In the old days if you wanted a mortgage you went to the local building society, had an appointment with a branch manager who would interview you, look at your paperwork and your account conduct and make an individual decision on whether or not you could have a loan for the dream home you’d seen.
Your mortgage would be over 25 years and odds are you’d stay with the same building society until you’d repaid the whole amount at which point the manager would proudly hand you back the deeds to your home that they had retained for safekeeping.
It was often seen as a massive accomplishment to have paid off your mortgage early. To make extra payments to their mortgage account and become mortgage-free gave people financial peace of mind and often the ability to brag to their friends and family about how lucky they were.
Mortgages have changed.
- You can now get a mortgage over terms of up to 40 years, and some lenders will let you keep it until your chosen retirement age – even if this is 75 years old!
- People typically ask their Financial Adviser to help them move to another lender once their competitive rate ends – as the best deals are often elsewhere
- Lenders choose how much to lend based on their own criteria, which varies wildly!
For many people repaying your mortgage early is not the best option for a good quality of life and a successful financial future – and I’m going to explain to you 5 reasons why it is literally THE LAST THING YOU SHOULD DO.
Reason 1. Not all debt is bad.
Mortgage rates are typically below 2.5% which means that this is the cheapest loan you are ever going to get – especially if you’ve locked in for 2-5 years.
Personal loans and car finance are often around 5-9% – so repay these first, or if you know that you are going to need a new/different car in a couple of years save the money in a savings account so that you have a bigger deposit (and can get a smaller car loan) or pay for the car with cash. Credit cards are often at rates of 9-18%, some are higher if you have bad credit or if it is a Store Card/ catalogue account so divert any spare money into paying these off as soon as you can and you can save thousands in interest.
Reason 2. You may face a penalty.
If you have a fixed rate mortgage it is likely that there is a penalty for repaying the mortgage early. Most lenders let you repay up to a set amount per year with no penalty (often 10% of what you currently owe them – so if you over £150k you could overpay by £15k a year) but some don’t so check the annual statement from your provider, or call them to check first!
Reason 3. You don’t have your financial safety net in place.
If your washing machine blew up tomorrow and you needed to find £400 for a replacement do you have that money without putting it on a credit card?
If you went off sick for 6 months following a serious illness or accident do you have enough money in savings or a suitable insurance policy in place to pay your mortgage and bills?
Building up an emergency fund is essential in any kind of financial planning. If you are fortunate and work for someone like the NHS or a local authority that will pay your full salary for 6 months, followed by 6 months at half pay you might just about be ok if you went off sick long term. But what about everyone else?
Statutory Sick Pay (if you’re employed) is £94.25 a week for 28 weeks – can you pay your mortgage and bills on £377 a month?
If you’re self-employed you get nothing. It is your responsibility to look after yourself if you’re too ill to work or have an accident. You need to decide whether you’re going to take out some insurance, and/ or save some money to fall back on.
Build up your emergency fund before you look to overpay on your mortgage.
Reason 4. You have not sorted your retirement planning.
When you’re in your 20s, retirement seems like ages away, in your 30s often you have other financial priorities (buying a new house, having kids) and by the time you get to your 40s you may be starting to wonder how you’ll ever be able to retire, or even work less hard.
Pensions are an important part of retirement planning, but not the be all and end all. If you already have a portfolio of Buy-to-Let properties that will provide retirement income, have already spoken to your Financial Adviser to set up your directors pension scheme (not the NEST workplace pension you did for your staff!) or have another credible retirement strategy then you can skip this bit – but if not consider the following.
Pension investments over the last 10-20 year period have typically grown at rates of 6-10% per year which is a much better rate than the 2% per year you’re paying on your mortgage – and the earlier you start to invest the longer your money has to grow. It’s time in the market, not timing the market that is key.
Ask your Financial Adviser to run a forecast to see how much you need to put away each month to meet your retirement goals – if you still have spare money over, then yes repay your mortgage!
Reason 5. What’s your quality of life like?
It’s all well and good having a dream and creating a plan to get there, but you need to enjoy the journey. No-one knows how long they have in this world, and there is no point scrimping and saving every penny to repay your mortgage early if you have no money left each month to do fun stuff and can’t afford a family holiday.
A night out, a take-away curry or a weekend away – the things that help you build memories and one of the reasons that you probably became a business owner.
How about you open another account for ‘fun stuff’ and transfer a percentage of your money in at payday?
This means that you will always have money for a holiday, or a meal out, and can spend the money on treating yourself without having to feel guilty over spending it, or worrying that your bills won’t get paid on time. It means that even in a month where you’ve not earned very much, you still have money set aside to enhance your quality of life.
You could also open accounts for other things that are important to you. Personal development, charitable giving or even to just build up an emergency fund – with most banks you can set up additional accounts online in a matter of minutes.
The key thing is that if it is important you need to prioritise saving for it, not hope that there will be money left at the end of the month for it.
And finally…
If you have no consumer debt, an emergency fund and money each month for a great quality of life then YES do divert extra money towards your mortgage and get it repaid. If you need help getting your plan in place, pop over to the Peace Together Money Confidence Group and get some more great tips – see you there!