I just looked at modifying an initial SWR based on taking mortgage into account and concluded that paying it off was probably the best thing.
Fundamentally, my mortgage rate is 1.41% and current CD/Gilt rates are less than that. Is retaining control of capital in an emergency the only advantage a bond structure has ?… but that really is thin .. really thin !
We do however have our mortgage spit into two with One having around £10K remaining and the other around £67K. The monthly cost is £127 and £719 respectively. [Now eagle eyed may have spotted I used £65K in the previous article – that is because that is what it would be if I was to pay it off at the time I plane my big SIPP drawdown]
So is there a good reason to only partially pay off ? I had struggled before as the interest rate is so very low. It just seemed illogical to do much other than leave it, but in looking at setting up a full drawdown package next year I did wonder as it clearly affects the start fund point.
As for a reason why I suddenly write another article (2 in 2 days … go for record I say) … Well I saw a consumer programme that gave an example of someone loosing their house as the fraudsters had managed to get the UK Land Registry to change the deeds, then took a large loan out and disappeared. A bit of an e-journey shows a small but growing number of very sophisticated scams like this.
However, mortgage companies put a lee on the records to show a title interest and nothing can be changed without their agreement. The scams all require that a home owner has no mortgage. Should anything happen and the mortgage company allow it, they have a liability so adding a layer of security and recourse.
So I am toying with the idea of paying off the big one (if I don’t set a Gilt ladder up, and simply carrying on paying £126 a month…. it is I grant a bit paranoid !
1. Greater title deed security – for some reason there does not seem to be a strong ID check as part of the Land Registration process: maybe there should be
2. Enhanced Credit Record – something else I was unaware of is that having no debt, paying off a credit card monthly etc can adversly affect a credit record. I really don’t get the explanations of this, but there does seem to be advise saying take a loan out for a month or two every year or so to maintain a credit record, or don’t pay a Credit card off every single month …. crackers ! Also, worth noting (again, news to me) that insurance costs (home, cars etc) can be higher with a lower credit score. I suppose self evident to a degree, but non the less a surprise.
3. Interest gain – I keep 10K invested. If I make greater than 22 quid a year from the investment then I gain more than I pay in interest.. and the amount of interest is going down. In fact the total interest payable (assuming rates don’t change) will be £406. In essence, If I put the 10K into a government gilt paying 0.75%, I get £450 in interest. If I use a modest cash ISA rate of 1.5% then it would be a little over £900
1. I carry a debt I do not need too – I am really loath to do this. I have started using my credit card more, but mostly as it enables a cash flow requirement to be planned in, and does give a level of consumer protection (in the UK). But I don’t believe it banks of store cards, multi-credit cards, loan after loan …. if only people did the maths and saw how poor it makes them.
2. Unless I take higher risk, I could loose capital value in real terms – Having spent the last 3 or 4 years rapidly accumulating and seeing the highest returns for the risks I wanted to take, I am loath to forego a positive return. But I also know that things like a reserve/cash bucket to aid smoothing a future sequence event will carry little if any return and so just have to get used to the idea that not everything needs a return, its also about balancing the risk as a total.
3. There is a certain ‘scam’ paranoia – not a healthy mindset, and it is only a small number of cases, and really, we would have to be very unlucky …. just can’t feel worried about everything
All just adds to the thought process. Yes, in most retirement cases where income can be relatively fixed, debt is not a great thing. But I did not realise the credit record impact so need to have a look sometime. It is not that we need credit but perhaps a small home debt is a worthwhile thing after all.