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Last updated: 22 Dec 2022
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Mortgage headache - weighing up your options

With increases in interest rates and rising inflation, we're often asked about planning opportunities around mortgages. In this insight, we outline some considerations for approaching repayment options in the context of your wider financial situation.

There are thousands of people every month coming to the end of their fixed-rate mortgage deals whose costs will increase dramatically. If you're one of these people, you might be wondering how much you should devote to paying off your mortgage and what planning options you could consider. 

When discussing finances, we must be aware that decisions relating to money are not purely black and white and we need to consider many factors, including people's emotions. Paying off your mortgage is a significant milestone and many want to achieve it as quickly as possible. However, making monthly over-payments or one-off lump sums, particularly at the expense of other savings may have unexpected consequences in the future.

About the author

Rachel O'Donoghue

+44 (0)20 7556 1256
odonoghuer@buzzacott.co.uk
LinkedIn

There are thousands of people every month coming to the end of their fixed-rate mortgage deals whose costs will increase dramatically. If you're one of these people, you might be wondering how much you should devote to paying off your mortgage and what planning options you could consider. 

When discussing finances, we must be aware that decisions relating to money are not purely black and white and we need to consider many factors, including people's emotions. Paying off your mortgage is a significant milestone and many want to achieve it as quickly as possible. However, making monthly over-payments or one-off lump sums, particularly at the expense of other savings may have unexpected consequences in the future.

What factors might impact your decisions?

What factors might impact your decisions? 

Interest rate: Clearly, the interest rate you're being offered, or moved to, is a big factor in your decision. In simple terms, if you think you can get superior returns from a long-term investment portfolio, you may be better off to not pay off the debt at an earlier stage, and vice versa. 

Cash reserves: For many people, if you keep large amounts in cash (separate from your emergency fund) and don't wish to invest it, you're unlikely to be receiving more interest than your mortgage rate, so would be better off repaying part of the mortgage.

Mortgage options: When you look at paying lump sums off your mortgage when receiving bonuses or inheritances; If you have the income to service the interest, the compound returns you might receive from investing lump sums for the long-term, can be compelling. This does of course depend on the rate offered and your specific circumstances.

Diversification: There's also the risk of having a large proportion of your wealth in property. You may have worked extremely hard to pay off your mortgage early and own your home outright. Unless you have other assets that can generate income, you may be forced to either downsize, or continue working at a time you were hoping to slow down and without enough time to benefit from long-term compounded returns.

Understanding the options

Understanding the options

Consider this example scenario. You have a £500,000 mortgage, at 5% interest and 20 years remaining on the term. You receive a net bonus payment of £50,000, long term net investment returns in this scenario are the same as the current interest rate, so 5%.

Option 1: Pay the £50,000 off the mortgage. The monthly mortgage payment will be £2,970, so over the term of the mortgage, you'll have paid a total of £712,752.

Option 2: You pay the £50,000 into an investment account and use your ISA allowances for the next 2.5 years, your net return is 5% p.a. You have monthly mortgage payments of £3,300, so your total payments are £791,947, £79,195 more than option 1. However, your original investment has grown to £132,664.89, so you are left with an additional £53,469.89.

You should carefully consider your options whenever making decisions on your mortgage. There are many factors which determine the best outcome for you, such as job security, level of equity in the property, level of income, and other assets, among other things. It is also difficult to predict in advance how mortgage rates may move and there are of course no guarantees of investment returns. We would always encourage utilising modelling tools to clarify your objectives and decide what your best course of action is, as well as seeking independent advice.

Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.

Albert Einstein

Speak to an expert
Speak to an expert

To speak to one of our specialists, please contact Doug Rodman in our Financial Planning team. Alternatively, fill out the form below and we'll be in touch shortly.

Disclaimer: This insight has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from. 

Please note that past performance isn't a reliable indicator of future results and investment returns are not guaranteed.

 

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