Paying off your Mortgage

Fancy doing a 'David Cameron'?

As the papers revealed yesterday, and at the tender age of 43, the Tory leader has indeed paid off his mortgage. For many people, the idea of owning their home outright is one of the most appealing of all financial possibilities. Supposing for a moment that a windfall did come your way, which was just sufficient to prize the deeds from the clutches of building society. Would you or should you do that? On the surface at least, it should be a straightforward decision. But regrettably, it isn't. Because it all depends on your age, your financial circumstances and that other minor matter - what you and your spouse want out of life. Here are a few scenarios that help illustrate the point, assuming in each case that there's a lump sum of £150,000 available.

1. Couple A are in their early 50's, owe £120,000 on their mortgage, £10,000 on credit cards and have a pension pot and investments worth £150,000. Answer? Don't blow the cash on fast cars, holidays and racehorses - do the right thing and deal with the credit card debt first, then the mortgage. And then (perhaps) buy that new car.

2. Couple B are also in their 50's, have a £100,000 mortgage, owe £10,000 on credit cards and have no pension or investments. In the absence of a pension, one of the key considerations here is what they do with the money they save by being rid of the mortgage? If they don't like the idea of investing it in stocks and shares, preferring instead to leave their windfall on deposit, then the most their capital could earn would be around 3% gross a year. There is the risk that their money will devalue if inflation takes off but if the mortgage is cleared they could consider redirecting the monthly savings from the mortgage into a pension contribution for the future spreading the risk. On the other hand, investing their £100,000 could produce a return for them that's higher than the rate of interest they pay on their mortgage. So in theory at least they'd do better investing their windfall and continuing with their mortgage.

3. Couple C are in their early 30's owe £150,000 on their mortgage, have no other borrowings, savings of £7,000 and because of Mr C's redundancy, have decided that they need to start their own business. Perhaps the answer here is to do a bit of both: pay say £75,000 off the mortgage and use the rest to provide working capital for the business and some income for the couple until the enterprise is up and running. Alternatively, they may wish to look at an offset mortgage which would give the best of both worlds. Your capital sits in a deposit account for your use earning no interest but the amount in this account is balanced off against what you owe meaning no mortgage interest either.

If this is you beware of the new pension legislation being put in place from July as it may be absolutely imperative that you make a pension contribution with some of the money.

Certainty is a difficult thing to come by in this world but it is an undisputable fact that by reducing your mortgage you have that certainty. It is vital however that you do not miss an opportunity unique to your situation and it is key to have cash available somewhere.

Just how desperate are you to get out of the clutches of the building society? And do you think that paying off a mortgage is a smart move financially - no matter what your circumstances it may be? Just remember mortgage borrowings on your primary residence are likely to be the cheapest long term borrowings you ever have!!