ABOUT a month ago I received a call from an old school friend looking for some advice in relation to his mortgage.
He was telling me how his mother recently completed the sale of her own house following the death of her husband late last year, and used some of the money to help him clear his mortgage.
He was reluctant at first — he didn’t want her money. He wanted her to spend it on herself. Without doubt, the prospect of having no mortgage excited him, but I got the sense that this feeling also made him feel guilty because his father had only died six months earlier and they were still grieving his passing.
We continued to talk every week and I think he wanted to take the money but wanted someone like me to tell him it was the right thing to do.
So, from a financial perspective, I looked at whether taking this lump sum from her now and paying it off his mortgage was the right thing to do, and it was. Even if he chose to accept the money and invested it instead, he would still be better off if he cleared his mortgage. He would simply pay back less interest than he could earn with it on deposit.
I also wanted to look at whether, over time, his mortgage would depreciate in value and this happens when inflation and interest rates go up. If they do, you are effectively paying back a mortgage with cheapened euros, and when this happens you are better off holding on to a mortgage rather than paying it back.
If inflation and interest rates go down, however, as has happened in the last number of years, your mortgage payments begin to cost you more in real terms and you would be better off clearing it rather than holding on to it.
Anyway, with all of this in mind, he accepted the money and cleared his mortgage.
He called me last week with this good news and as we were finishing up our conversation, he asked, “What now Liam? What will I do with the money I was paying on my mortgage?”
It was a great question, because each year I am sure there are many thousands of people who become mortgage-free. Regardless of the reason, the question remained: what do you now do with that extra money each month?
I am sure you could think of lots of things you could do with what was once your monthly mortgage payment. I suppose what you should do is influenced by your own particular circumstances i.e. your age, income, family status and so on, but having a plan is important.
Because regardless of how you got there, you need to do something and you need to consider your options and choose one or two that best suit you. When I spoke with my friend, some of the ideas I thought of and suggested to him were as follows.
Spend some of it
Spend some your new found cash, but not all of it. Give yourself a break, but be careful. People tend to spend what they earn and your previous mortgage repayment might get consumed by other things and you will begin to wonder, how you ever coped when you had a mortgage. So I would recommend spending 20% of your previous mortgage repayment.
Consider saving the rest — i.e. 80%. If my friend does, he will be able to save €800 each month and in 15 years he will have accumulated nearly €200,000.
Pay more into your pension
Some people might think that putting money into a pension is the last thing they would want to do now that they become mortgage-free but there are great reasons why you should.
First of all your contributions grow tax free within the fund and secondly the amount you contribute will qualify for tax relief.
So if you are a 40% income tax payer, every €100 you pay into your pension will only cost you €60.
If I was in my 30s, 40s or 50s I wouldn’t be relying on the state to fund my income to any reasonable level in retirement.
The average life expectancy for a woman is now 86 and for a man it's 83, so there is a big income gap and plug to fill from normal retirement age. Having a good pension and additional savings to call upon will be important if you want a good standard of living in your golden years
Set up a new business
There is always a fear factor when setting up a new business because if it didn’t go well, you will be unable to pay back your mortgage and eventually you will lose your home.
The “family home safety net” is continuing to be a PAYE worker, but what if your mortgage was paid off and you owned your own property. Would you be more inclined to give it a try when you don’t have to earn as much and you don’t have that fear of losing your home? I think so.
Regardless of how you became mortgage-free, the opportunities it can give you to either turbocharge your finances in areas like investment or pension planning, or simply having the ability to change pace and shift down a gear — or two — is tremendous.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie