For most people in the UK, buying a house means getting a mortgage and clearing this mortgage can be one of life’s most satisfying experiences (and not just from a financial perspective). Being able to clear your mortgage early may seem like an excellent goal, but even if you reasonably think you can and even if you think that, in principle, you’d like to, there may be sound reasons for you to pass on the option. Here are three of them.
Mortgage debt is one of the most affordable forms of debt there is.
If you have any other form of commercial debt in addition to your mortgage (commercial debt meaning debt other than student loans or other government-backed loan schemes), then you should almost certainly prioritise paying back that debt over paying back your mortgage because it is pretty much guaranteed to carry a higher rate of interest. It’s also worth noting that even if debt is not initially secured against an asset e.g. credit-card debt, lenders can go through a legal process by which it can be secured against any assets you have and so if you use your excess cash to build up equity in your home, but then run into financial difficulties, you may ultimately find yourself in a position where you are forced to sell your home to pay back your “unsecured” debt (and its associated interest). By contrast, if you prioritise paying down the higher-interest debt then your outgoings will reduce more quickly, thus putting you in a better financial position.
You may be able to get a better return on your money elsewhere.
Let’s be clear about the difference between investment-backed mortgages, more commonly known as endowment mortgages, and using excess cash for investment rather than mortgage repayments. Not to put too fine a point on the matter, endowment mortgages were an all-in bet on the performance of your investments and, what’s more, for many people they were an all-in bet which took up most, if not all, of their bankroll. With the benefit of hindsight, endowment mortgages were always a catastrophe waiting to happen and should go down as a dark chapter in financial-services history. By contrast, opting to use your spare cash for investments rather than to make extra payments towards your mortgage does not put your home at risk. You will continue to make your repayments as normal, building up equity in your home, you will just give yourself the flexibility to look for better returns elsewhere. When considering this point remember that while your home may increase in value you can only really realise this value when you sell it. Other forms of investment, however, can be used to generate an income while you still hold them and that income could then, potentially, be put towards paying down your mortgage if you so wish.
You may find it more beneficial to build up a cash cushion.
If your idea is to pay down your mortgage as much as you can in case you experience a loss (or at least a reduction) of income in future, then you may actually be better served to tuck away the cash so that you have a cash cushion for that scenario. You might also want to use some of it to put towards appropriate insurance cover. Remember that Payment Protection Insurance came into the limelight due to a mis-selling scandal rather than through being a fundamentally bad product. If you are in employment and have a mortgage, then it may actually be a very worthwhile buy. The self-employed are unlikely to be accepted for PPI but could still look at Income Protection Insurance and Critical Illness Insurance.