Pay off Mortgage?

[Mortgagewonder]

I am just wondering if paying off our mortgage very early is the right thing to do? Due to a windfall from insurance my wife and I have the capacity to pay off our mortgage now. We are both mid 30s with two kids and no immediate plans to move house. Household income is approx 65k and remaining mortgage is about 170k. The money is in a high interest account just now as our financial advisor warned us against paying off our mortgage. We are noticing the tax burden of the interest as we are both currently PAYE and not used to dealing with HMRC.
We did set some money aside to pay down the mortgage until our fixed rate ends and we aren’t squandering the money either. I have massively upped my pension contributions and we have stocks and shares ISAs but we are living more comfortably than ever before.

If your interest rate is 1.47% (or whatever it was) and there’s a 0.5% penalty to pay it off, you’d be mad to pay it off.

i don’t know what interest rate you are earning or what tax you pay on it. But, for arguments sake if you are earning 4% and paying 50% tax, it’s still worth 2% rather than the 1.47% on your mortgage. So you would be losing more money by paying off the mortgage than you are on tax. and that’s not even factoring in the 0.5% penalty. Let that sink in. Do the sums on it.

when the fixed interest rate ends, then it might be worth paying off, but not now.

Put 50k (each) into premium bonds. Can you not pay of 10% of the mortgage per year without penalty? If do do that and pay off the rest when the term is up. The lowest interest rate at that point is likely to be much higher than the one you’re on. Yes in short term it’s annoying to pay tax interest…but maxing ISA and premium bonds you don’t have too much to worry about (think of it as only getting half the interest).

Overpay to the limit without having to pay ERC. 50k each in premium bonds. As others have said there is a calculation you can do to work out which is better money, tax on interest versus ERC's.

Thanks yes that does align with our thinking just now!

Put it in cash ISAs, premium bonds and the best instant access accounts available.

With ISAs, the personal savings account and premium bond prizes being tax free, that's about £180k that earns a return without being taxed and so what I you pay some tax on your interest. It's still earning a lot more than your mortgage is costing you.

Withdraw the amount of money equal to your mortgage payment from the instant access account each month if you want your monthly budget to feel like you're not making mortgage payments.

If tax is your main concern, £100,000 in premium bonds (£50,000 each) £40,000 in cash ISAs (£20,000 each). All interest / bond payouts tax free.

That leaves £20,000 since you say it’s £160,000 in total.

If one of you is a basic rate tax payer and gets £1000 interest before tax, that’s £1500 interest before tax. If both are, that’s £2000 before tax. £20,000 at 7% (unlikely to get this much) interest is £1400 so within the tax free band.

You can then decide whether to pay off your mortgage in 2027 when the interest rate goes up depending on whether it’s better financially to keep your money in savings (based on the interest rate).