Is paying your mortgage off always the best move?

Have you ever had the frustrating experience of finding that your jigsaw puzzle has some pieces missing?

In a way, our services as financial advisers are to find those missing pieces for you, and slot them into place so that, suddenly, you can see the whole picture.

Here’s just one example of a situation where the full implications of a plan may not be obvious.

When a home owner is nearing the end of their mortgage, they often look forward, after years of mortgage repayments, to shuffling off what has usually been the largest single debt of their life.

Perfectly understandable, it sounds like a great plan, and it often is

However, paying the mortgage off may not always be the best move, depending on that bigger picture we just mentioned. 

It may depend on what other types of debt you have. Using your mortgage to underpin a debt restructure can save you hundreds, maybe thousands of pounds in the medium term.

Consider a high earning female on a salary of £130,000, but whose monthly expenditure is also high, so that her outgoings account for most of that. Let’s call her Sue.

Sue was nearing the end of her mortgage, and was considering paying it off, but over a chat we found that her other debts were onerous. She had recently bought a new kitchen ‘on the plastic’, and so was burdened with a considerable credit card debt – practically the most expensive type of debt you can have – and in addition, she was repaying a large car loan.

Her high salary also meant she was losing her £12,500 personal tax allowance, which gives us the first tranche of our annual income tax-free. For higher earners, it works like this: every £2 you earn over £100,000 chips £1 away from your personal allowance. By the time your earnings reach £125,000, therefore, all of your £12,500 has been eaten up. 

However, you can recover your allowance 

If you bring your taxable income back down under the £100,000 limit – and this is where Sue’s mortgage came in. On our advice, she moved both those expensive debts over and folded them into her mortgage. This freed up several thousand pounds of her salary each month, which we then directed into her pension. 

Yes, this increased her mortgage, but debt in your mortgage is much cheaper than credit cards and car finance. Most importantly, the additional pension contributions reduced her taxable income to the point where she regained her £12,500 personal allowance.

A better result all round!

However, if your situation is different, perhaps your other debts are low, then clearing your mortgage may be the sensible option. But there are other issues – other ‘pieces of the jigsaw’ – that we can make you aware of, before you decide.

If you had a decreasing term life policy, for example, which you took out to pay off your mortgage if you had passed away, that’s a policy where the benefit amount – the ‘payout’ – decreases over time, and is often set to expire when your mortgage is paid off. If that was the only life policy you had, then you could suddenly find yourself with no life cover to protect your family.

If you do decide to pay off your mortgage, the next challenge may be having too much money!

You may wonder how best to use your new-found disposable income. We can advise you, for example, on putting it to work for your family. If your children are off to university, tuition fees start at £9,250 a year, according to the World University Rankings, but that’s rock bottom and most are substantially more.

If your children have university behind them, they may be looking for the elusive first home deposit, at which point you may be considering setting up your own official branch of ‘Bomad’ – The Bank of Mum and Dad.

Don’t smile – Bomad is a serious, if unofficial player in the mortgage market these days. The London School of Economics (LSE) says that mums and dads now make up the sixth-biggest mortgage lender in the country. 

And it’s not cheap: in a report by the Centre for Economics and Business Research, carried out for the Post Office, they found that the average amount lent to millennial buyers by their parents for house purchase was £24,347.*

As you see, sometimes the missing bits of the jigsaw can be hidden under the settee, out of sight.

We’re here to take them out, and lay them on the table where you can see them!