I’ve met a number of clients recently who have a mortgage and want to know if it is a good idea to pay off the mortgage with their savings. This is a difficult question to answer and a few things have to be considered - how you feel about debt, What savings would you have left when the mortgage is paid off and what is your long term plan (ie can you afford the mortgage long term, do you have maturing pensions or lump sums in the future.)
Obviously, no-one can advise you on the best course of action to take as this is a very personal decision and what you decide will very much depend on how you feel about debt. Many people hate debt and have struggled through their lives to get rid of their mortgage and so do not want to be “lumbered” with one in retirement. Other people are happy with a mortgage and feel that any savings that they have would be better invested to pay them an income rather than disappearing to pay off their existing mortgage.
I met a client last week who has a 50,000 euro repayment mortgage and is paying around €470 a month. They are comfortable with the payment and have around 10 years left to run on the mortgage. They have 80k Euros in savings and wondered if it would be best to pay off the mortgage. I told them that this is a decision that only they can make, but my feelings were that if they can comfortably afford the repayments then why not continue them rather than reducing their savings by 50k. Paying off the mortgage would save them €470 a month however, they may find that because they have this free money then it gets swallowed up in the home monthly budget, (ie they just spend more a month) and they won’t actually feel better off. However, when they look at their bank balance they would certainly notice the 50k missing from the account! I felt that if they could afford the mortgage then carry on paying it and invest the 50k for growth.
So this is fine if you have a repayment mortgage. If you are comfortable with the payment, then carry on paying it and invest your money for the future. At the end of the mortgage term you will have no mortgage and a ton of money in your bank account (assuming that you have invested wisely!). It is a different issue if you have an interest only mortgage. If you borrow 50k over 10 years, then after 10 years you will have paid the interest for borrowing this money from the bank and you will still owe 50k. With this type of mortgage there will always be a day when the money has to be paid back to the bank. Most people take an interest only mortgage if they have a lump sum maturity in the future to pay it off.
One client I met has a 60k interest only mortgage and 75k in savings and they are struggling to make the repayments. They don’t have any other method of paying this lump sum back when the mortgage ends other than their savings. They don’t also don’t want to pay off their mortgage now and leave them with little in their bank for emergencies. The problem with this situation is that the interest rates are low for savers, so their 75k isn’t exactly growing at the rate of knots. Our advice was to reduce their mortgage but not necessarily pay it off. This way they can have the best of both worlds. If they pay 35k off their mortgage they should more than half their payments, which should ease their finances immediately. With the 40k savings they could keep 20k in their savings account for emergencies and this would leave them with 20k to invest for growth or income. If they invested 20k for 10 years and it makes 6%-8% per annum it should pay off the 25k mortgage and also leave them with a nice lump - at 6% per annum compounded this would return 35,816 in 10 years (if it grew at 8% - the return would be 43,178). Also, they could take an income from their investment which would help their finances even further.
As I stated this is a personal choice and it is best to seek professional financial advice, you can contact me, Daniel McGonigle, at:
T:+351 289 314 530
F:+351 289 314 520
E: daniel@affinityglobalwealth.com
W: www.affinityglobalwealth.com
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