I don’t normally do posts like this, but I am in a bit of a quandary so I thought I would ask my lovely readers what you would do in the same situation.
As part of our long term plans, including financial freedom and early retirement, we are aiming to be mortgage free at the same time. Part of the reason why we are counting on being able to keep our monthly outgoings so low is by not having any mortgage payment.
At the moment, each month I aim to overpay our mortgage by £85, give or take. Now, this is a lot less than it used to be and doesn’t cover the interest applied every month. This helps to keep our mortgage going in the right direction (lower!) and it also feels like we’re making baby steps in every area of our early retirement plan. Our mortgage is five figures, so not particularly huge. The interest added each month is around £184, which is much less than when it first started. But, over the year that adds up to over £2,200!
And, I’ll be honest, Brexit is making me slightly anxious. There are a lot of things in the news which make it sound like after March 2019, when we leave the EU, life and finances for a lot of people could be tough for a while. Obviously, no one can actually predict what happens until that point, because no one actually knows!
I’m also feeling it in my investments a bit – they seem very volatile at the moment. I know that the market has ups and downs, and we’re due a correction at some point, but they have been swinging a fair bit lately. Now, I know this doesn’t matter until I sell them, on paper, but it’s a bit scary checking in at times. I’m a dividend income investor and, as of yet, my income remains unaffected by the market swings. But, do I continue with my plan or not?
I am toying between three options, especially in the short term. These are:
A) Continue as we are. Put most of our money in savings and overpay by about £85. Grow the dividend income (hopefully) in the same way we have been. We’re on track to receive £800 in year 3 so continue with this path.
B) Do a bit of each. Put slightly less into savings and overpay more on the mortgage. So, our aim this month is to save £700 and overpay £85. Option B would mean saving £400 and overpaying by £385, ish. So we are doing things to help us, just as a slightly slower path.
C) Only put a small amount in savings and overpay much more on our mortgage. This option could be putting £200 into savings and the rest on our mortgage. This would have a bigger impact on reducing our mortgage much more quickly than we are at the moment, but our savings and in turn the dividends received would slow down dramatically.
Option A is the one we are currently doing. We put the majority of our money into savings and overpay a small amount. The overpayment is also a token payment so that it feels like we’re doing something practical with the mortgage. The main reason for this is that I focused on building our investments and dividend income.
Option C would feel a little strange as we would be putting very little into our long term savings, which would be a total change of track. But, we could make massive inroads into paying off our mortgage and so would pay a lot less interest back overall.
Option B feels like a compromise; we would be putting money into savings and we would be overpaying our mortgage. The rate in which our savings would grow would be reduced significantly, but would still grow and receive income on. Our mortgage would go down faster and the interest we pay on the balance would slowly reduce.
I’m so torn as to what to do! I feel like the markets could be in for a turbulent time in the not too distant future. Am I brave enough to keep ploughing all of our money into investments even though it might not seem that stable? Is it better to pay down our mortgage in case interest rates suddenly go up sharply (our mortgage follows the base rate)?
So, over to you, please! What would you do, in my position? I’d love to hear your thoughts below!
Follow me on:
Facebook | Twitter | Instagram | Pinterest
I’m in the same boat, I currently save £2500 of my post tax income and put about 3/4 into stock and shares isa to max it out every year and the rest goes on the mortgage. I have a niche stressful job so I’m also on the FIRE track. This week my portfolio has gone from 10% return to 0.5%…that return is overall in the 18 months I’ve had it. So effectively I’ve “lost” most of my profit for now. That’s been v scary. However, this is the point that we have the opportunity to lower the average cost of our funds/stocks by buying them at a reduced rate. If you don’t keep buying the average cost is higher. On the mortgage front, I have a lifetime base rate tracker so I’m paying off the mortgage sooner rather than later, because interest rates are starting to rise. But I’m doing this not by reducing my investment contribution, but by selling everything I don’t need- I can always rebuy later but so far I’ve not needed to. I’ve also done it by having a super-frugal month and any extra I squeeze out also goes on the mortgage. If I get a £10 amazon voucher for online surveys, £10 from my current account goes to mortgage. I’ve been doing this for about three years and have only another 1-2 left. But I agree it’s a little nerve wracking. I recommend reading Jim Collins stock series on his blog. He also has a great 1 hour video on YouTube. He invested through the financial crisis so he’s pretty level headed. That has helped me to stay the course.
I am now 60 and hindsight , so they say, can be a wonderful thing. We decided about 15 years ago to do everything we could to pay off the mortgage. We achieved that 6 years ago. By frugal living we managed to save cash so this summer we finished our teaching jobs. Hubby still has 18months to go to get his TP. O got a small one from July. However we both have part time jobs now giving us more time. I make curtains and cushions for people. He has gone back to being a stlf employed Dispensing Option, 3 days a week ( his original career. ) Paying the mortgage off made a massive difference to our lives. I do wish though that we had invested in stocks and shares, although hubby had a private pension and that is invested in the stock market with a lovely financial advisor who we linked up with About 8 years ago. . It sounds to me that option B sounds good. All the best. X
I think you need to take emotion out of the equation and crunch the numbers with projections of 5, 10, 20 years etc for each option. It doesn’t matter what shares do in the short term so Brexit shouldn’t be a factor on the shares, but may be on the mortgage.
Try searching The Simple Dollar (US) or Monevator (UK) sites as they’ve given advice on this sort of thing before.
We are like Linda, we took the jump 7 years ago and significantly downsized our property, by paying of large chunks of the mortgage for the 18 months before hand. we did sell on a falling market, but managed to buy at a good rate with a large sum to put down. We continued on this track and completely cleared our mortgage in the year if the crash, phew! As redundancy for one or both of us was definately a possibility. My OH took the hit, and I went part time, but given that we had no outstanding debt meant that the journey was not too bumpy. We are still building savings albeit it slowly as we both have to wait till 66 for State pensions, but we both have small occupational pensions and hubby has a service pension. Like Linda we wished we had gone into SS earlier, but children’s education and our love of travel got in the way😎. On reflection I would plump for the “as much off the mortgage route” that payment not having to go out each month, or if it does then as a much smaller amount means you keep a roof over your head. I was brought up by a grandmother who lived through the “30’s depression” her mantra was – roof over your head and food on the table is all you need, everything else is a bonus and a blessing. She had 6 children and no NHS, so knew what tough was.
I would go with option B. If we look only at the current numbers, perhaps the smartest option would be to go with option A with low interest rates at the moment. But that may change and I think it’s psychologically better to have as little debt as possible. Of course, that’s for you to decide and all three options in essence are better than what most people do by not saving anything extra 🙂
BI
If I was you I would pay off the mortgage as much as you can.
I remember 15% interest rates!
Try to take the emotion out of your decisions. You should be investing for the long term so it does not matter that the markets are going through a ‘correction’. When prices drop that is the time to buy BUT you have be brave enough to do it. If you are worried about the stock market right now, should you be investing at all? Your stock investments should be for a minimum of 5 years, preferably 10+ years. I also second Jim Collins stock series and Monevator.
However we paid our mortgage off early because it felt right for us. So if you cannot be completely practical and non emotional about your saving strategy then option B sounds like a plan. At the end of the day you have to be able to sleep at night and be comfortable with your decisions. What I do or someone else on the internet, or any of the ‘experts’ out there right now doesn’t matter. It’s your money and your peace of mind so go with what is right for you.
“When prices drop that is the time to buy BUT you have be brave enough to do it.”
“If you are worried about the stock market right now, should you be investing at all?”
BINGO !!!
That’s the best advice you’re going to get on this post 😉
I agree with Linda, pay off the mortgage first. The vast amount of accumulated interest over the period of your mortgage is huge. We managed to pay our mortgage off at 50 and our savings have increased quickly over the last 5 yrs. Unfortunately saving are not performing very well at the moment. I personally feel that interest rates may have to rise significantly after Brexit. I can remember the bad old days of the 1980s when interest rates were crippling! Good for savers, bad for mortgage payers. It’s a difficult decision to make. Some people like to see their saving increasing whilst others enjoy the freedom of being mortgage free. You do need a safety net of savings, just in case!
Good look on deciding which is right for you.
There will always be dips in the market like this but it will recover in the long term.( I have just increased my direct debits to increase my buying while it’s low). You don’t have to change the whole plan permanently, if it’s making you jittery you could change it for a set amount of time. Interest rates are low still. I would keep it the same but I think you need a cash financial safety net for when you do retire and your income dividends dip so you have cash to make up any shortfall. I think if I was in your position I’d increase morgage payment a bit for a while to make you feel better. The market might correct next week for all we know.
mortgage, pay it off as soon as possible, we did………
Is there a sneaky option D in there? I know you currently reinvest your dividends each month. Why don’t you put those towards your mortgage instead? If you are able to continue achieving £100 or more in dividends you are covering your interest and possibly doing more and it means your current savings aren’t interrupted too much.
That is a tough one! Are your interest rates fixed or variable? If they are fixed, than you might do better in a broad index stock market fund. For example, if mortgage interest is a fixed 3.5 percent, and the stock market returns a 10 percent historical average, than you would come out ahead. On the other hand, paying off the mortgage is a garunteed thing, and the market is not. There is also the peace of mind that comes from owning your home free and clear!
Additionally, you might also want to have several months of living expenses in a safe, cash savings account . This really helps in times of economic insecurity, job loss, etc.
I love your blog!!!
I would go with paying off the mortgage first, there will then still be time after for wise investing and saving, and seeing what the world looks like at that time. Getting rid of the mortgage is a huge thing especially with interest rates being so volatile. It may feel strange for you to do this, but I think it is the best way to go. There is a lot of security in knowing you own your house free and clear. We were involved in a hurricane and lost our home all our belongings and all our savings trying to start again, we are still paying a mortgage and I am now in my late 50s, it would be great to have that burden off our shoulders. However life sometimes throws things in your path as it did to us, and we have to deal with it. I wish you good luck, but the mortgage is a huge thing to get paid off.
We live in very different times now with artificially low interest rates … very different from a lot of the comments above about paying the mortgage off asap.
At the moment paying down debt is a stupid thing to do when rates are so low – capital / leverage should be used instead to create wealth for the long term. Only once debt interest rises to above investment gains would it make sense to switch to debt pay down.
Forget Brexit too, all markets are wobbly this week and that’s nowt to do with Brexit – the US isn’t in the eurozone yeah 😂😂😂
But hey, what you’re potentially facing is something a lot of you FIRE bloggers have yet to experience because you aren’t old enough … what to do when the market crashes and you watch the underlying values of your investments plummet.
You’re going to think WTF, I gave up this, that, and the other so I could be frugal and save a few quid and now it’s gone. What you need to be thinking is this is a great time to be frugal so you can plow into the markets and buy cheap units ahead of the next bull run 😉
If it were me, I would put as much as possible towards the home mortgage – I only wish I was mortgage free in retirement. Fortunately my house payment is low but would be so much nicer if it was ZERO. Best of luck with your decision making!
If you pay off your mortgage, no matter how bad things get, you can’t have your home taken away from you through repossession.
If you plow everything into S&S, you will almost certainly be in the better financial situation in 20+ years time.
It’s just a case of balancing these two really. And trusting yourself not to do anything stupid during a dip in the market.
I know focusing on S&S and carrying a mortgage for many years into the future is the optimal and most logical path, but I can’t say I have any regrets that we paid off our mortgage extremely early 🙂 Our monthly nut is so small now that I am extremely relaxed about all things financial 😀
If you pay off your mortgage, no matter how bad things get, you can’t have your home taken away from you through repossession.
If you plow everything into S&S, you will almost certainly be in the better financial situation in 20+ years time.
It’s just a case of balancing these two really. And trusting yourself not to do anything stupid during a dip in the market.
I know focusing on S&S and carrying a mortgage for many years into the future is the optimal and most logical path, but I can’t say I have any regrets that we paid off our mortgage extremely early 🙂 Our monthly nut is so small now that I am extremely relaxed about all things financial 😀
I think this sort of depends on the timeline for the mortgage. I mean is there a chance of paying it off in only a couple of years? Or even with a massive overpayment, is it still 10 years out? Do you already have a full year’s worth of mortgage payments in cash reserves or safe CDs? If not, maybe put the investment money into something more accessible and less risky for right now while the market shakes like jelly? Bond, Money Market, and CD rates are going up a bit as stocks wobble. (they always do)
If it was me, I would split it 50/50. So any savings should go half and half. Or you decide to focus on one thing. Your savings look really good, maybe prioritise your Mortgage for the next few months!
Let us know what you decide!
We have a $350k mortgage at 4%. I am paying that off with 66% of our income monthly because it’s guaranteed to save us 4%. Also, I think in asset classes and we own about $500k of our house but we already have $750k in stocks, so to keep a balanced portfolio I invest more into property. When paid off, I will invest more into stocks or FIRE.
If speaking about emotions, I would pay 50% of savings to close the mortgage and 50% as investment.
In my case I will not pay down anymore the mortgage: the tax is 1.8%, I can invest better these money: any investment with 5% is better than down payment for a 1.8% ( in reality is smaller than 1.8 because I have extra the tax deduction and professional deduction)
You miss a few key data points: what is the interest rate on your mortgage? what is your marginal tax rate? what is your expected return from ‘savings’? How close are you to retirement? All these factors have a bearing on the decision.
Living in your own home is tax free and with the loss of MIRAS, interest is typically not tax deductible, so you need to tax-adjust to be able to make a good comparison between ‘savings’ and mortgage payment (maybe the same, e.g. if you savings is in an ISA wrapper).
I used to have an offset mortgage and aggressively paid down debt. While the ‘return’ on obviated interest payments may be low. They are also ‘tax-free’ and is a safe return. Hopefully you are not doing strange mental accounting and have bonds with a lower post-tax return (i.e. if you’re not paying down interest, all your savings should be in stocks or tax-free bonds with a higher rate of return).
If you are nervous, then Option B might be a way to hedge your bets.
Option C – get rid of your mortgage.
Pay the mortgage. Think of it as investing with a guaranteed return: if your current mortgage has an APRC of 5% that’s the return you’re getting on what you overpay. That’s better than the 4% expected from index fund investing. “I have no mortgage” is a great place to be.
There’s already a lot of comments/opinions here but I’ll also give mine anyway… I would also suggest to pay the mortgage first. Best of luck!
Hmmmm hard to comment without all the figures. Tilting things more towards mortgage repayment / away from equity investment might, I suspect, make sense at this point.
As an alternative to just choosing between your options, you could shift to option C in the short term, whilst we’re mired in Brexit and market valuation uncertainty, and set a date in your diary to review, say, in a year’s time? Jo
Mortgage,we became mortgage free in our 50s.Every spare penny was thrown at it!
The feeling of knowing that whatever happens,no.one can take away the roof over our heads is priceless.The icing on the cake was when I called up to cancel the life insurance early,only to discover that we could have claimed several years earlier when I had cancer,the cheque they sent enabled us to fit solar panels,replace the roof and have a Caribbean holiday,and a nest egg.
See, that’s why I’m so conflicted! Not having that monthly payment every month would also really help 🙂