I’ve been playing around with the budgets [again] as I wanted to incorporate my new wage into the mix. Whenever I do this, I always seem to come back to the same thing: being mortgage free.
Being mortgage free is definitely our biggest financial motivator, always has been; there’s just something about owning your house……..even if someone else might be living in it and you’re in Portugal!
So we’re going back to targeting our mortgage debt.
Our current mortgage stands at £116k, and on the standard repayment schedule this would take 19 years, 10 months to repay. Currently we overpay by £57 a month which reduces the term by approximately 2 years. To move the end date forward to December 2020, our goal date for Financial Independence, we need to make over payments of £480 a month, doable, baring disasters, now that I’m working again.
We will need to be very flexible with our plan as there will be lots of things coming into play over the next ten years, like, interest rate changes, moving abroad and salary differences but for now the £480 overpayment will probably start in January.
If you had a choice would you invest or pay off your mortgage? Please let me know your thoughts in the comments.
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{ 7 comments… read them below or add one }
Here’s a thought: what if you pay YOURSELF the extra 480 a month into a special account. Then, if you find you still don’t need the money, you can use it to prepay in large chunks. You could even save the whole payoff amount and then obliterate the mortgage with a flourish in 2020! That way, the money is in your control at all times. If you truly need it for something dire, you’ll have the cash. Once you’ve prepaid the mortgage, the money is out of your control and you can’t get it back unless you refinance, which is very expensive. You’ve become so good at setting and keeping large goals that this might be another viable option.
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Diane’s idea is a good one. I do understand your desire to get it knocked out as soon as possible but it is nice to have some money on hand in case of emergency. Either way I admire your tenacity at reaching your goals!
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From the other side…
)
Once upon a time, I saved hard to buy my house and managed on a relatively small mortgage. I did only limited repayments for several years.
A few years ago I got a very well paid job and could have had a grand lifestyle. I instead decided to become debt-free and repaid everything aggressively. February 2010 I repaid the last shrapnels on house mortgage and student loans. I became debt-free. (Yes, yes, yes!!!!!)
My advice is to repay rather than to invest; all investments can loose value!
But what is financial independence? How do you measure that, Laura? *
I will still need to work (when I move to Portugal
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I think you should keep a small reserve aside, but use anything above and beyond that to aggressively pay down the debt. It makes no sense to me to pay more interest than is absolutely necessary. It also seems that cash on hand introduces a temptation to use the savings for something other than debt reduction. Conversely, if you start chipping away at the mortgage, you’ll feel less inclined to dip into savings, since the reserve will be smaller (and hopefully used for the “true” emergencies).
Only invest if you can find a debt instrument of similar term length (and risk characteristics) which offers a higher rate of return. I’d be very surprised if you can find such an investment.
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Laura Reply:
September 16th, 2010 at 6:31 am
Thank you for all your comments; I should clarify, we will be able to save approximately the same amount again. We have a 12 month emergency fund so this would be savings outside of that -
Diane: Thank you for your comment. I noticed these last 12 months that we (I) are a lot better at attacking debt than building savings. For some reason there is more resolve there.
Kristina: Thank you!
Maria: Financial Independence to me is having more passive income coming in than expenses going out. Thank you for saying hello and telling your story; very inspiring! When are you planning to move to Portugal?
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Laura Reply:
September 16th, 2010 at 6:39 am
Thanks Executioner: Debt seems to work like a ‘carrot on a stick’ to me and I think this is where I have the most success. We will still be able to save cash for emergencies, on top of our already 12 month ef, so to me getting rid of the mortgage seems our best option. We’re looking at our house in the UK being an income producing asset in 2020, part of a grand retirement plan
I’ve noticed this year that I’m ‘inclined to dip into savings’ far too easily!!
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Well, everyone has different circumstances and are at different stages in their lives, but for me I would always pay off my mortgage as rapidly as possible. That was not something I did originally, but I am obsessive about it these days. Pretty much the only way I know to live for near free, is to own your own home with the mortgage paid off. If you rent, you’ll be renting till the day you die.
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This is a personal matter, depending on attitudes to debt and risk. If you are coming at the question from truly knowing your strengths and weaknesses you are probably doing the right thing. More objectively, it will depend on your loan to income and loan to value ratios. Your current mortgage — I am guessing — is still a substantial chunk of your house value, so personally I would tend to prioritise that whilst leaving yourself adequate monthly surplus for expenses, small luxuries and a bit of saving.
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Laura Reply:
September 17th, 2010 at 12:50 pm
salisgrano: thank you for your comment. yes, debt payoff is more of a strength than saving, although this is roughly 50% of our monthly saving amount so it’s the best of both worlds. Mortgage approx. 65% of house value.
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If I were able to overpay by that much I would get rid of the mortgage (thus saving the cash that would have been lost in interest) and then look at investing future savings. Looking forward to hearing about your new job and new plans!
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Laura Reply:
September 17th, 2010 at 12:47 pm
Thanks Shoestring
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