Benefits of Early Mortgage Repayment

My 35 year old son asked if there were ‘any benefits to paying off his mortgage early?’ I think the generations have a different view when it comes to debt and borrowing so this is an interesting challenge on which I can respond.

Headline Benefits on Early Debt Repayment

• You own the property free and clear – it is a great feeling why the mortgage has gone.
• You no longer need to make regular repayments and have more disposable cash available for other things.
• No finance company is taking a lump out of you with interest or charges
• In an uncertain economic climate one uncertainty, housing, has been removed.
• You can pledge your property again if the need arises.
• Total interest payments will be lower and you wont suffer higher rates in the future.

A Look at Interest Rates

• Predicting interest rate changes over the life of a mortgage is too hard for mere mortals.
• 99% of the life time of a mortgage, the rate you would earn on savings will be less than the rate you will pay on borrowings. The ‘turn’ is how banks and finance companies should be making a living.
• Interest calculated annually on the total outstanding before any repayments are credited is or was a way of unscrupulous finance companies to increase their returns at the borrowers expense. Even calculating on a monthly (not daily) basis will cost a borrower significant sums over the life of a mortgage.
• If you have the facility to repay a mortgage early then interest is a cost you do not have to pay!

A Look at Inflation and Opportunity Lost

• It is seductive to think you are repaying your current debt in 10, 20 or more years hence when inflation will have taken care of the currencies worth. Tell that to the Japanese who have suffered deflation and are repaying debts now with wages that are worth less than when the debt was incurred.
• Inflation is not the key to eroding your debt you also need wage inflation.
• Even with inflation and regular increases in average net incomes your personal situation may alter. There is a time of life when your income is at an optimum. For the majority that is not at the end of a mortgage but may be significantly earlier.
• Lost opportunity is what else you can be doing with your money. Saving, spending, donating or burying seem to be the alternatives. If it is someone else’s money, the mortgagors, then repaying seems to have some moral justification.
• A property ”free and clear is not a substitute for a pension. You need somewhere to live and a source of income in retirement. Property to let may be a good alternative to a pension.
• Investment is the alternative use for early mortgage repayment money. A successful stocks and shares portfolio ( sheltered from tax in an ISA wrapper) may perform better than using your money to repay the mortgage early but it may do the opposite and bomb!

Summary

To be contemplating the benefits of Early Mortgage Repayment is a nice problem to have – we should be so lucky.

‘Neither a borrower nor lender be’ except when you need somewhere to live. Makes me think positively about the investment route for spare cash. Over a 30 year period capital growth in mixed equities I would hope will beat mortgage interest paid out. (This presupposes low investment costs and not paying too much in charges to finance companies for fund management.)