few years.

It's a leasehold flat with a horrendous managing agent. The company (essentially a family) is now so vilified on social media and their reputation is so widespread that the flat is unsellable. Conveyancing solicitors are telling would-be buyers to steer clear of properties "managed" by this company, if things even get to the conveyancing stage.

Leaseholders in the building have recently gone to tribunal and won right-to-manage and we will be instructing a reputable managing agent. But it will take a couple of years to properly untangle and distance ourselves from the gangster company. The gangster company is also the freeholder under another company name, so may still spook potential buyers. Purchasing the freehold may be something me and my fellow leaseholders want to try in a couple of years, but I've no idea of the cost.

Sorry this is long!

Pay the mortgage off.

You are looking at this from one perspective of money in savings
or no savings. Your house is an asset in your savings and investment portfolio. You can remortgage, or sell, your asset if you need a significant sum of cash. Plus it is an asset that is likely, no guarantees, to grow.

Additionally, the income (rent) from the asset that was used to pay the mortgage can be put into other savings and overtime will grow.

Thank you for your response @Americansmoothy

There's no one in real life I can really speak to about this and it's really helpful to see it laid out without (my) emotion in it.

I agree that paying down the mortgage is likely to be a good idea.

However, the only thing I would worry about is whether or not you will be able to find another suitably paid job - you mention being made redundant.

Unless you're very likely to find another sufficiently paid job so your emergency fund won't be wiped out, you could pay down some of the mortgage and keep the rest back, perhaps so you can manage for a year of no/low income.

You'll be able to nearly earn 5.6% in savings so it won't cost much to save the money instead (some accounts pay around 5% and you can get more than this with a regular saver, so you could drip feed the money in) but the slight extra cost in interest could be worth it if you find yourself out of work longer than you'd like.

Of course, if you already have a new job, or get one very soon you can always pay off your mortgage now with little risk to your financial stability.

@BarbaraofSeville thank you. I should have said, I’ve got employment. The redundancy money is from a while back - I was too cautious to spend it.

A few things to think about..
If things didn't work out with your current partner, is the flat somewhere you would like to move back to?
How long is the fix on the new mortgage? What are the fees?
What is the variable rate on the current mortgage when you move off the discounted rate?
If the issues with the management company were resolved, would your inclination be to sell the flat?
How long would it take to pay off the mortgage using rental income?
Do you have a pension? What are your plans on retirement age and income?
Do you have some income protection cover should you become unable to work before retirement?

If you like the flat and are happy to move back there should the need arise, and if you have a pension in place, (along with some income protection/ critical illness cover until you retire); then I would pay off some of the mortgage, but I would aim to leave yourself an emergency cash fund of 12 months if that's feasible.

I would study carefully the new legal requirements in the pipeline for landlords - are you happy you can fulfil these? Some of them are onerous and costly.

If you really want to sell the flat but are held back by the issues you outline, I think I would hold fire and move onto the variable rate of current mortgage. It avoids being tied in and fees, and wait to see if issues are resolved soon. Then put it on the market and see what happens. If it sells, you have the option to buy something else that would suit you better. If you could buy a place in your name, without the assistance of a deposit from your partner I would do that.

Moving to a bigger place together sounds unrealistic at the moment, but if your DP has poor financial skills it might be wise to keep your own property in any event.
You could eventually rent out both properties and use the rental income to rent a bigger property between you. This would give you the opportunity to see how pooling finances in a property would work, albeit a rental one, as a trial run.

If you have no income protection or pension, or little pension in place, I would consider putting some of your money in these areas. A pension would tie up your liquidity for some time but you would receive the 20% uplift in tax relief. Income protection, when you have separate finances, is advisable I would say.

I’m in a similar position with an unsaleable flat, and while all my logic says I should pay down the mortgage to save interest costs, I’m not sure it is as sensible as others are saying.

At the moment, the flat isn’t an asset. It isn’t readily saleable and so once you plough money into the mortgage the only way to get that back out is remortgaging (and in my scenario, cladding means that’s not currently an option).

Therefore, given the difference between what my cash is earning (3%) and the mortgage rate (5.5%) isn’t THAT big, then I’d rather have the cash readily available to me if needed for other purposes.

That said, I don’t have enough cash to fully repay the mortgage and I might feel different if that were the case (not least because I’d feel a bit more free and it would be one less thing to worry about!)

The thing to remember about paying off the mortgage is that your savings will start to build up quickly once you put the money you were paying the mortgage with away each month. Income from letting the flat is therefore yours rather being used to pay the bank!

Can you consider an offset mortgage? I have one with Accord. You can stash your savings there and effectively pay little or no interest but have access to them if your situation changes?