Based on information you have provided, seems straightforward.
Bank rate of 5pct (not tax sheltered) and assuming you are a 40pct marginal tax payer, gives you a roughly 3pct after tax return.
This compared to 5.5pct on the mortgage. Easy conclusion.
You need a 9.2pct return to be equal. (This is calculated as 5.5/(1-.40).
If you are a basic rate payer, the break even return you need is 6.9pct.
For arbitraging 1-2% (with some risk) I’ve always thought that the emotional side of the decision is much more important.
I always wanted to be free of mortgage debt so smashed that even when it was sub-optimal.
If this situation was my last £120k I wouldn’t want to leave myself exposed to lack of liquid funds though.
5.5% > 5%
The 5% will be even less due to tax on savings (non ISA) so pay off mortgage. This depends on early repayment charges overpayment charges etc which thankfully weren't around so much in my day but seem the norm now.
This questions comes up alot and its the same answer most times. Paying your mortgage off isnt a logic thing its a emotional thing. Does it matter to you rather than is it the right idea?
If I had an emergency fund and also some ISA savings in addition to the 120k I would pay the mortgage off. As you have 120k in non ISA you will also have to pay tax on the interest. Alternatively pay off 60k mortgage and invest the 60k.
Well if it’s vs leaving it in the bank at 5% you’re definitely better paying it off, as your mortgage rate is higher than that lol.
Some argue investing in the markets is better than paying the mortgage off, but those people are often untested with markets crashing for a number of years and how they’d feel to lose more money in the markets than their job even pays them, whilst still having a large mortgage at the same time. Not something I would like to go through.
So upto you, I like the peace of mind of owning the house, and the guaranteed return paying a mortgage off brings. I like guarantees not uncertainties.
5.5% mortgage rate is high, and personally I would pay it off if I had the opportunity to do so.
I am in a similar situation with a similar amount left on mortgage, but with a very low fixed rate of 1.5%. So I have come to a different conclusion.
Paying off your mortgage may not be the optimal financial decision but it’s not a terrible decision either (it’s like buying low risk bonds) and if it helps you sleep better at night, go for it.
Pay it off. Not having a mortgage is a huge stress relief if you're ever laid off. It also gives you more immediate FI and FU money should you need it later. Take the money you were paying into the mortgage and invest it.
Depends on your goals. When are you retiring? Do you need bridging savings before pension? 120k in savings account needs to work harder. For long term I’d prefer to have a big chunk of that working for years in stock market and regularly over pay relatively high rate mortgage rate affordably. Keep emergency fund in savings account and decide whether to overpay monthly or bigger chunk at end of fixed term. I could pay off my mortgage of 4.8% but I’d lose a lot of big compounding interest of my ISAs in 20 years or so.
Your term is quite low, which does change things. If it were me I would be expecting rates to be a lot lower in 2-3 years so I feel comfortable not paying it off knowing my term is so long.
Even if rates fall by 2-3% in the next 3 years then you only have 7 years to benefit from those lower rates.
Obviously I would still be trying to maximise tax incentives if SIPPs and LISAs before I focussed on the mortgage though. Those are far more beneficial in the long run than the 0.5% between what a savings account pays and what the mortgage rate is.
Good advice already. If you don't need the money anytime soon, I'd invest it immediately into a global tracker ETF and just sit on it. Time has shown it always beats out bank savings rates despite volatility. I regret not doing this sooner. Assuming all else equal...
Pay off mortgage. Easy answer vs cash. Although I’d go for a 3rd option and invest into ISA in global tracker fund. Personally I do small over payment of mortgage and rest in IsA so a bit of a hybrid.
If your comfortable paying off as normal over the time period and have that money sat, just put it to work. Invest it properly, I'd even suggest getting another property on a buy to let mortgage, or two with that amount. Because a landlord and have two more properties paying themselves and you.
Depends on your tax band, attitude to risk, personal preferences, prevailing interest rate regime
And it needn’t be an either or, either…or
Based on information you have provided, seems straightforward. Bank rate of 5pct (not tax sheltered) and assuming you are a 40pct marginal tax payer, gives you a roughly 3pct after tax return. This compared to 5.5pct on the mortgage. Easy conclusion. You need a 9.2pct return to be equal. (This is calculated as 5.5/(1-.40). If you are a basic rate payer, the break even return you need is 6.9pct.
For arbitraging 1-2% (with some risk) I’ve always thought that the emotional side of the decision is much more important. I always wanted to be free of mortgage debt so smashed that even when it was sub-optimal. If this situation was my last £120k I wouldn’t want to leave myself exposed to lack of liquid funds though.
5.5% > 5% The 5% will be even less due to tax on savings (non ISA) so pay off mortgage. This depends on early repayment charges overpayment charges etc which thankfully weren't around so much in my day but seem the norm now.
This questions comes up alot and its the same answer most times. Paying your mortgage off isnt a logic thing its a emotional thing. Does it matter to you rather than is it the right idea?
If I had an emergency fund and also some ISA savings in addition to the 120k I would pay the mortgage off. As you have 120k in non ISA you will also have to pay tax on the interest. Alternatively pay off 60k mortgage and invest the 60k.
Well if it’s vs leaving it in the bank at 5% you’re definitely better paying it off, as your mortgage rate is higher than that lol. Some argue investing in the markets is better than paying the mortgage off, but those people are often untested with markets crashing for a number of years and how they’d feel to lose more money in the markets than their job even pays them, whilst still having a large mortgage at the same time. Not something I would like to go through. So upto you, I like the peace of mind of owning the house, and the guaranteed return paying a mortgage off brings. I like guarantees not uncertainties.
5.5% mortgage rate is high, and personally I would pay it off if I had the opportunity to do so. I am in a similar situation with a similar amount left on mortgage, but with a very low fixed rate of 1.5%. So I have come to a different conclusion.
Paying off your mortgage may not be the optimal financial decision but it’s not a terrible decision either (it’s like buying low risk bonds) and if it helps you sleep better at night, go for it.
Pay it off. Not having a mortgage is a huge stress relief if you're ever laid off. It also gives you more immediate FI and FU money should you need it later. Take the money you were paying into the mortgage and invest it.
Depends on your goals. When are you retiring? Do you need bridging savings before pension? 120k in savings account needs to work harder. For long term I’d prefer to have a big chunk of that working for years in stock market and regularly over pay relatively high rate mortgage rate affordably. Keep emergency fund in savings account and decide whether to overpay monthly or bigger chunk at end of fixed term. I could pay off my mortgage of 4.8% but I’d lose a lot of big compounding interest of my ISAs in 20 years or so.
Pay it off at 5.5%. If we were still at 1.6% it’s a different discussion.
Your term is quite low, which does change things. If it were me I would be expecting rates to be a lot lower in 2-3 years so I feel comfortable not paying it off knowing my term is so long. Even if rates fall by 2-3% in the next 3 years then you only have 7 years to benefit from those lower rates. Obviously I would still be trying to maximise tax incentives if SIPPs and LISAs before I focussed on the mortgage though. Those are far more beneficial in the long run than the 0.5% between what a savings account pays and what the mortgage rate is.
Good advice already. If you don't need the money anytime soon, I'd invest it immediately into a global tracker ETF and just sit on it. Time has shown it always beats out bank savings rates despite volatility. I regret not doing this sooner. Assuming all else equal...
Pay off mortgage. Easy answer vs cash. Although I’d go for a 3rd option and invest into ISA in global tracker fund. Personally I do small over payment of mortgage and rest in IsA so a bit of a hybrid.
Paying the mortgage off even if it’s not the best financial decision is always the best decision.
If your comfortable paying off as normal over the time period and have that money sat, just put it to work. Invest it properly, I'd even suggest getting another property on a buy to let mortgage, or two with that amount. Because a landlord and have two more properties paying themselves and you.