Reasons not to pay off mortgage early

biznewbie · 25-09-2022 3:41pm #1

I am trying to decide on whether to pay off my mortgage early. Below are some of the reasons I have researched so far on reasons not to pay off the mortgage early. I would like to know from the community if there are any other reasons that I may not be aware of. I would appreciate help in adding more to the list below. Thanks.

Lesser interest rate so the money could be used somewhere if planning to make an investment.
If there is a chance for a higher interest rate than the mortgage interest rate, no point in paying off the mortgage early.
If there are other debts with a higher interest rate, pay off those debts first.
Emergency and retirement funds are not managed.

coylemj · 25-09-2022 4:27pm

I'm not sure what you mean by 'Emergency and retirement funds are not managed'.

Do you have the option to top up your pension via AVC? That would be a good use of spare cash since you would get full PAYE relief. If your existing pension contributions (incl AVC) are not at the limit for your age bracket, you can put in a lump sum before the end of October to use up to the 2021 limit and put in another sum to claim up to the limit for 2022. The downside is that the money can't be touched until you reach retirement age but you can claim the 2021 tax relief straight away and the 2022 relief in January next.

the_amazing_raisin · 25-09-2022 6:57pm

The only reason I wouldn't pay extra into the mortgage is if it took you below your safe threshold of savings

You'll want to maintain at least 3 months expenses in your savings account to cover the scenario where you lose your job. Best to add 10% onto that given the current hyperinflation we're living in

I know social welfare is a thing (thankfully) but it takes a while for your application to be processed and you don't want to miss any payments in the meantime

I know paying extra into the mortgage seems like flushing money down the toilet, but it comes good a lot sooner than you think

We've been trying to make payments when we can and have beaten the mortgage down over the space of 5 years to something with an end in sight. I reckon we've cleared more than a third off the original loan

That all inclusive cruise vacation is tempting, but at the end the only thing you've got is a tan and a lot of red in the bank account

Also the "investing" path is basically BS. Most online sites talking about how much money you can make on stocks are talking about the US, where tax laws are much more friendly to investors. Here the tax on income from investments is so high it's basically a futile enterprise

In our case always chose to lower the monthly payments rather than shorten the mortgage. It gives you a bit extra each month to save or just enjoy life a little bit more and have some breathing space. You can always shorten the mortgage later when it's much smaller

the_amazing_raisin · 25-09-2022 7:16pm

One other thing to note is that even if the interest on an investment or savings product is much higher than your mortgage it can still be more valuable to pay into the mortgage

For example on a 30 year mortgage of €300,000 at 4% AER, a €5,000 overpayment will save you €3,500 in interest ove the term.

For an investment product to make you that amount of money after tax, it would need to pay off over 100% of the original

I agree with paying off other debts faster if you can, they tend to be much higher interest and will really drag on your finances

I would also advise putting AVCs into your pension. You don't pay tax on these up to a certain limit, so every €100 paid into your pension only costs you €60.

You can use the pension authority calculator to figure out what income you'd like in retirement and how much you'll need to pay into the scheme

Again, I know retirement is probably a fair bit away. But if you can pay into your mortgage and pension early then it means that your retirement will be a lot more enjoyable, and might even come a little earlier if you get lucky

CPTM · 25-09-2022 7:19pm

Two points I see which are missing there would be firstly a lot of people would argue that maxing out your pension contributions is better than paying off the mortgage early. If that's something you're aware of and have factored in then that's fine. I prefer over paying the mortgage than maxing my pension contributions but that's mainly because I'm happy enough with where my pension is at, and I'd rather be debt free while the kids are still young, instead of having extra money when I'm old which I probably won't spend.

The other important point is the inevitable inflation over time which will erode a lot of your mortgage debt. If your salary is one which will rise over time along with inflation and the hot economy, then the "future" you would be way more able to clear the debt than the "present" you.

the_amazing_raisin · 26-09-2022 9:15am

I agree that it's definitely good to pay into your pension. It's kind of the same logic as the mortgage, the earlier you pay in the bigger the savings

While it's true your salary generally goes up, that's not to say you're expenses won't go up as well. So personally I think it's better to pay in what you can

One thing you could try would be to aim for an overpayment of once a year. If you're on a fixed rate then they generally allow you to pay up to 10% of the remaining loan.

So you can take that as a goal to save for, and if you fall a bit short then don't sweat it, you did what you could and next year it'll be easier

dotsman · 26-09-2022 12:47pm

https://www.boards.ie/discussion/comment/119663831#Comment_119663831

https://www.boards.ie/discussion/comment/119663887#Comment_119663887

If you don't understanding investing, then it is unwise to refer to it as "BS".

Likewise, if you don't understand overpaying your mortgage, it is best you don't try to sell it as an idea.

For example on a 30 year mortgage of €300,000 at 4% AER, a €5,000 overpayment will save you €3,500 in interest ove the term.

For an investment product to make you that amount of money after tax, it would need to pay off over 100% of the original

Over a 30 year period, I would be expecting that 5K investment to net me well over 50K in after-tax profits. And, yes, that is paying Irish taxes.

Oh, and by the way, if you were doing the mortgage overpayments correctly, that 5K would not give a paltry return of 3.5K (so low, you're actually losing money due to inflation), but would return a little over 10K in savings. But it is still a drop in the ocean compared to investment returns.

OP, the easier way to look at your question is - what reason would a person have to overpay? Simply, the only scenario where it makes sense is if they have more money than they know what to do with and are otherwise going to simply leave it in a low/zero interest-bearing deposit account. The advice to overpay the mortgage comes from a time when Irish people were paying huge mortgage interest rates and had no viable options for stock investment, and thus made sense. Unfortunately, as "advice", it has been still peddled about for the last 20 years despite being to the detriment of those that choose to do it.

Overpaying a mortgage is basically a low-interest, long-term savings account that you cannot access (and get the benefit of) until the mortgage is repaid. If going long-term, stock investment is a vastly superior option due to the returns (and risk mitigation over long term), along with the critical ability to cash in some/all of it at any time if you require. Investing in pension gives even better returns as tax free but, similar to overpaying, locks you in long-term.

But ahead of all them on the priority list is ensuring high interest debt is repaid, emergency funds are established and essential insurance is in place. For emergency funds, unlike the advise above that it should be "at least 3 months", it will depend on the person's circumstances and is typically in the range of 1-12 months (job security, financial commitments, number of dependents, spousal income, risk appetite and family support being the main factors determining the appropriate figure)

boomshakalaka · 07-10-2022 7:05pm

https://www.boards.ie/discussion/comment/119666417#Comment_119666417

Solid take. I wonder if you could elaborate on what you see as essential insurance?

Reasons not to pay off mortgage early

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