Money Q&A: Pay off the house or hold on to the cash?

My wife and I are currently in a dilemma over whether to pay off some or all of our mortgage (on a house worth pounds 112,000). We are both in our early 30s. I have been building up pensions since the age of 18 including, more recently, additional voluntary contributions. My wife has no pension provision and stopped work six years ago when we started a family. We have various PEPs, shares and building society accounts worth pounds 52,000. We have life cover of pounds 85,000. As the only wage earner, on a salary of pounds 23,000, paying off the mortgage would give me peace of mind. On the other hand we may want to use the money for private education.

DA, Warwickshire

You are young parents with young children, a mortgage and (no disrespect) a less than astronomical salary. Yet you are in the sort of position that could make many of your peers green with envy.

Over recent years some financial experts have said that paying off a mortgage is one of the best and safest "investments" you can make in terms of the return you get. But the case for clearing a mortgage debt may be less strong at a time when interest rates are low and look set to remain so. You need to look at how the cost of borrowing compares with the return from investing your money. And you need to take a view on likely future borrowing costs and investment returns.

For example, you may be paying about 7 per cent on your mortgage. Remember that until the abolition of mortgage tax relief next year the true cost is a bit less than 7 per cent on the first pounds 30,000 of your loan. Compare 7 per cent with the after-tax return you get on your savings and investments. Some investments (Tessas and the new ISAs - individual savings accounts) are tax free.

Stock market investments are harder to call. What is the likely total return - ie, dividends plus changes in capital value? What is the likely total return after income tax and, possibly, capital gains tax? If you think you can get a total after-tax return of, say, 10 per cent against a mortgage cost of 7 per cent then you will make a net 3 per cent on your money.

Before deciding to clear the mortgage, find out whether there are any penalties. If you opt for partial repayment check whether this will have an immediate effect on the interest you are charged. With some lenders, repayments do not register on the outstanding balance on which interest is charged until the end of their financial year.

Before paying off the mortgage, take account of any spending plans on the horizon. Investigate the likely costs of private education. If you are likely to need to take out a personal loan at some time, it may be best to hold some money back rather than pay off the mortgage. Mortgages are one of the cheapest ways to borrow money.

Finally, the one weakness in your otherwise strong financial position is that your wife has made no pension provision. In fact she cannot pay into a formal pension plan with all the associated tax perks unless she has relevant earnings from employment or self-employment. If you pay off the mortgage you should keep your endowment policy going until maturity in order to get full value from it. Maybe you should consider the endowment policy as essentially belonging to your wife to make up for her lack of a pension.

Student saver

Our 18-year-old son is going to university in October. We will be able to offer him most of the financial support he is likely to need but he will probably have to take out a student loan of about pounds 1,000 a year for his four-year course. Nevertheless, he is interested in getting into the savings habit and would like to set aside pounds 10 a month in a medium-to-long- term savings plan maturing in, say, 15 to 20 years' time. Does this make financial sense given he will leave university with a debt? And if it does, where should he save? I have had some 25-year with-profits insurance policies which will give excellent returns, but I am told these are old- fashioned.

CM, Manchester

It rarely makes sense to save money if you also need to borrow. Borrowing usually costs more than the return on savings. However, the interest rate on an official student loan is the inflation rate, and borrowing does not come much cheaper than that. Also, there is a long delay before the loan has to be repaid. And you could argue that getting into the savings habit at an early age may provide long-term financial benefits that outweigh any short-term costs.

But what if your son needs to borrow more than he is allowed to borrow in the form of an official student loan?

Students are notorious for getting into debt - and you do want your son to have a good time at university outside his academic studies. Even preferential overdraft rates and other loans for students don't come cheap.

If your son does decide to squirrel away some money, he should retain some flexibility. He may want to repay debt soon after graduating, or he may need a deposit for a flat (although pounds 10 a month is not going to produce a big lump sum over four years). A deposit-based individual savings account would probably be the best option. He may not even need this if he is a non-taxpayer but he has nothing to lose with an ISA. And he could become a taxpayer while a student if he finds lucrative holiday work.

Be wary of with-profits policies. The costs can be disproportionately high on small premiums and returns on these policies have been falling fast.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Administrator

£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

Recruitment Genius: Dialler Administrator

£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

Ashdown Group: Contracts Manager - City of London

£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Day In a Page

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

RuPaul interview

The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

Secrets of comedy couples

What's it like when both you and your partner are stand-ups?
Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

Satya Nadella: The man to clean up for Windows?

While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
The best swimwear for men: From trunks to shorts, make a splash this summer

The best swimwear for men

From trunks to shorts, make a splash this summer
Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

Mark Hix goes summer foraging

 A dinner party doesn't have to mean a trip to the supermarket
Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

With an audacious flourish, the home hero ends all debate

Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

Aaron Ramsey interview

Wales midfielder determined to be centre of attention for Arsenal this season
Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
The unlikely rise of AFC Bournemouth - and what it says about English life

Unlikely rise of AFC Bournemouth

Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms