Mortgage Should I pay off my mortgage in full?

Why the relief of being free of debt can be deceptive.

by UBS Insights 18 Nov 2020

Image: UBS

Freeing yourself of debt puts you at ease and is something a lot of people aim for. But rationally speaking, paying your mortgage off in full is seldom the best solution.

Affordability is the priority

Paying off your mortgage has various conflicting implications for your finances. If your mortgage gets smaller, your interest payments will decline. However, these savings need to be offset against a higher tax burden because these payments can no longer be offset against your income. In addition, to make voluntary repayments you may be using money from an investment vehicle (e.g. your custody account), which is providing attractive returns. For the immediate calculation, repaying your mortgage will only be worthwhile if the money you save offsets the additional taxes you will pay and the drop in investment returns for the money used.

Stay flexible

Financial independence is about more than being debt-free. If you have used up some or all of your wealth to repay your mortgage, this is money you will not have for general living expenses or unexpected events. Due to lower incomes in retirement, the decision to repay your mortgage is often irreversible, because the options for increasing your mortgage are restricted after you retire.

Every situation is different. The sample calculation demonstrates that there is considerable room for maneuver. On the one hand, you can set affordability as your goal, assuming you do not want to change your current accommodation. On the other hand, it is worth evaluating the value of financial flexibility on an individual basis and weighing it against the desire to be debt-free.

Calculate Affordability

In principle, calculating affordability is easy: A mortgage is considered affordable if your regular fixed costs do not exceed one-third of your disposable income. Fixed costs include interest, repayments and the ancillary costs of the property, and are calculated according to specific rules.