This is an updated post. It was originally published in September 2017.
You’ve got to the point where you are asking yourself “Should I pay off my mortgage?”. Maybe the children have left home so your disposable income has increased or perhaps you have received a capital sum from an inheritance or pension fund and you don’t know what to do with it. It may simply be that you are fed up with having it so want to be rid of it.
The first thing to say is getting rid of debt is never a bad thing. I don’t know of anyone who regretted the day they became mortgage-free.
However, the decision may be a bit more nuanced for you than that. With mortgage interest rates so low using disposable income or capital to reduce debt is an opportunity cost: your money could be working harder elsewhere.
This is where your attitude to investment risk and your capacity for loss comes in. You could invest your money in global investment markets via a pension, ISA or investment account and receive a greater return. If you invest for the medium to long term (5 years plus) you should benefit from growth on your investment.
However, as this video explains, investing involves different types of risk. If you would not be comfortable experiencing, or can’t afford to experience, investment losses as and when stock markets fall (which they will at some point) then you are most likely better off reducing or paying off your mortgage debt.
While higher returns are by no means guaranteed history shows that for the patient and disciplined investor investing in stock markets provides greater opportunity for long term returns than any other asset (including bricks and mortar for any property junkies out there). The benefits are even greater if you re-invest the income generated from an investment portfolio. This video provides some tips on how to invest wisely.
Timing also comes into it. If the end of your mortgage term is on the horizon, say within 5 years, and the stock markets fall within that timeframe it is going to be hard to recover any losses so you may find you have less than you started with when your mortgage term ends. You may be able to increase the term as you wait for markets to recover but in this scenario you are probably better to reduce your mortgage.
It may be that you are expecting a future capital expenditure, to complete some home improvements for example. If this is the case maintaining a small mortgage balance or opting for an offset mortgage (you have a savings account linked to the mortgage with the same interest rate so the cost of the mortgage is offset by the savings interest you receive) keeps your options open. If you need access to mortgage finance it will be more readily available than if you had to apply for a mortgage again.
You may also be taking a view on the future direction of interest rates. With rates having been at an all-time high you may be feeling the pinch compared to a few years ago before interest rates rose with the cost of living crisis. Interest rates are expected to fall from the current highs but are unlikely to return to the all-time lows we enjoyed for so long after the Credit Crunch. If you are finding the cost of your mortgage is limiting your lifestyle prioritising reducing it may be preferable to you.
In summary, if you are asking yourself: “should I pay off my mortgage?” it is a very personal decision. You should consider your current financial situation and how you see that changing in the future. But, as I said at the top of this post, nobody I know regretted being mortgage-free.
